AccountingProfitsversusEconomicProfit
An accountant's definition of profit is different from an
economist's definition. Accounting profit (also called
bookeeping profit) for a firm consists of total revenue minus
explicitcosts(the monetary costs a firm has; its expenses).
accounting profit ==total revenue (TR) - explicit costs
For an accountant, the total costs do not include the implicit
costs(the opportunity cost of the owner's time, money, or
firm's resources). Implicit costs are not considered. The wage
that the owner could get elsewhere and the interest that could
be earned on any funds if they were invested elsewhere are
considered implicit costs; it is implied that the owner will
fore go anything that could have been earned. An accountant
only cares about the difference between total revenue and
explicit costs.
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AccountingProfitsversusEconomicProfit(cont.)
Economic profit = total revenue ( TR) minus total costs.
economic profit =
total revenue (TR) - total costs (implicit and explicit)
Economic profits are a more accurate and more used measure
of the incentive for a firm to stay in business because it takes
into account all of the relevant decision-making factors.
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AccountingProfitsversusEconomicProfit(cont.)
For example, suppose accounting profits for a bakery are
$40,000 a year. Now figuring economic profits: suppose the
owner of the bakery could earn $35,000 a year working instead
as a manager at a video rental store. Suppose also that the
owner could sell the bakery business, invest the money, and
earn $3,000 per year. Then the opportunity cost or implicit
costs, which the accountant would not include, is $38,000
($35,000 + $3,000). The $38,000 would be included in the
economist's figures as part of the total costs, so that his
calculated profit would equal $2,000 ($40,000 - $38,000).
Accounting profits== $40,000 while economist profits==
$2,000, but the $2,000 is enough of an incentive for the firm to
stay in business versus doing something else.
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AccountingProfitsversusEconomicProfit(cont.)
The term normal profit is an economic condition that occurs
when economic profits equal zero. It is the minimum level of
profit needed for a company to remain competitive in business
(breakeven point when price (P) = average total costs (ATC1.
Suppose a firm's economic total revenue (TR) is $40,000. Now
assume that their total costs (TC) ( explicit and implicit) equal
$40,000. Their economic profit would be $0 but their normal
profit would be $40,000. Normal profit occurs when your
economic profit is equal to your total costs.
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AccountingProfitsversusEconomicProfit-Questions
35. Econotni c profit ca n be calculated as accountin g
profit minu s which of the followin g?
(A)
(B)
(C)
(D)
(E)
Fixed co ts
Implicit co ts
M arginal cost
Explicit co ts
Total co ts
22. Sh I by is an entrepreneur who has decided to
op n a 1nall adverti ing firm. She rents office
spac at a co t of $25,000 per year she ha
employed an a i tant at a alary of $30,000
per year and he incurs annua l utility and office
supp ly expe n e of $20 000. Her be t alternative
is to work elsewhere and to earn a salary of
$50,000 per year. How much annual revenue
mu t her firm receive so that Shelby earn zero
economic profit?
(A) $50 000
(B) $75,000
(C) $100,000
(D) $125,000
(E) $150,000
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AccountingProfitsversusEconomicProfit-Questions
35 . Econotnic profit ca n be calculated as accounting
profit minu s which of the following ?
(A)
(C)
(D)
(E)
Fixed co ts
Implicit co ts
M arginal cos t
Explicit co ts
Total co ts
22. Sh I by is an entrepreneur who has decided to
op n a 1nalladverti ing firm. She rents office
spac at a co t of $25,000 per year she ha
employed an a i tant at a alary of $30,000
per year and he incurs annua l utility and office
supp ly expe n e of $20 000. Her be t alternative
is to work elsewhere and to earn a salary of
$50,000 per year. How much annual revenue
mu t her firm receive so that Shelby earn zero
economic profit?
(A) $50 000
(B) $75,000
(C) $100,000
$125 ,ooo
(E) $150,000
ce )
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AccountingProfitsversusEconomicProfit-Questions
23. A firm pr due 400 bo ks and 11 ach bo k
f r $15. If th xplicit c t of pr ducing th bo ks
i $4 500 and th it11plicit
firm'
A
(B)
C)
(D
E)
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c n micpr
$0
$500
$1, 0
$1,500
$5,000
fiti
ti $1 ~000,th
AccountingProfitsversusEconomicProfit-Questions
23. A firm pr due 400 bo ks and 11 ach bo k
f r $15. If th xplicit c t of pr ducing th bo ks
i $4 500 and th it11plicit
firm'
A
(9 )
C)
(D
E)
Page8
c n micpr
$0
$500
$1, 0
$1,500
$5,000
fiti
ti $1 ~000,th