Chapter 3 - Demand and supply analysis: The firm. This chapter focuses on decision making by the suppliers/producers of goods and services, whereas Chapter 2 examined the role of individuals in shaping the demand for goods and services. | Chapter 3 Demand and Supply Analysis: The Firm Presenter’s name Presenter’s title dd Month yyyy 1. Introduction Copyright © 2014 CFA Institute 2 Note to the presenter: This chapter focuses on decision making by the suppliers/producers of goods and services, whereas Chapter 2 examined the role of individuals in shaping the demand for goods and services. 2 2. Objectives of the Firm Profit () in general terms is total revenue (TR) less total cost (TC): Accounting profit is the net income, as determined using accounting principles: The costs in this case are only explicit costs. Economic profit is Economic profit = Total revenue – Total economic cost, where total economic costs include the implicit opportunity costs. Copyright © 2014 CFA Institute 3 LOS: Calculate, interpret, and compare accounting profit, economic profit, normal profit, and economic rent. Pages 91–93 Accounting profit is the difference between explicit revenues and explicit costs, whereas economic profit is the . | Chapter 3 Demand and Supply Analysis: The Firm Presenter’s name Presenter’s title dd Month yyyy 1. Introduction Copyright © 2014 CFA Institute 2 Note to the presenter: This chapter focuses on decision making by the suppliers/producers of goods and services, whereas Chapter 2 examined the role of individuals in shaping the demand for goods and services. 2 2. Objectives of the Firm Profit () in general terms is total revenue (TR) less total cost (TC): Accounting profit is the net income, as determined using accounting principles: The costs in this case are only explicit costs. Economic profit is Economic profit = Total revenue – Total economic cost, where total economic costs include the implicit opportunity costs. Copyright © 2014 CFA Institute 3 LOS: Calculate, interpret, and compare accounting profit, economic profit, normal profit, and economic rent. Pages 91–93 Accounting profit is the difference between explicit revenues and explicit costs, whereas economic profit is the difference between explicit revenues and the sum of explicit and implicit costs. 3 Normal profit and Economic profit Normal profit is the accounting profit such that both explicit and implicit costs are covered: Normal profit = Accounting profit – Economic profit Also known as abnormal profit or supernormal profit. Accounting profit = Economic profit + Normal profit Example: Revenues €1,000 Total explicit costs €500 Opportunity cost €400 Accounting profit €1,000 – 500 = €500 Economic profit €1,000 – 500 – 400 = €100 Normal profit €500 – 100 = €400 Copyright © 2014 CFA Institute 4 LOS: Calculate, interpret, and compare accounting profit, economic profit, normal profit, and economic rent. Pages 91–93 Normal profit is the accounting profit that exceeds the economic profit. Note to presenter: These concepts may not sink in until numbers are used. Another example: Consider a company that has revenues of $100 million, explicit costs of $60 million, and implicit costs of $30 million. Accounting profit
