Stephens PotteryFor All Your Pottery Requirements

an economics problem?

. Ms. Googumpuckey runs a small pottery firm. She hires one helper at $12,000 per year, pays annual rent of $5,000 for her shop, and spends $20,000 per year on materials. She has $40,000 of her own funds invested in equipment (pottery wheels, kilns, etc.) that could earn her $4,000 per year if alternatively invested. Total annual revenue from pottery sales is $72,000. She has been offered $15,000 per year to work as a potter for a competitor. Calculate a) the accounting profit, b) normal profit and c) the economic profit for Googumpuckey’s pottery firm

Accounting profit is simple. It’s the revenue received minus the expenses actually paid out.

Economic profit is more “theoretical”. First, you figure your accounting profit, then you deduct from that figure the money you could have made otherwise with the investments used. So from the accounting profit you would also subtract $4,000 (that could be made if she invested the money) AND you deduct the $15,000 she could make if she went to work for a competitor.

Normal profit is different than accounting profit because opportunity cost is taken into consideration. It is the point where the “economic profit” is equal to zero. Remember that zero “economic profit” does not mean the company is not making money. When you figure the two above, then you also need to figure how much revenue (sales) she needs to make the economic profit equal to zero. Normal profit occurs at the point at which the resources available to the firm are being efficiently used and could not be put to better use elsewhere.

I am not doing your homework for you, but now you should have a better understanding of how to find the three answers.

Potter’s Wheel for sale, Shimpo RK-Whisper