Answer to Question #109309 in Microeconomics for Dilpreet Kaur

Question #109309
A recent news article$ 649 iPhone 7 estimated to cost Apple $220discussed that an estimated cost of raw materials required to make Apple's 4.7-inch iPhone 7 with a base 32GB storage was approximately $220 U.S. dollars . Apple was Selling the iPhone 7 for $ 649 in the United States (most phone carriers reduced the cost for customers who went on a specified plan ). Can we conclude from the information above that Apple is making an economic profit of about $429 per iPhone 7?
Expert's answer

The profit remaining at the disposal of the enterprise after deducting costs and other costs for the manufacture of products or the provision of services is called economic.

Economic profit is defined as the difference in total income and economic costs of the enterprise. The composition of economic costs includes not only explicit but also implicit costs. Explicit costs are often referred to as direct or external costs. This category includes the so-called "visible" costs that are accounted for by accountants:

  • workers' salaries;
  • communal expenses;
  • the amount of materials used in the production;
  • rental payments, etc.

Implicit costs reflect lost profits. They rely on abstract meaning. For example, the owner of the company must provide available funds in another project that should have been proposed. Another example: an entrepreneur has a plot of land that he could rent, but he did not begin to do it. The potential rental income is the implicit expenditure of the landowner.

In this example, we are not talking about total "visible@ costs, but only the cost of the materials is reflected. Nothing is mentioned about implicit costs, therefore, the value of 429 dollars is not an economic profit.

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