MANAGERIAL ECONOMICS ASSIGNMENT

QUESTION 1.
EXPLAIN THE DIFFERENCE BETWEEN ACCOUNTING PROFIT AND
ECONOMIC PROFIT .
Profit is the revenue one gets after the costs have been
deducted.
ACCOUNTING PROFIT
Accounting profit is calculated according to generally
accepted accounting principles (GAAP).
It is a companys total revenue reduced by the explicit
costs of producing goods or services. These explicit costs
involve expenses such as the cost of raw materials,
employee wages, transportation, rent and interest on
capital.
Usually, accounting profit is limited to time periods, such
as a fiscal quarter or year.
Accounting profit computations are primarily used for
income tax purposes, financial statement preparations
and to review financial performance.
ECONOMIC PROFIT
Economic profit takes into consideration explicit costs and
implicit costs, while accounting profit only utilizes explicit costs.
For Example:
If a company had 250,000 in revenues and 150,000 in
explicit costs, its accounting profit would be100,000. The
same company also had 50,000 in implicit, or opportunity
costs. Its economic profit would be 50,000.
The economic profits are based on scarcity so they include
explicit costs (for payments to labor, land and capital) and

implicit costs (the use of the entrepreneur). Economic profit

computations are not normally limited to time periods.
ECONOMIC PROFIT FORMULA
Economic profit is defined as the difference between Total
Revenue and Total Economic Cost.
Total Revenue = Receipts from sales
Average Revenue = Total Revenue/Quantity
Marginal Revenue = Change in total revenue as a result of
changing the rate of sales by one unit. It is also the slope of
Total Revenue.
Economic Cost = Explicit Costs + Implicit Costs
Summary:
1. Accounting profit is the difference between the total revenue
and the total cost, excluding the cost of the opportunity. On the
contrary, economic cost is the difference between the total
revenue

and

the

total

cost,

including

the

cost

of

the

opportunity.
2. Accounting profit can be defined as the revenue deducted
from the explicit costs, and economic profits, as the revenue
deducted from explicit and implicit costs.
3. When compared to economic profits, accounting profit is
calculated for a certain period of time.
4. Economic profit will always be lesser when compared to
accounting profits. In comparison with economic profit, the
accounting profit is only given during leap years.
5. Accounting profit can be called as the revenue obtained by a
firm after all the economic costs are met. A firm can be said to

have accounting profits if the revenue exceeds the accounting

cost of the firm.
Question 2.
Write short note on monopoly profit
In economics a monopoly is a firm that lacks any
viable competition, and is the sole producer of the industry's
product. In a normal competitive situation, no firm can charge
a price that is significantly higher than the
Marginal (Economic) cost of producing (the last unit of) the
product. If any firm doing business within a competitive
situation tries to raise prices significantly higher than
the Marginal cost of producing the product, it will lose all of its
customers to either other existing firms that charge lower
prices, or to a new firm that will find it profitable to use a lower
price (closer to its marginal cost) to take customers away from
the firm charging the higher price. But since the monopoly firm
does not have to worry about losing customers to competitors,
it can set a Monopoly price that is significantly higher than
its marginal cost, allowing it to have an economic profit that is
significantly higher than the normal profit that is typically found
in a perfectly competitive industry. The high economic
profit obtained by a monopoly firm is referred to as monopoly
profit.

Monopoly profit occurs when a firm restricts output so as to

prevent prices from falling to the level of costs.
Monopoly profit arises when a firm with market control is able
to set a price that exceeds average total cost. This is termed
monopoly profit in honor of the monopoly market structure with
the greatest market control and the one most likely to generate
monopoly profit.
From the diagram above, from point E to F represents the
monopoly profit.

REFERENCES
MONOPOLY PROFIT, AmosWEB Encyclonomic WEB*pedia,
http://www.AmosWEB.com, AmosWEB LLC, 2000-2016.
[Accessed: May 30, 2016].
www.economicshelp.org/blog/117/monopoly/profit-and-price-ina-monopoly

https://www.cliffsnotes.com/.../economics/monopoly/profitmaximization