In the earlier blog, we took an example to illustrate the way people invest their resources into any venture. In today’s blog we define some more terms which are used in the context of performance to make a comparison. These are generally economic terms and hence, would have to be dealt in detail while discussing them in economics.
The relation between the expected value and actual value could give rise to three classifications -
Normal Performance - is the performance achieved to match the resource-owner's expectation with the value generated by the firm from the resource.
Below - Normal Performance - is the performance when the value generated from the resource by the firm is lower than the expected value.
Above - Normal Performance - is the performance when the value generated from the resource by the resource is greater than the expected value by the resource-owner.
The positive difference between the expected value and the actual value is known as economic profit or economic rent.
In general the firms that are earning above-normal economic profits enjoy some sort of competitive advantage in their market or industry, those with normal economic profits would be having a competitive parity while those with below-normal performance would face competitive disadvantage.
There is however one difficulty with this measure of performance - using economic profit; it is difficult to measure.
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