GIGAMIND

Folder:
126 Decision Making
File:
126.004 Decision Making - Accounting Profit vs Economic Profit

Accounting Profit vs. Economic Profit

A rational agent considers both accounting profit and economic profit.

Accounting profit is the net profit of a firm. These are the explicit factors.
- E.g. the "accounting profit" of moving to a new house/place is the amount of money you save vs staying were you are.

To calculate whether it is rational to continue running the business (or running the business in this way) you need to calculate the implicit factors as well. E.g., the opportunity cost.

Economic Profit will never be higher than accounting profit assuming there are some implicit costs to factor in.


Source:
Tags:
  • decision-making