Profits: Accounting Profits, Normal Profits, and Economic Profits:

A business's goal is to male profit, that it to make more money form selling a product or service than it cost to produce it. Economics and accountants measure costs differently, so they measure profit differently. For an accountant, costs are limited to what the firm has to pay out. These are called explicit costs. An economist includes these explicit costs but will also include the opportunity cost of resources, inventories and capitalOpportunity costs are also called implicit cost, because the firm does not have to pay for them actually. If the firm's revenue covers both explicit and implicit cost, it is said to be making normal profits. In the firm that is earning normal profits, the resources are making at least as much money as they could in their next best alternative, so they will stay in business. If the firm's revenues cover implicit and explicit costs with money to spare, the extra revenue is called economic profit.

Profit is maximized when marginal costs equal marginal revenue. Marginal cost is the addition to the total cost that is created by producing an additional unit of output. Marginal revenue is the addition to the total revenue by selling one additional unit of output. Profit is thus maximized when marginal cost equals marginal revenue. If marginal revenue is greater than marginal cost, then producing an additional unit of output will add more to revenue than to costs, therefore increasing profits. If the marginal cost is greater than the marginal revenue, the firm is producing too much; additional units are adding more to costs than to revenue, thereby decreasing profits. When MR = MC, profits are maximized, because any other level of output leaves the possibility of increasing profits by increasing revenue or decreasing costs.