Economic Profit vs Accounting Profit

Accountant and a Firm

Accounting Profit Explicit costs

TR= $125,000 Explicit costs= $95,000 Implicit Costs= $50,000

Accounting Profit= +$30,000 Economic Profit= -$20,000

Economist and a Firm

Economic Profit implicit costs explicit costs

Accounting Profit

TR- explicit costs

Total Rev

TR= P x Q

Normal profit

ZERO economic Profit the min accounting profit needed to keep firm in business and cover all costs TR-TC= 0 if NEGATIVE... profit-maximizing owners will likely go out of business

Economic Profit

accounting profit - implicit (opp) costs TR - (Explicit + implicit costs) must include implicit costs in calculation of firms profits bc these are opp costs items of value foregone when....the owner invests own money and land/building time in her own business rather than selling them for their best alternative uses cover all costs of producing gum but if sell gum for more money... can make a +economic profit

if a firm's TR can cover explicit costs but not implicit costs

accounting profit= + economic profit= -

Economic Explicit Costs

actual $ coming out of pocket; TRANSACTIONS internal to the firm depends upon the decisions the firm makes for itself (what resources to buy) AKA an opp cost

Economic Implicit Costs

evaluation of a cost value/appreciation of a cost ex) the amount of money the owner's time could have commanded in an alternative use ex) buy car (explicit) if drove less than car would be more appreciated bc less miles on a car= more value) ex) rent to a third party that the owner could have earned on her property AKA opp cost of the firm's owner's alternative uses

Accountant Explicit Costs

only measure actual payment of out of pocket purchases by a firm to buy resources necessary to produce its goods and services ex) cost of labor, raw materials, shipping, rent, utilities

Accountant and why they don't measure Implicit costs

they focus and evaluate the business not the owner's opp costs implicit costs can vary in unpredicted ways over time and among consumers... so don't know exact value of every person bc its not always the same so don't measure implicit costs