Dave runs his own construction business.  He has just completed
building a house.  When an economist calculated Dave's costs and
compared the costs to the amount of money Dave sold the house for
(which was equal to $170,000), the economist calulates the Dave earned
a zero profit.  Someone argues that Dave was foolish to have charged
this price because he didn't make anything.  The economist disagrees
with the conclusion.  How can the economist be correct? The person who
argued that Dave was foolish to built the house was thinking of what
measure of profit? Explain.

Hi k9queen,
The idea here is that the economist and the person who argues that
Dave is foolish are using different measures of profit. For a
non-economist, profit is measured simply as the difference between
income and expense. Thus for a non-economist:

Profits = Total Revenue - Total Costs

An economist, however, doesn't measure profits like that. That formula
needs a further adjustment, namely, the inclusion of the opportunity
cost. in this case, the opportunity cost is the profit that could have
been obtained if the money invested in the construction had instead
been invested somewhere else. Usually, this opportunity cost is taken
to be the interest rate one could have obtained if it had desposited
the capital in a bank instead of investing it in the construction.
Also, the opportunity cost includes what Dave could have earned if
instead of spending time running his business, he had spent his time
working for a salary in some other firm. Let's call these two things
"normal profits". The economist, then, measures the profits that were
made *in execess* of the normal profits. For an economist:

Profits = Total Revenue - Costs - Opportunity Cost

Thus, when the economist says that Dave had zero profit, he is not
implying that Dave made nothing out of the sale of the house. The
economist is implying that Dave didn't make profits in excess of
normal profits; that is, he didn't earn more than if he had invested
his money in a bank and had worked for a salary. In other words, Dave
did make something: the opportunity cost, or "normal profits".

You might want to check the following page for more information:

Firms and Industries
://www.google.com.ar/search?
q=cache:_jXv3fYirrUJ:lsb.scu.edu/~dgarvey/lecture11.ppt+%22opportunity+cost%22+%22zero+profit%22&hl=es&ie=UTF-8
(find "zero profit")


Google search strategy:
"opportunity cost" "zero profit"
://www.google.com.ar/search?q=%22opportunity+cost%22+%22zero+profit%22&hl=es&lr=&ie=UTF-8&oe=UTF-8&start=0&sa=N


I hope this is clear enough. If you have any doubt, please request a
clarification before rating the answer. Otherwise I await your rating
and final comments.

Best wishes!
elmarto