Hot answers tagged

11

It seems economic models do not explicitly include ownership of the firm (not of the physical capital, an input used to produce). Many economic model do have profits. We're just more careful about what we call it. See the definition of "economic profit." When you think of profits, you need to ask yourself if the money you are making is simply a fair ...


7

Greg Mankiw's answer: plus extra characters


4

Opportunity cost is simply the value not obtained of the highest value alternative. It can be positive or negative; meaning it doesn't really make sense to define the opposite as opportunity profit. There is only two ways to go about it rationally, either you are profiting from doing something, or you are not profiting by not doing something, which is ...


4

The standard measure of the size of an economy is total income. Profit is just one type of income (accruing to owners of firms). Wages that accrue to the workers in a firm can increase, which can be taken from the profit of the firm. In that way, income from other sources can continue to increase even though firms earn zero profit. Other sources of income ...


4

It is very common for a company to have a loss (i.e. expenses > revenue) in the first year. Amazon is actually a very good example of that. It’s also a good example of ‘growth before profit’ strategy. Amazon was incorporated on July 5, 1994, and begun service in July 1995. This means that not only it did not generate profit in its first year, there were ...


4

Both in Economics and in Accounting, there is the following fundamental principal: we have to subtract revenues generated in a given time period from costs incurred in the same time period (because this is what makes basic sense). Now, "cost" is the value of productive resources absorbed into production, in the given time period. The total value of an "...


3

Recall the profit function. $$\pi=pf(x)-wx$$ where $x$ is a set of inputs, and $w$ is a set of input prices. A firm is profit maximizing when $MC=MR$ or in a competitive case where $MC=p$. If a worker is paid his marginal product (where $MPL=w$) we only pay what he produces. If marginal cost is constant and marginal revenues are constant across all ...


3

profit (v.) early 14c., "to advance, benefit, gain," from profit (n.) and from Old French prufiter, porfiter "to benefit," from prufit (see profit (n.)). Related: Profited; profiting. profit (n.) mid-13c., "income;" c. 1300, "benefit, advantage;"from Old French prufit, porfit "profit, gain" (mid-12c.), from Latin profectus "profit, advance, ...


3

I think this is just a reflection of the casual language of the popular press. What appears to be in dispute in this question is if profits can be negative or if that case is properly referred to as losses. I agree that in many contexts this is at best a confusing usage. Most dictionary definitions are clearly implying that profits must be positive (e.g., "...


3

Accounting (after tax) profits are net of depreciation and of interest paid on loans, or of any capital/equipment actually rented by the firm. So conceptually, they map to "net returns on own capital". Not necessarily "equilibrium" or "competitive", because such characterizations are some steps further down the modelling road, in making assumptions on the ...


2

My reading is yes, it is procyclical in levels and margins. This paper uses industry and firm data to look at price cost mark-ups and firm profit margins in U.K. manufacturing and services. In particular it examines how they behave over the business cycle. It has two main findings. First, the estimated average mark-ups and the profit margin ...


2

One of the assumptions of perfect competition is that firms are price takers. Ultimately price is determined by the quantity of goods supplied, and with perfect competition, there are infinite (or an arbitrarily large) number of firms, so a firm that changes their price by itself will simply have no business, since there are cheaper places to buy from. The ...


2

In former times, seignorage was a de facto fee charged by a government authorized mint for converting precious (or semi-precious) metals into de facto trademarked hard currency. Typically a mint would charge about a ten percent fee for this service. Anyone in possession of the hard currency could "redeem" the currency by melting it down back into the ...


2

How come they accepted the 8 euro offer if they could have gone to the people who pay 15 euros as well? Could it be that matching the suppliers and the customers has same value? If what you are doing is truly trivial you will get nothing. If what you are doing is not trivial but relatively easy then you will soon have a competitior who is offering 10 euros ...


2

In perfect competition, $MR=P$. When $MC>P$, marginally you're generating losses but you may still be profitable overall. This is represented by your (positive) yellow area, which is smaller than the blue area (the optimal one).


2

There is no loss at Q' and you are indeed right that the yellow area represents the firm profits. However, if you were to compare the yellow area to the blue area you would find that the latter is greater. So profit for the firm is not optimal at Q' but is optimal at Q*. This is what the quote refers to, it says the firm will be generating losses on its ...


2

Most of what you have done was correct. Here are the steps to finish the argument. Evaluating the profits at the optimum, you get \begin{equation} \pi_G=R(y^*(t))-C(y^*(t)) \quad\text{and}\quad \pi_N=R(y^*(t))-C(y^*(t))-ty^*(t). \end{equation} Differentiate the net profits with respect to $t$: \begin{align} \frac{\mathrm d\pi_N}{\mathrm dt}&=R'(y^*)\...


2

The margin with 1 bag was \$25 (revenue) / \$15 (labor + materials), or ~166%. The margin with 2 bags, assuming no additional labor costs, is \$50/$25, or 200%. When this business plans out expenditures on labor and materials for the third time around, it has \$50 cash, enough to pay $5 for labor and up to of 4.5 bags of candy.


2

First off some terminology: opportunity cost are not necessarily avoided profit. Profit is a term that is used for firms, but opportunity cost does not just apply to firms. Moreover as @clinical coder points out the opportunity costs are not avoided profits but the value of the best alternative forgone. For certain firm decisions that may be forgone profit, ...


1

I don't think it is a case. On a page you linked we have a proof that the profit function is non-decreasing in $p$. If the output price decreases, $p \geq p'$ and factor prices remain constant, $w_i \leq w'_i$ for all inputs, then the profit would be less or equal to the previous one. Then, in connection to your previous question: How to prove that a ...


1

Suppose that the wholesale cost of the product is 40USD, and the maximum price that most customers are prepared to pay for the product is 50USD, but a few customers are prepared to pay 100USD for the product. Suppose also that the few customers who are prepared to pay more for the product will put less effort into waiting for discounts. Suppose also that ...


1

There is a Hungarian economist by the name János Kornai, who has renowned work on eastern block socialist systems. He has devised a system theory on coordination mechanisms which guide the way people work together and allocate resources. Based on this theory you can explain different economic and political systems as well. The four coordination mechanisms ...


1

You largely answered this question yourself: you provided this reference to a Gennero Zezza paper: (link to paper) Zezza states in the second paragraph that most of the thinking about the Paradox of Profits was mistaken, as the authors used models which were not stock-flow consistent (flows disappeared). If people are arguing that there is a paradox, but do ...


1

Why would a company issue unpaid shares? Possible reasons are: buyer's temporary lack of sufficient funds to perform the acquisition, whence the issuer of shares is willing to grant credit for the sake of "closing the sale"; fiscal planning (be it the buyer's and/or the issuer's planning) might be such that delaying payment of shares will place him at a ...


1

We can define a (positive) cost to be simply a negative benefit. In which case, a (positive) benefit is simply a negative cost. So yes, in general, costs can be negative. Note though that in economics, it doesn't usually make sense to speak of costs in isolation or benefits in isolation. Instead we usually look at the net benefits (i.e. all benefits minus ...


1

This is a massive area of research, revived recently under the title of "capital misallocation". Some reason why capital do not fully adjust: grow in intangible capital-intensive sectors (which require more internal financing than other sectors) + low interest rates. quadratic adjustment costs on investment. financial frictions lowers access to credit to ...


1

BC Hydro is a a public body: that means it can run for the wider public good, rather than purely as a profit-maximiser. Pretty much everywhere in the world, electricity markets are dysfunctional. They typically have high negative externalities. Historically, electricity prices haven't included all the costs of the electricity, which means that electricity ...


1

You have to distinguish between state owned public service companies and state owned for-profit companies, the for-profit companies are really commercial companies with governments being major shareholders. I would not use the term "state owned" in case of the latter form. Governments can form joint-ventures with private and multinational companies. ...


1

Let $TR(Q), TC(Q): [0, \infty) \to [0, \infty)$ be continuous and twice differentiable functions w/ resp derivatives $MR(Q), MC(Q)$. It is not always the case that $$TR(Q) > TC(Q) \ \forall Q$$ If it were, we would have $$\{Q | TR(Q) = TC(Q)\} = \emptyset$$ Even if we had $$TR(Q) > (or \ge) \ TC(Q) \ \forall Q$$ meaning our profit is positive ...


1

I want to take Alecos' answer, which seems to be more explicit about the issue at hand, and provide a formalisation, which to me provides a better picture of why neoclassical models do not usually allow for accounting profits. Imagine an economy, where a government had issue a bond which pays interest rate of $r$ per period. There is no inflation, so all is ...


Only top voted, non community-wiki answers of a minimum length are eligible