Unusual Revenue Gain: Definition, Calculation
In the realm of economics, the pursuit of profit is a central focus for businesses. One key concept that helps measure a company's financial success is the economic profit.
The economic profit formula is straightforward: Total revenue minus explicit costs minus implicit costs equals the economic profit. Explicit costs, as we know, include total variable costs and total fixed costs. Implicit costs, on the other hand, are not found in the income statement. They represent the opportunity costs of using the firm's current resources.
Economic profit becomes positive when a firm earns higher revenues than both explicit and implicit costs. This can be achieved in various market structures, such as monopolies and oligopolies.
In a monopoly, the company holds absolute power over quantity and quality as it is the sole producer. Abnormal profit can persist in such markets due to the lack of competition and high barriers to entry. On the other hand, companies in oligopoly markets can generate positive economic profit through differentiation and by controlling a significant share of the stock market today.
In oligopolies, high barriers to entry and market power allow for the maintenance of abnormal profit over time. This is unlike in perfectly competitive markets, where abnormal profits are not sustainable in the long run due to the attraction of new entrants.
Interestingly, in Germany in 2023, the highest abnormal profits are primarily accounted for by companies engaged in systematic internalization. This market structure, characterised by frequent organized trading of stocks, ETFs, certificates, and comparable financial instruments outside regulated markets or multilateral trading systems, enables firms to capture abnormal profits by executing client orders internally rather than on open exchanges.
It's important to note that companies earning abnormal profits may attempt to hide this fact to reduce competitive pressure and avoid anti-competitive investigations. However, it's crucial for businesses to remember that transparency and ethical practices are key to long-term success.
The opportunity costs of using a production machine can be the cost of buying it or renting it, depending on the choice made by the company. Understanding these costs is essential for making informed decisions about resource allocation.
In conclusion, economic profit is a valuable tool for understanding a company's financial health and performance. By understanding the concepts related to economic profit, such as the production function, external economies of scale, and economies of scope, businesses can make more informed decisions and strive for long-term success.
