Question

Discuss the difference between the accountant's concept of profit and the economist's view of profit?

3. Profits or losses must be temporary for perfectly competitive firms. Why?

Answer 1

Accountant concept of profit- Account concept of profit is known as accounting profit .Accounting profit is a company's total earning. It is calculated according to GAAP(generally accepted accounting principles). It includes explicit cost like operating expenses, interest and taxes etc.  

Accounting Profit= Total revenue - Explicit cost

Economist view of profit- Economist view of profit is known as economic profit. Economic profit is determined with the help of economic principles. It includes both explicit cost and implicit cost(opportunity cost)

Economic profit= Total revenue - explicit cost -implicit cost

Key Differences

1. Accounting profit is realised by firm during an accounting year. Economic profit is gain in excess of what is required to cover the expenses. This include opportunity cost.

2. Accounting profit is normally more than economic profit beacuse economic profit includes explicit and implicit cost whereas accounting profit includes only explicit cost.

3. Accounting profit is revenue obtained post meeting economic cost whereas Economic profit is obtained when revenue exceeds opportunity cost.

4. The accountant shall consider accounting profit as they will consider production cost and their impact on profitability. In view of economist when they describe cost then they are interested in how the company decided to implement the strategy. It will analyze how these strategies can have impact on firm and the economy.

Profit and Losses in perfectly competitive firms is temporay because firms under Perfect competition market gets normal profit in the long run due to free entry and exit of firms in the market. It means there is restrictions on the entry and exit of the firms in the market.

If firms are getting extra normal profit it will attract new firms which cause rise in supply thus market price will decrease and extra normal profit will convet into normal profit.

On the other hand if firms are bearing losses then they will leave the industry, supply will decrease and market price will rise and firms will get normal profit.

Total Revenue(TR)

Total cost(TC)

Normal Profit= TR=TC

Extra normal profit= TR>TC

Losses= TC>TR