Economic Profit and Profit Calculation from Each Perspective

c. Types of long-term costs

In the production and business process, in order to survive and develop in competition, enterprises must constantly innovate production technology, machinery and equipment. Accordingly, all costs are variable or in the long term, all costs are variable costs. That is:

- Long-run average cost (LATC) is the average cost per unit of product. LATC = LTC/Q (Where: LTC is total long-run cost; Q is production output sold).

Long-run average total cost (LATC) is the sum of the costs in the short-run periods. Therefore, the LATC curve is the envelope that passes through the lowest point of the average costs in the short-run period.

ATC 1

ATC2

ATC3

LATC

E 3

E 1

E 2

Figure 2.32: Long-run and short-run average cost curves

- According to the graph above:

+ In the first cycle: The enterprise determines the short-term average cost as ATC 1 (point E 1 - ATC 1 min).

+ In the second cycle: The business determines the short-term average cost as

ATC 2 (point E 2 - ATC 2 min).

+ In the third cycle: The enterprise determines the short-term average cost as ATC 3 (point E 3 - ATC 3 min).

They are collected from the corresponding short-term costs. For example: From the costs

short-term average ATC1, ATC2, ATC3. We can determine LATC from the lower envelope tangent to the ATC1, ATC2, ATC3 lines.

- Long-run marginal cost (LMC) is the additional cost when a business produces 1 more unit of goods or services in the long run. And it is also a curve, cutting LATC at its minimum point.

2.3.2.2. Revenue

a. Total revenue

Total revenue is the total income of a business from selling goods and services. Total revenue is calculated as follows: TR = P * Q

b. Marginal revenue

- Concept: Marginal revenue (MR) is the additional or decreased revenue when producing or selling one more unit of product.

- Calculation: MR =  TR/  Q

+ If we determine the revenue function as a function of output, we have the marginal revenue function in the form:

MR = TR' (Q)

In which: MR is marginal revenue

TR is total revenue Q is quantity of product

TR' (Q) is the first derivative of the total revenue function with respect to Q

+ If the revenue function cannot be determined:

MR MR i MR i  1

i Q Q

ii  1

MR = P

MR MR

Marginal revenue curve when price decreases with output

Marginal revenue curve when price is constant with output

Figure 2.33: Marginal revenue curve in two cases

The marginal revenue curve of a business has two typical cases:

- When an increase in output leads to a decrease in price, the marginal revenue curve slopes downward to the right.

- When output increases and price remains constant, the marginal revenue curve is horizontal.

2.3.2.3. Profit

a. Concept

In a market economy, profit is the ultimate goal of a business. Any business wants to maximize profits.

Therefore, Profit is the difference between the total revenue of the enterprise when selling goods and services and the total costs incurred. TPr = TR - TC

In which: TPr is total profit; TR is total revenue; TC is total cost

Or TPr = (P - ATC) * Q

In which: (P - ATC) is unit profit (profit earned per unit of product); Q is production or sales volume on the market.

+ Gross profit = TR - VC

+ Net profit = Gross profit - FC

b. The role of profit

- Profit is a synthetic economic indicator reflecting the results and efficiency of the production and business process of an enterprise.

- Based on the profit index, we can know the capacity of organization and management, rationalization of production process, dynamism and creativity in grasping market demand and the efforts of the business owner.

- Profit is the highest economic goal, the condition for businesses to exist and develop. Based on profits, businesses expand production, innovate technology and improve the lives of workers.

c. Classification

In microeconomics, business profits are often classified into the following types:

- Business profit (calculated profit) = Total revenue - Total calculated cost

- Economic profit most accurately reflects the business performance of the enterprise, including the efficiency in using resources.

+ Economic profit = Total revenue - Total economic cost

or: Economic profit = Calculated profit - Opportunity cost.

- Average profit: in fact, it is the rate of return on investment capital that the enterprise has spent in the production and business process or it is the opportunity cost of capital.

- Monopoly profit: is the profit that the business gets due to market power. Because they are the only ones, they have the right to set the selling price of the product, determining Q. Therefore, to earn monopoly profit, the selling price of the monopolist > marginal cost (MC) or P > MC

d. Origin of profit

- Promote the advantages of the enterprise or individual. This is the natural income of production resources. Because in the production and business process, enterprises can use existing resources in different ways.

- Seize business opportunities. It is a reward for being adventurous, daring above average, and daring to take on above average risks of the business.

- Select the optimal combination of input factors.

- Adventurous, creative, innovative business.

- Control the price of goods and services in the market (monopoly). For example: how to calculate profit (depending on the concept)

Table 2.9: Calculating economic profit and profit calculated from each perspective

Accountant's concept

Economist's view
1. Total revenue	102 million	1. Total revenue	102 million
2. Accounting costs	80 million	2. Cost
- Raw materials	50 million	- Accounting costs	80 million
- Labor hire	20 million	- CPCH on the boss's labor	12 million
- Other items	10 million	- Bank interest	5 million
		- Point rental	5 million
		3. Total economic cost	102 million
3. Accounting profit	22 million	4. Economic profit	0

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2.4. ENTERPRISE DECISIONS ON PRODUCTION VOLUME

2.4.1. Under profit maximization conditions

At Q 1 , marginal revenue MR 1 is greater than the corresponding marginal cost MC 1 . The consumption of product Q 1 will have a positive marginal profit (MPr 1 = MR 1 - MC 1 ). Therefore, the firm will expand production to level Q*. At level Q*, MR=MC and the marginal profit

= 0. The production and consumption of product Q* does not increase or decrease the firm's profits.

When production exceeds Q*, say at Q 2 , it will reduce the firm's profits. The firm will reduce production to Q*.

In summary: to maximize profit, the firm produces at output level Q*, where MR = MC.

(The maximum profit does not have to be positive, but is simply the highest possible profit given the given conditions.)

MR 1

MC 1

0 Q 1 Q* Q 2 Q

Figure 2.34: Profit-maximizing choice

2.4.2. Under the condition of revenue maximization

In production and business, enterprises do not always achieve maximum profits, but in many cases, business managers have to face different situations. For example, when a new enterprise enters the market, the goal is to maximize revenue (usually in the short term).

- Then choose output so that TRmax is obtained under the condition MR = 0.

- The idea is to dominate the market -> highest selling goods -> discount.

Let Q* be the output that generates the highest revenue. It must satisfy one of the following two conditions: MR = 0 or ED = -1

When MR = 0 then TRmax because TR Q = PQ

There are two conditions required (TR)' Q = 0 and (TR)'' Q < 0

=> (TR)' Q = (PQ)' Q = MR = 0

2.5. MARKET AND MARKET STRUCTURE

2.5.1. Market

2.5.1.1. Concept

There are different views on the market:

- The market is the meeting place between supply and demand (a popular concept recognized by many economists)

+ Demand is consumers, they must have the ability to pay and the goal of

they are the highest benefit.

+ Supply are the producers, the people who create goods and services with the purpose of selling and their goal is the highest profit.

That is done when they meet and talk to each other.

- The market is where buying, selling, exchanging, transferring goods, services and factors of the production and business process take place.

It can happen:

+ Direct: buyers and sellers meet directly with each other to exchange goods and services

+ Indirect: buyers and sellers do not meet each other but still buy, sell and exchange with each other.

For example: In the stock market, buyers and sellers communicate with each other through information.

- The market is the bridge between production and consumption, a very important step in the reproduction process.

"Bridge" here is an invisible bridge and through it its goal is production - distribution

- exchange - consumption. Only through the market can the goals of producers and consumers be realized.

- The market is the synthesis of economic relationships formed in the activities of buying and selling goods and services.

2.5.1.2. Role

- For consumers:

+ The market is where buyers meet sellers and satisfy their needs for goods and services.

+ The market helps consumers have the opportunity to choose optimal consumption.

- For businesses:

+ The market is the decisive condition for the existence and development of enterprises in the market mechanism.

+ The market is considered the business environment, the place that reflects and tests the most accurate decisions of enterprises when choosing production and business plans. Based on the market, enterprises can evaluate whether their production and business activities are good or not.

- For the State: The market is the subject and basis for the State to set out appropriate economic policies to regulate production and consumption activities to serve the goals of socio-economic development in each period.

2.5.1.3. Function

The market has four main functions as follows:

- Recognition and acceptance of goods and services. In the conditions of a market economy, each enterprise has different production conditions and production costs. If the product is recognized by the market and accepted by buyers, it can be sold.

- Implementation (value and use value). Because when the buying and selling process goes smoothly, the seller receives value (money) and the buyer receives use value.

- Regulates and stimulates production and consumption in society. When talking about the market, we must talk about the invisible hand that is the market price.

- Providing information. Information is the market's signal function for consumers and producers to know: Prices of goods and services; Supply and demand relationship of a certain good or service; Payment methods when buying and selling goods and services.

2.5.1.4. Classification

Depending on the research purpose, people often rely on the following criteria to classify the market:

- Based on scope (Implication is the space where exchange activities take place)

+ Domestic market: exchange only takes place within a certain country.

+ International market: buying and selling takes place outside national borders.

+ Urban and rural markets

+ Plain market and mountain market.

- Based on the characteristics and properties of the product during the remanufacturing process

+ Consumer goods market: there are only goods for consumption (market for buying and selling agricultural products, food,... industrial consumer goods).

+ Market of production factors: where the buying and selling of factors serving the production process take place.

For example: Land market, labor, capital,...

If we follow this second classification, from a micro perspective, this economy only has two agents: businesses and households. And associated with it, we only see two types of markets: the goods-services market and the factor market.

In the goods and services market, businesses are the suppliers and households are the buyers of those goods (demand).

In the factor market, businesses are the buyers of factors of production, while households are the suppliers.

- Based on the stages of the goods and services circulation process

Goods go from producer to consumer through which stages?

+ The wholesale market is where the buying and selling of goods and services takes place between manufacturers and commercial organizations.

+ The retail market is where buying and selling activities take place between commercial organizations and consumers.

- Based on the role of buyers and sellers in deciding 2 factors : market price and quantity of goods and services:

+ Perfectly competitive market.

+ Monopolistic competition market.

+ Oligopoly market.

+ Pure monopoly market.

2.5.2. Market structure

2.5.2.1. Perfectly competitive market

a. Concept

First, we should learn how economists define a perfectly competitive market so that we can develop theories related to the firms operating in this market.

A perfectly competitive market is a market in which there are many buyers and many sellers, but everyone assumes that their buying and selling decisions do not affect market prices.

Example: Milk market

No single milk buyer can influence the price of milk, because each buys only a small amount relative to the market size. Similarly, each milk seller has only limited control over the price of milk, because other sellers also supply milk, which is essentially identical. Since each seller can sell all the milk he wants at the going price, there is little reason for him to lower his price; if he raises his price, buyers will go elsewhere.

b. Characteristics

From the concept, we see that the important feature of this market is that the quantity of product supplied by each firm has no effect on the market price. A firm in a perfectly competitive market acts as if the market price does not depend on the quantity sold by the firm and therefore, the firm is called a price taker.

Therefore, the demand and supply of a particular entity do not affect the market price. The demand curve for each enterprise's goods will be a horizontal line because regardless of their supply, they will receive a fixed price.

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