Economic Profit Essay
As what have been cited at the start of this paper, Wal-mart has been operating at a large scale. We all know that producing in a large scale cuts operational costs (Mandel 1). This scenario is explained by the economies of scale. Wal-mart has been operating in economies of scale for the past years and benefit from the ‘premiums’ that the economy offers for companies operating in the said condition. Here are some of the internal factors that contributed for Wal-mart to attain economies of scale: • Wal-mart hires numerous competitive managers and offers trainings and seminars to expand the horizons of these managers.
• Wal-mart also huge funds available to expand its operation locally and internationally like in terms of the size of the store and the machineries that they are being use in their stores. • Wal-mart has sufficient amount of laborers to perform the task needed in the company. • Wal-mart was able to establish good working relationship with their supplier and this help them in making more discounts to further set their prices lower. • Wal-mart has been operating on a large scale that reduces its operational costs.
Those are just few of the factors that contributed for
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Assuming that the expenses of the company remains the same as compared before, then, the increase in the profit would be tantamount to saying that revenue also increased. Now in order for us to make an analysis of the economic profit we have to determine also the amount of opportunity costs on the investments of Wal-mart. We are all aware that the U. S. market including the financial sector is not performing well for the past period due to the panicking of the investors in the stock market.
With this, investing on other revenue generating financial institutions would be risky for the mean time and this lessens the level of opportunity costs for the current investment of Wal-mart. We don’t have to have numbers in order to make a conclusion on this part since the relationship of opportunity costs and revenue would be enough of to determine the status of the economic profit of Wal-mart. The formula for computing economic profit: Economic Profit = Revenue – Opportunity Costs Based from the above formula we can say that an increase in the revenue and decrease in the opportunity costs would raise the economic profit of an entity.
Since we have already determined that the revenue of Wal-mart increased last quarter and the opportunity costs on their investments is low, therefore, the economic profit of Wal-mart remains to be positive [+] or Wal-mart receives more gains in its current investments and investing on other investments would only give them losses. This [+] economic profit of Wal-mart would only hold if they continue to generate more profit and offset the opportunity costs existing on other business ventures in the market.