Demamd nad supply

1. ECONOMIC COST
&
ECONOMIC PROFIT

2. FOR AN ACCOUNTANT, INFLOW OR OUTFLOW OF FUND IN THE BUSINESS
IS IMPORTANT. HENCE ONLY EXPLICIT COST FINDS PLACE IN ACCOUNTING
COST, WHEREAS FOR AN ECONOMIST EXPLICIT AS WELL AS IMPLICIT COST IS
IMPORTANT. ECONOMIC COST INCLUDES OPPORTUNITY COST, WHICH DOES
NOT FIND PLACE IN ACCOUNTING COST.
PROFIT = REVENUE – COST, SINCE THERE IS DIFFERENCE BETWEEN
ACCOUNTING COST AND ECONOMIC COST, THERE IS DIFFERENCE BETWEEN
ACCOUNTING PROFIT AND ECONOMIC PROFIT.
ACCOUNTING PROFIT = REVENUE – COST (ONLY EXPLICIT COST)
ECONOMIC PROFIT = REVENUE – COST (EXPLICIT AND IMPLICIT / OPPORTUNITY COST)

3. IN ECONOMICS, THERE IS YET ANOTHER PROFIT CONCEPT, NAMELY NORMAL
PROFIT
NORMAL PROFIT IS THE MINIMUM RETURNS EXPECTED BY THE PRODUCER.
IT IS THE SUM TOTAL OF ALL THE IMPLICIT AND OPPORTUNITY COSTS.
WHEN THE PRODUCER EARNS ONLY NORMAL PROFIT, HIS ECONOMIC
PROFIT IS ZERO.
WHEN ECONOMIC PROFIT IS POSITIVE, IT MEANS THE FIRM IS ENJOYING
SUPER-NORMAL PROFIT

4. EX. 1 HEENA, A HOUSEWIFE ALSO TAKES TUITION @ Rs.100 PER HOUR. WHILE
WHILE IN DUBAI IN THE SUMMER HOLIDAYS, SHE BOUGHT SOME DRESS-
MATERIAL FOR WHICH SHE PAID Rs.50 PER METER. THIS MATERIAL COULD
BE SOLD BACK TO LOCAL FABRIC SHOP IN MUMBAI @ Rs.150 PER METER.
HEENA IS CONSIDERING USING THAT MATERIAL TO MAKE DRESSES, WHICH
SHE WOULD SELL TO HER FRIENDS AND NEIGHBOURS. SHE ESTIMATES THAT
EACH DRESS WOULD REQUIRE 4 METERS OF MATERIAL AND 4 HOURS OF
TIME. IF THE DRESSES COULD BE SOLD FOR Rs.900 EACH, COULD HEENA
EARN POSITIVE ECONOMIC PROFIT BY MAKING AND SELLING DRESSES?

5. SOLUTION - 1
REVENUE Rs. 900
LESS: COST OF MATERIAL Rs. 200
ACCOUNTING PROFIT Rs.700
LESS: 4 HRS. OF WORK Rs.400
4 MTS. OF CLOTH Rs.600
REVENUE Rs. 900
ECONOMIC PROFIT ( - ) 100
HEENA COULD NOT MAKE POSITIVE ECONOMIC PRFIT BY MAKING AND
SELLING DRESSES.

6. EX. - 2 KISHOR GENERALLY SPENDS HIS SUMMERS WORKING ON THE COLLEGE
MAINTENANCE CREW AT A WAGE RATE OF Rs.60 PER HOUR FOR A
40-HOUR WEEK. OVERTIME WORK IS ALWAYS AVAILABLE AT AN
HOURLY RATE OF 1.5 TIMES THE REGULAR WAGE RATE. FOR THE
COMING SUMMER, HE IS OFFERRED THE PIZZA STAND CONCESSION
AT THE STUDENTS’ UNION BUILDING, WHICH WOULD HAVE TO BE
OPEN 10 HRS. PER DAY, 6 DAYS A WEEK. HE ESIMATES THAT HE CAN
SELL 100 PIZZAS A WEEK AT Rs.60 EACH. THE PRODUCTION COST OF
EACH PIZZA IS Rs.20 & THE RENT ON THE STAND IS Rs. 1500 PER
WEEK. WHAT SHOULD KISHOR DO?

7. SOLUTION - 2
IF KISHOR TAKES PIZZA STAND, HIS ACCOUNTING PROFIT WOULD BE;
REVENUE Rs.6000 (100 pizzas @ Rs.60 each)
LESS: RENT Rs. 1500
PRODUCTION COST Rs.2000 (100 pizzas @ Rs.20 each)
LESS: OPPORTUNITY COST Rs. 4200 (2400 +1800 overtime)
40 HRS. @ Rs.60 per hour + 20 HRS. @ Rs.90 per hour (overtime)
ECONOMIC PROFIT ( - ) Rs. 1700
ACCOUNTING PROFIT Rs. 2500

8. EX. - 3
A RECENT ENGINEERING GRADUATE TURNS DOWN A JOB OFFEER OF Rs.3,00,000
PER YEAR & STARTS HIS OWN BUSINESS. HE WILL INVEST Rs.5,00,000 OF HIS
OWN MONEY IN THE BANK A/C EARNING 7% INTEREST PER YEAR. HE ALSO
PLANS TO USE HIS BUILDING HE OWNS IN KOLKATA THAT HAS BEEN RENTED FOR
Rs.15000 per month. REVENUE IN NEW BUSINESS DURING THE FIRST YEAR WAS
Rs. 10,50,000 WHILE EXPENSES WERE;
ADVERTISING Rs. 50,000
TAXES Rs.50,000
EMPLOYEES’ SALARY Rs.4,00,000
SUPPLIES Rs. 50,000
PREPARE TWO INCOME STATEMENTS, ONE USING TRADITIONAL ACCOUNTING
APPROACH & THE OTHER USING OPPORTUNITY COST APPROACH TO DETERMINE
PROFIT.

9. SOLUTION - 3 ACCOUNTING APPROACH
REVENUE Rs.10,50,000
LESS: ADVT. Rs.50,000
SALARIES Rs.4,00,000
SUPPLIES Rs.50,000
TAXES Rs.50,000 Rs.5,50,000
ACCOUNTING PROFIT Rs.5,00,000

10. OPPORTUNITY COST APPROACH
REVENUE Rs.10,50,000
LESS: EXPLICIT COSTS
ADVT. Rs.50,000
SALARIES Rs.4,00,000
SUPPLIES Rs.50,000
TAXES Rs.50,000 Rs.5,50,000
IMPLICIT COSTS
SALARY FOREGONE Rs.3,00,000
RENT FOREGONE Rs.1,80,000
INT. FOREGONE Rs.35,000 Rs.5,15,000
ECONOMIC PROFIT ( - )15,000

11. EX. - 4
SWASTIK ELECTRONICS LTD. HAS AN INVENTORY OF 5000 ELECTRONIC
CHIPS ORIGINALLY PURCHASED FOR Rs.25 EACH; THEIR MKT. VALUE NOW
IS Rs.50 EACH. THE PRODUCTION DEPARTMENT HAS PROPOSED TO USE
THESE CHIPS BY PUTTING EACH ONE TOGETHER WITH Rs.60 WORTH OF
LABOUR & OTHER MATERIALS TO PRODUCE A WRISTWATCH THAT
WOULD BE SOLD FOR Rs.100 EACH. SHOULD THIS PROPOSAL BE
ACCEPTED? EXPLAIN.

12. SOLUTION - 4
SALES Rs. 5,00,000
LESS: COST OF CHIPS Rs.2,50,000
COST OF LABOUR & OTHER MATERIAL Rs.3,00,000
Rs.5,50,000
NET PROFIT (-) 50,000
PROPOSAL SHOULD NOT BE ACCEPTED.