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Economics explained


Firm's cost structure



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Profit is a very simple concept: it's bringing in more money than you spend.

In order for a business to continue to exist, the total revenue it collects must exceed the total expenses it accumulates at some point in the foreseeable future.

Profit is important because it allows businesses to stay in operation.

Without profit, firms will struggle to survive in the long run.

Profit provides an incentive for entrepreneurs to take risks.

Without generating Profits, a business can't compensate its owners, who may be investing considerable time, money, and energy into the operation. If the owners don't find their investment worthwhile, they'll close the business.

A firm earns profit if its total revenues exceed its total costs of production.

Profit is calculated by using the formula :

Profit = total revenue - total costs

To understand how costs and revenues interact to determine economic profits or losses, economists like to break up a firm’s total costs into two subcategories:

fixed costs

variable costs.

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