Vanguard

Explain the difference between economic profits and accounting profits.

1. Economic profits are profits which deduct from profit not only sales revenue and economic cost, but they also deduct opportunity cost. Opportunity cost would be the economic value of a company’s assets and resources (i.e. plant / equipment), had they been employed elsewhere. If a company’s assets employed elsewhere would earn more than they are currently earning for a company, opportunity cost may be high.

The example used by the text illustrates a software engineer whose worth in the job market is $200k / year. If this person runs a software company, and the company earns $1,000,000, it must subtract incurred supplies/expenses of $850,000. The owner is left with $150,000 accounting profit. However, when one subtracts the opportunity cost of the income the owner would have earned from an employer ($200k), the true economic profit remaining is - $ 50k. Therefore owning a software company is not profitable, and leaves the owner in the negative for an actual salary amount.

Accounting profits do not calculate the opportunity cost into their equation. Accounting profits are simply sales revenue minus accounting cost. Accounting profits may be deceivingly higher than economic profits.

What is infrastructure? Why is it essential to economic development?

2. Infrastructure is made up of tools and assets which can assist in the production and distribution of goods and services that a company itself cannot provide on its own. More specifically, infrastructure is often thought of as encompassing highways, streets, roads, bridges; mass transit; airports and airways; water supply water resources; wastewater management; solid-waste treatment and disposal; electric power generation and transmission; telecommunications; and hazardous waste management.

Government typically plays a role in the development and maintenance of infrastructures. Government involvement is often to protect consumers and prevent monopolies from occurring. Government is a large supporter or research and development for infrastructure. This is evident in the widespread growth of the internet.

Transportation is critical to economic development as it allows large quantities of goods to be shipped across long distances, from manufacturers to consumers. Air travel, interstate trucking, railroads, and large ships allow goods to successfully enter into the market place, regardless of where they are originally made.

Mass communications media includes television, radio, internet, and telecommunications. The reaches of these modes of communication have enabled businesses across the globe to reach potential audiences through advertising, public relations and market research. The speed of internet and fax have enabled business to communicate order information instantly. Businesses are also able to work together as partners, without geographic distances creating barriers. A company can have workers across the globe by employing today’s means of communications.

The infrastructure continues to grow in proportion with economic development. Both factors enhance and complement each other’s growth over time.

Economies of scale are usually associated with the spreading of fixed costs, such as when a manufacturer builds a factory. But the spreading of fixed costs is also important for economies of scale associated with marketing, research and development, and purchasing. Please explain.

3. An economy of scale is based upon the idea that price is decreased per unit as output increases.

In terms of purchasing, a consumer can often pay a lower price per unit as the amount of items purchased increases (i.e. buying in bulk). There are three reasons why bulk purchases can save money.

The first is that the seller could potentially save money if he sells only to a single buyer. If there are fees or fixed costs associated with each transaction, then it will prove to be less expensive to sell more volume to less customers, than to sell less volume to more customers.

Secondly, a bulk purchaser has more to gain from getting the right price. If a seller contracts with an institution that is going to buy in bulk, the seller will work harder at securing the lowest wholesale prices for goods. A customer who is buying bulk on high priced items is more easily inclined to switch sellers for even a small reduction in items’ pricing, as this will amount in greater savings.

Third, bulk customers are more appealing to sellers. A seller would rather reduce its prices and