Question

Your firm has total sales revenue of $1,000,000 and total explicit costs of $600,000 and total implicit cost of $300,000. What will be the accounting profit for the firm? What will be the economic profit for the firm? Explain the difference using the data.

Answer 1

Implicit costs (or opportunity costs) represent the divergence between economic profit (total revenues minus total costs, where total costs are the sum of implicit and explicit costs) and accounting profit (total revenues minus only explicit costs). Since economic profit includes these extra opportunity costs, it will always be less than or equal to accounting profit.

So, accounting profit = Total revenue - explicit cost = $1,000,000 - $600,000 = $400,000
Economic profit =& Total revenue - explicit cost - implicit cost = $1,000,000 - $600,000 - $300,000 = $100,000

As we can conclude, the accounting profit of firm is higher than the economic profit, as it doesn't include the opportunity costs.