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 External Costs. This is the cost imposed on a third party. For example, if you
smoke, some people may suffer from passive smoking. That is the external cost.
 Private Costs. The costs you pay. e.g. the private cost of a packet of cigarettes
is £6.
Economic profit is the profitability measurement that calculates the amount
that revenues received from selling a product exceeds opportunity costs incurred from
using resources to make and sell these products. In other words, it’s the excess money
a company earned from one course of action over another had they chosen
differently.
For the most part, we will assume that owners of firms endeavor to maximize
total economic profit, where economic profit (Pr) is defined as the difference between
total revenue (TR) and total economic cost (TC), that is:
Pr=TR-TC. (7.1)
Total revenue is the total receipts a seller can obtain from selling goods or
service to buyers. It can be written as (P×Q), which is the price of the goods
multiplied by the quantity of the sold goods.
Profit is the engine of maximum production and efficient resource allocation in
pure capitalism; it’s can’t be underestimated. The existence of profit opportunities
represents the crucial signaling mechanism for the dynamic reallocation of society’s
scarce productive resources in purely capitalistic economies. Rising profits in some
industries and declining profits in others reflect changes in societal preferences for
goods and services. Rising profits signal existing firms that it is time to expand
production and serve as a lure for new firms to enter the industry. Declining profits,
on the other hand, a signal producers that society wants less of a particular good or
service, presenting existing firms with an incentive to reduce production or to exit the
industry entirely. In the process, productive resources move from their lowest to their
highest valued use. Moreover, profit maximization not only encourages an efficient
allocation of resources, but also implies efficient (least-cost) production. Thus, purely
capitalist economies are characterized by a minimum waste of societys’ factors of
production.
In economics and business, specifically cost accounting, the break-even point
(BEP) is the point at which cost or expenses and revenue are equal: there is no net
loss or gain, and one has "broken even." A profit or a loss has not been made,
although opportunity costs have been "paid" and capital has received the risk-
adjusted, expected return. In other words, it´s the point in which the total revenue of a
business exceed its total costs, and the business begins to create wealth instead of
consuming it. It is shown graphically as the point where the total revenue and total
cost curves meet. In the linear case the break-even point is equal to the fixed costs
divided by the contribution margin per unit.
The break-even point is achieved when the generated profits match the total
costs accumulated till the date of profit generation. Establishing the break-even point
helps businesses in setting plans for the levels of production which it needs to
maintain be profitable.

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