What is Profit? Video Lecture | Economics for JAMB

hey how you doing econ students this is
mr. Clifford welcome to ac/dc econ right
now we're going to talk about profit no
not that kind of profit as you know the
goal of every business is to maximize
profit and it turns out there's actually
two different types of profit
there's accounting profit and economic
profit before we go any further you have
to know that economists hate accountants
and accountants hate economist no I'm
serious if I'm walking down the street
and I see an accountant it is on it's
kind of like Peter Griffin and that
chicken the reason why they hate each
other is because they both have a
different way of calculating profit and
they both think that they are right even
though the accountants are clearly wrong
you probably know that profit is all of
your revenue coming in - all your costs
but what costs should be included for
example every business has certain
explicit cost these are out-of-pocket
costs that they would normally pay for a
restaurant this be the price of hiring
the workers and paying your rent and all
the other ovens and things that you need
to run your business again that's called
explicit costs when accountants
calculate profit they're looking at just
explicit costs they're looking at the
total revenue minus the explicit
out-of-pocket cost that you normally
think of but economists know better we
know that explicit costs are not the
only type of cost there's also
opportunity costs these are implicit
costs so when you run a business you put
your money into it and you could be
doing something else with your money or
you could be doing something else with
your time the value of those things are
implicit costs so economic profit is
your total revenue minus your explicit
and implicit costs now let me give you
an example that'll make more sense
let's assume that LeBron James who
leaves the NBA to go open up a taco shop
so he opens up this taco shop and he
gets a certain amount of revenue let's
say two million dollars of revenue
coming in all right he also has certain
explicit costs of running the business
he has to pay for cheese and meat and
for the workers and for rent and for the
tables and that comes up to about a
million dollars the accountant would
calculate his profit and say he's making
a million dollars 2 million - 1 million
equals 1 million dollars so the
accountant say hey great job well done
you're making a lot of money
congratulations but the economists also
factors in the implicit cost the 20
million dollars that he could be making
if you stayed in the NBA so let's
calculate
profit it's the two million dollars of
revenue minus the 1 million dollars of
explicit cost also subtract out the 20
million dollars of implicit costs so if
you look at it that way LeBron is
actually losing 19 million dollars by
opening up that taco shop it's a loss
not a profit
take that accountants accounts are
important to figure out how much is your
company earning and trying to pay your
taxes but economists are better at
figuring out how much is your real
profit when you're trying to make
decisions going back to the taco shop
example what if I told you the next year
LeBron made zero economic profit is that
a good thing or a bad thing your first
thought is that zero economic profit is
a bad thing but actually it's not think
about it to have zero economic profit
your total revenue has to equal your
explicit and implicit costs so LeBron
can be making just as much money opening
the taco shop as you would work in the
NBA so his total revenue must be huge
and his accounting profit has to be
positive so the idea of zero economic
profit is called something it's called a
normal profit in a competitive market
firms break even and make zero economic
profit because they can't make more
profit doing something else or they
would have gone and done that other
thing the flip side of that is if they
are making a bunch of profit other firms
will jump in and that profit will go
away the point is making no economic
profit is a perfectly normal thing and
that's why it's called normal profit all
right hopefully that makes sense until
next time