economic profit vs. accounting profit
TRANSCRIPT
My Business VentureMy Business Venture
Comparing Economic Profit to Comparing Economic Profit to Accounting ProfitAccounting Profit
Total Revenues – Total Costs = Total Revenues – Total Costs = Profit or LossProfit or Loss
Price X Quantity Price X Quantity Normal ProfitNormal Profit: Opportunity Cost : Opportunity Cost
of Entrepreneur. of Entrepreneur.
TOTAL REVENUE
2000 BURRITOS SOLD @ $5.00 = $10,000
TOTAL EXPENSES
CITY PERMIT $2000
PAYMENT TO FORMER STUDENT TO MAKE BURRITOS $3000
PAYMENT TO REDDY RENTS FOR EQUIPMENT: (Capital, Fridge, Cash register, Utensils, ect.)
$2000
Payment to Mpls. Industrial Food Supply $1000
TOTAL COST $8000
ACCOUNTING PROFITS:
(total revenue – total cost)
$2000
Did I really make accounting profits? What did my accountant forget?
It turns out I could have worked for the summer at Sears selling refrigerators
SEARSNET WAGES $2900
FORGONE INTEREST ON START UP CAPITAL
$100
Total Implicit Costs $3000
EconomicProfit
Implicit costs(including a
normal profit)
ExplicitCosts
Accountingcosts (explicit
costs only)
AccountingProfit
Ec
on
om
ic (
op
po
rtu
nit
y) C
os
ts
TOTAL
REVENUE
Profits to anEconomist
Profits to anAccountant
ECONOMIC COSTS
WHAT WAS THE OPPORTINITY COST OF RUNNING MY BUSINESS?
DID I MAKE AN ECONOMIC PROFIT WITH PHAT BURRITOS?
Accounting Profit $2000
Implicit Costs $3000
Economic Profit - ($1000)