What is economic profit and accounting profit with the information given?

Question

Price=$20, Quantity=400units, Unit cost=$15, implicit cost=$4,000

Please explain your answer.

7/26/2013 | Joseph from Denton, TX | 2 Answers | 0 Votes

Answer 1

The "economic profit" is a way of incorporating opportunity cost into your decision making. So in your example; "implicit costs" would imply that the subject had sacrificed an opportunity that amounted to a numerical addition of $4,000 of profit he had shot down in favor of the current course of action; or what we see here as the "Accounting profit"

So although you can calculate the accounting profit as:

"AccountingProfit=(Total Revenue-Total Expenses)" --> ($8000-$6000)--> $2000;

That number is misleading because his economic profit; or including the $4,000 opportunity lost would change the economic profit to

EconomicProfit=(AccountingProfit-Opportunity Cost)--> ($2000-$4000)--> -2.000

Answer 2

Accounting Profit is equal to total revenue minus explicit costs:

($20 - $15) × 400 = $2,000

Economic Profit = Total revenue - Total economic cost
Total economic cost = Explicit costs (firm’s actual cash payments for inputs) + implicit costs (opportunity costs of non-purchased inputs, such as entrepreneur’s time or money)

$2,000 - $4,000 = - $2,000