I get that its when total revenues equal total cost; but thats a point of no profit no loss. Why would I as an entrepreneur try to get into a business which only promises me normal profits in the future, because I’m basically only subsistence earning.
In: Economics
One thing is that the total cost includes “implicit costs”, which are basically “things that are not costs in the normal sense of the word”.
For example, you could be running a business and paying yourself an $80k salary, while previously you were getting $30k at an office job. An “implicit cost” to your business is the $30k that you aren’t now earning.
From https://www.investopedia.com/terms/n/normal_profit.asp :
“Example of Normal Profit
To better understand normal profit, suppose that Suzie owns a bagel shop called Suzie’s Bagels, which generates an average of $150,000 revenue each year. Also suppose that Suzie has two employees, each of whom she pays $20,000 per year, and Suzie takes an annual salary of $40,000. Suzie also pays $20,000 annually in rent and $30,000 annually for ingredients and other supplies. After meeting with her financial advisor, Suzie learns that based on her business and her individual skills, the estimated opportunity cost of operating Suzie’s Bagels full time is $20,000 each year.
Based on this information, Suzie calculates that her average annual explicit costs are $20,000 + $20,000 + $40,000 + $20,000 + $30,000 = $130,000. This results in an accounting profit before taxes of $20,000. Because her average annual implicit costs are $20,000, her average annual total costs will be $130,000 + $20,000 = $150,000. She observes that her total costs are equal to her total revenues and determines that her bagel shop is in a state of normal profit.”
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