Economic profit vs accounting profit | Microeconomics | Khan Academy | Summary and Q&A

TL;DR

Accounting profit measures the income a business generates after deducting expenses, while economic profit takes into account the opportunity cost of alternative ventures.

Key Insights

• 💨 Accounting profit is the traditional way of calculating profit, deducting explicit expenses from revenue.
• 👨‍💼 Economic profit includes both explicit and implicit costs, such as wages foregone, providing a more comprehensive assessment of a business's profitability.
• 👨‍💼 A negative economic profit suggests that running the business may not be the most financially advantageous option.
• 👨‍💼 Economic profit considers opportunity costs and helps businesses evaluate the potential benefits of alternative ventures.
• 👯 Accounting profit is what most people refer to as profit in everyday conversations.
• 👨‍💼 Economic profit helps business owners make rational decisions to maximize their overall profit.
• 🇨🇷 Implicit opportunity costs, such as wages foregone, can significantly impact economic profit.

Transcript

Background voice: Let's say this past year I started a restaurant and I want to think about what type of a profit I've been making at that restaurant. We're going to think about it in 2 different ways. We're going to think about it in terms of an accounting profit, which is really the type of profit that most of us associate with a business or a fi... Read More

Questions & Answers

Q: What is the difference between accounting profit and economic profit?

Accounting profit focuses solely on deducting explicit expenses from revenue, while economic profit also includes implicit costs like wages foregone or alternative income opportunities.

Q: Why is economic profit important for businesses?

Economic profit helps businesses assess whether their current operations are the most profitable option, taking into account the potential income they could have earned from alternative ventures.

Q: Can a business have positive accounting profit but negative economic profit?

Yes, a business can generate income that exceeds expenses but still have negative economic profit if the opportunity cost of running the business is higher than the potential income from other ventures.

Q: How does accounting profit differ from revenue?

Revenue represents the total amount of money customers pay a business for its products or services, while accounting profit is the income remaining after deducting expenses from revenue.

Summary & Key Takeaways

• Accounting profit is calculated by subtracting expenses, such as the cost of food, labor, rent, and equipment rent, from revenue.

• Economic profit considers not only explicit costs but also implicit costs, such as wages foregone by the business owner.

• Economic profit can differ significantly from accounting profit, with a negative economic profit indicating that it may not be financially beneficial to continue running the business in its current form.