Economic profits are positive, and there are two conditions that must be met for a firm to earn them:
First, the opportunity cost of producing the good or service must be less than the price it charges;
Second, the firm’s total revenue from selling its product must exceed its total costs.
The most common way for firms to make an economic profit is when they have an absolutely inelastic demand curve (i.e., their demand doesn’t change with changes in price). In this blog post we will explore why a firm will earn economic profits when:
1) It has an absolute inelastic demand curve
2) Its marginal cost is greater than zero
3) Its average fixed cost per unit of production is less than its average variable cost per unit of production Economics can be a tough subject to wrap your head around, but hopefully, this blog post has helped explain why firms earn economic profits when.
Note: numbers and bullet points are not allowed