Question

Discuss the importance of Economic Profit and Marginal Cost. What do you think is more important with respect to individual business point of view?

Answer 1

The economic profit is the concept which shows the difference between the economic revenue from the business firms and the total opportunity cost of the firm. To find the economic profit, the revenue earned should be deducted from the explicit cost and opportunity cost. This economic profit will determine the market entry of new firms and their existence in the market. This will measure the long term account of certain firm’s business activities. Other firms have the ability and incentives to enter in a market, if there is positive economic profit is ensured. Marginal cost will measure the extra cost incurred over the production of additional unit. This will help to find the incurred cost of the firm. This will measure the change in cost also.
According to individual business point of view, the marginal cost is more important than the economic profit. The increasing marginal cost will retards the firms from the existing production level. At the same time, the increasing marginal cost will reduce the profit level of the firms. So the individual firms will more concern about the marginal cost. This will be mainly due to increasing wage rates, additional payment for inputs, high cost of adoption of new technologies etc.