Understanding Profit: Accounting vs Economic Profit

💰Explicit costs are easily identifiable dollar amounts, while implicit costs include costs that have been given up and are not easily assigned a monetary value.

🧾Accounting profit is calculated as total revenue minus total explicit costs, and is used to compare the financial performance of companies.

💡Economic profit is calculated as total revenue minus total explicit and implicit costs, and is a more accurate measure of a company's overall worth.

📊Economic profit is typically smaller than accounting profit because it includes expenses that are not necessarily directly connected to making a product or providing a service.

🔍The goal of companies is to maximize economic profit, which takes into account both explicit and implicit costs.

What are explicit costs?

—Explicit costs are easily identifiable dollar amounts, such as receipts for payments made by a company.

What are implicit costs?

—Implicit costs include costs that have been given up and are not easily assigned a monetary value, such as the opportunity cost of spending time waiting in line for a free item.

What is the difference between accounting profit and economic profit?

—Accounting profit is calculated as total revenue minus total explicit costs, while economic profit is calculated as total revenue minus total explicit and implicit costs. Economic profit provides a more accurate measure of a company's overall worth.

Why is economic profit typically smaller than accounting profit?

—Economic profit includes expenses that are not necessarily directly connected to making a product or providing a service, such as implicit costs. These costs reduce a company's profit from an economic point of view.

What is the goal of companies in terms of profit?

—The goal of companies is to maximize economic profit, which takes into account both explicit and implicit costs. Maximizing economic profit ensures the company is making the most effective use of its resources.

00:00Economists use different measures of profit, depending on the types of costs being considered.

00:35Explicit costs are easily identifiable dollar amounts, while implicit costs include costs that have been given up and are not easily assigned a monetary value.

01:05Accounting profit is calculated as total revenue minus total explicit costs, and is used to compare the financial performance of companies.

01:41Economic profit is calculated as total revenue minus total explicit and implicit costs, and is a more accurate measure of a company's overall worth.

02:19Economic profit is typically smaller than accounting profit because it includes expenses that are not necessarily directly connected to making a product or providing a service.

03:02The goal of companies is to maximize economic profit, which takes into account both explicit and implicit costs.