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Wize University Microeconomics Textbook > Economic Concepts

Accounting and Economic Costs/Profit

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Economic Costs and Profit

There is a key difference between accounting costs and economic costs.

Accounting Costs

These are the measured financial costs for the firm. They are also called explicit costs.
Example Wages paid to employees, rent for office/factory, cost of raw materials, etc.


Economic Costs

Economic Costs = Accounting Costs + Opportunity (Implicit) Costs\boxed{\text{Economic Costs = Accounting Costs + Opportunity (Implicit) Costs}}

The economic costs are always
greater
than or equal to the accounting costs. The opportunity cost is also called implicit costs.
Example: I'm considering going on a weekend vacation to Hawaii. The total costs of the tickets and hotel reservation put together is $1000. In addition, suppose I have a part time job on the weekend that could earn me $500.
  • Accounting cost (actual costs paid for the good) =
    $1000
  • Opportunity cost (what is given up) =
    $500
  • Economic cost =
    $1500

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Accounting Profit

Accounting Profit = Total Revenue - Accounting Costs \boxed{\text{Accounting Profit = Total Revenue - Accounting Costs }}

Economic Profit

Economic Profit = Total Revenue - Economic Costs\boxed{\text{Economic Profit = Total Revenue - Economic Costs}}


The economic profit is always
less
than or equal to the accounting profit.

Practice: Economic Cost and Profit

Sarah sells her paintings for $100 each and she sold 5 paintings this week. It cost her $400 to buy supplies like paint, canvases and paint brushes. In the time she made the paintings she could have worked in her school library and made $200. What is her accounting and economic costs and profit?

Accounting cost =

Economic cost =

Accounting profit =

Economic profit =
Extra Practice
Compared to accounting profits, economic profit is ___________ because accounting profit takes into account ___________ while economic profit takes into account ___________.
Melissa can work for the local grocery store and earn $35,000 a year. Instead, she runs her own business making revenue of $80,000. Her expenses in running her business are $12,000 for rent and equipment, and $20,000 to pay her workers. What are her accounting and economic profits?
Melissa can work for the local grocery store and earn $35,000 a year. Instead, she runs her own business making revenue of $80,000. Her expenses in running her business are $12,000 for rent and equipment, and $20,000 to pay her workers. What are her accounting and economic profits?
Melissa can work for the local grocery store and earn $35,000 a year. Instead, she runs her own business making revenue of $80,000. Her expenses in running her business are $12,000 for rent and equipment, and $20,000 to pay her workers. What are her accounting and economic profits?