If a business' total economic cost of producing 10,000 units of a product is N750,000 and this output is sold…

Analyze the question: The firm's total economic cost is N750,000 and its total revenue is N1,000,000. We need to identify the type and amount of profit.

Concept:

• Economic cost includes both explicit costs and implicit costs. Implicit costs include the owner's opportunity cost, such as the normal profit needed to keep the entrepreneur in business.
• Normal profit is the minimum return needed to keep the firm in that line of production. It is already counted inside economic cost.
• Economic (supernormal) profit = Total Revenue − Total Economic Cost

Solution:

Economic profit = Total Revenue − Total Economic Cost

= N1,000,000 − N750,000

= N250,000

Because the total economic cost already includes normal profit, the N250,000 is the extra return above normal profit. That makes it an economic (supernormal) profit.

Checking the options:

• A. Normal profit of N750,000: Wrong. N750,000 is the cost, not a profit.
• B. Economic profit of N750,000: Wrong. This is the cost figure, not the difference.
• C. Normal profit of N1,750,000: Wrong. This is just the sum of the two figures, which has no meaning here.
• D. Economic profit of N250,000: Correct.

Answer: D

Exam tip: In economics, "economic cost" already includes normal profit. So whenever Revenue > Economic Cost, the difference is economic (supernormal) profit. If Revenue = Economic Cost, the firm earns only normal profit. Remember: TR − TEC = Economic Profit.