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Economic Profit or Loss Evaluation - Report Example

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The report "Economic Profit or Loss Evaluation" presents a macroeconomic analysis of the theoretical evaluation of the industry's profit/loss within a period. Manufacturing may face an economic profit or loss in the short-run when no new firm enters or leaves the industry, and hence the number of firms is fixed…
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Economic Profit or Loss Evaluation
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Download file to see previous pages Similarly, no existing firm can leave the industry in the short-run. The reason behind this is that whenever a firm sets up in any industry it has to incur some sunk costs. In layman terms, sunk costs are actually setup costs. These costs are barriers that do not let the firms leave the industry in the short-run as no firm wants to leave the industry without minimizing or cashing in on some of their sunk costs. As we have already discussed, that no firm can be lured into or pushed out of the industry in the short-run. The reasons that may tempt the other businesses entering into the industry are off course profits, as discussed above. There are two types of profit that a firm makes in the short run based on its costs and revenue. A firm may be making large profits or break-even in this time-scale. In economic terms, break-even is known as normal profit because the calculation includes implicit or opportunity costs, which are not actual cost and hence a firm which is breaking even is making a profit in accounting terms. Normal Profits are usually denoted by AR=AC. Similarly, apart from a normal profit, a firm might also be making a Supernormal profit denoted by an equation AR>AC.
In figure 1, we see the condition in which the firm is making a level of profit that is just enough to persuade the firms to stay in the industry in the short-run but not enough to attract new firms. In short-run, when the firm is earning normal profits, the firm is just covering total costs. Since the TC (Total Cost Calculations) also includes implicit costs like opportunity cost of capital employed, return of capital in alternative uses, etc. These are not actual costs and hence breaking even would mean that firm is earning a profit which it could be earning in alternative businesses and hence breaking even would mean that firm is earning a profit which it could be earning in alternative businesses and hence there is no motivation for the firm to go out of the industry. The distinction in this situation, for the firm, is AC= AR, and thus, TC = TR (Lipsey and Chrystal, 2003). ...Download file to see next pagesRead More
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