Economic Profit 2020-04-20 08:00:00

Economic Profit

Economic profit divides profit into two categories: accounting and economic. Accounting profit is a financial profit. Taking the revenue minus explicit cost, you get the accounting profit. Explicit costs are raw materials and labor. Economic cost is the opportunity cost of going with one decision over others. Economic cost looks at what the company had to forego by choosing the path it did.

As an example, a person decides to invest $150,000 in starting a company. It earns $200,000 in its first year. The accounting profit is $50,000. On the other hand, the same person could have got a job as an employee making $110,000. $110,000-$50,000 = $60,000, resulting in a loss of $10,000 ($50,000-$60,000 = -$10,000). The lost $10,000 is the economic profit.

 


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