When a firm earns economic profit

Question

Quizplus · Accepted Answer

Economic profit represents a situation where a firm is earning greater profits than the opportunity cost of the resources used to produce the goods or services. This also means that the firm is earning more than the normal rate of return on its invested capital. As a result, other firms see the opportunity to earn similar profits and are likely to enter the market, increasing competition and potentially lowering the economic profit of the original firm. Accounting profits may still be positive, as they do not take into account the opportunity cost of resources. Market share is not relevant to the calculation of economic profit, and total revenue may not necessarily be maximized in a situation of economic profit.

When a Firm Earns Economic Profit