Managerial Economics - Essay Example

The majority of for profit firms are in business to generate profits from their operations. As such, the best way to measure a firm’s performance is to determine its current level of profitability compared to its previous profits for the same period. An increase in profits compared to the previous period entails that the firm is performing well while a decline in profits means that its performance is below expected standards since firms are mainly concerned with generating profits from their operations.

The major types of profits include accounting and economic profits as outlined in the prompt below.Basically, accounting profit is the surplus money gained by the firm after deducting explicit costs such as labour from the total amount of revenue generated from its operations. On the other hand, the difference between the firm’s accounting profit and implicit as well as explicit costs is known as economic profit (McGraw Hill Companies, 2013). It is important for the managers to understand the difference between accounting and economic profits.

Accounting profit denotes the firm’s market value to establish if it is operating viably. On the other hand, economic profit denotes if the firm’s economic condition is sound enough to continue with operations or halt them. It should be positive for a firm to carry own with operations. Example of accounting profit:Total revenue $5 000, explicit costs $2 000: In this example, the accounting profit is total revenue minus explicit costs ($5 000- $2 000= $3 000).From the same example above, the economic profit is calculated by deducting normal profit from accounting profit ($3 000 - $2 000 = $1 000).

Economic profit is positive which means that the firm can continue operations. References McGraw Hill Companies (2013). “Efficiency, Exchange, andthe Invisible Hand in Action: Chapter 7.” Viewed from: http://econweb.tamu.edu/aglass/econ202/Chap007Lecture.pdf