Business Form

Sole Proprietorship - When there is only one owner

Partnership - When there is at least two and maximum20 owners

Corporation - Where number of owners are unlimited

Main Objective of Business Firm

Making a profit

Profit means business firm must earn revenues in excess of costs.

Opportunity Cost

By economist point of view:

Cost is not what has been paid but what has been given up by taking one action rather than another

Opportunity cost is the measure of what has been given up.

The opportunity cost of an action is the value of the best forgone alternative.

Opportunity cost may be divided into two:

Explicit Cost - Also called an Accounting Cost, is incurred when an actual payment is made. Identification: Money Changes hand

Implicit Cost - Is incurred when an alternative is sacrificed

Accounting Profit

When business revenues exceeds business expense

Accounting Profit = Revenues - Expenses

While calculating accounting profit we consider only explicit cost as an expense.

Economic Profit

When business Revenues exceeds Total opportunity cost

Economic Profit = Revenues – Opportunity Cost                   

Economic Profit = Revenues – (Explicit Opportunity Cost + Implicit Opportunity cost)

While calculating Accounting Profit we consider both explicit and implicit opportunity cost as expenses.

Economic Loss

When Total opportunity cost exceeds business Revenues

Economic Loss = Opportunity Cost - Revenues

Normal Profit

A normal Profit is a return that the time and capital of the entrepreneur would earn in the best alternative employment and is earned when total revenues equals total opportunity cost.

A normal profit is an economic profit of zero.