Microeconomic Principles - Definitions and Examples

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I. DEFINITIONS Net Profit Margin (NPM) NPM of a firm is simply the percentage of net income (NI) from total operating revenue (TOR). This indicates, after subtracting tax, how much profit the firm has generated. For example, if IKEA accumulates, over a single period, total sales revenue of $100M, but recapitalizes part of that income (about $50M), and needs to pay tax of 40% of the earnings, it will end up with a free cash flow of $30M. NPM is simply $30M / $100M x 100%, which equals 30%. Capital Capital includes any long term assets that are invested into an organization for it to be able to run its operations, whether providing goods or services. For example, if there is a start-up pizza restaurant, it will require a capital…show more content…
Monopoly A monopoly of a market will exist when three attributes are identified: there is only one producer, there are barriers to enter such a market, and there are no close substitutes for the product. This produces a perfectly inelastic demand curve. In a hypothetical example, Schrute Farms is a large coffee bean producer. It is a family business and has been for years, and it does not produce its coffee beans unless these are cooked and in a state that they can’t be replanted to yield any crop, thus maintaining its exclusivity for the product. Business Profit versus Economic Profits Business profit or accounting profit is simply the net income of a company (total revenue minus total expenses), however an economic profit is a tougher profit to achieve. This is because it takes into account the missing investment opportunities. For example, if investment option A generates a 50% return while investment option B only generates 10% and option A was chosen exclusively: the business profit would simply be that of option A (50%) while the economic profit would be 50% - 10% = 40%. Therefore, if the total
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