Finance Formulas / July 19, 2018 / Alia Marquez
When the cross elasticity of demand for product A relative to the change in the price of product B is negative, it means that the quantity demanded of A has decreased relative to an increase in the price of product B. An increase in the price of B will reduce the quantity demanded of A.
An individual starts a business and incurs startup costs of $50,000. During the first year of operation, the business earns a profit of $75,000. If the individual had stayed at his previous job, he would have made $30,000. In this example, the accounting profit is $25,000, or $75,000 - $50,000. However, because the individual had the potential to earn income at another location while retaining the startup costs of the business, an economic loss of $5,000, or $25,000 - $30,000, is incurred. Although an accounting profit occurred, the individual would have made a larger profit if he had stayed in his previous position.
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