5. Economic Cost vs. Accounting Cost
d. describe the phenomenon of diminishing marginal returns;
What is the difference between Accounting Profit and Economic Profit?
- Accounting profit is the profit used by accountants to determine a firm's net income.
Accounting profit = Total revenue - Total accounting costs
- Economic profit equals a firm's total revenue minus its total economic costs.
Economic profit = Total revenue - Total economic costs
What is economic cost? What is opportunity cost?
Economic cost takes into account the total opportunity cost of all factors of production. Opportunity cost is the next best alternative forgone in making a decision. It is the unearned or nominal profit that the resource-owner did not make from investing in the next best alternative. As a result, you can have a significant accounting profit with little to no economic profit.
When economic profit is zero, a firm's accounting profit effectively becomes ______?
When economic profit is zero, a firm's accounting profit becomes normal profit, which is effectively the total implicit opportunity cost.