Question

Principles of Macroeconomics

Limit Essay to between 200 and 500 words on separate page(s) in pdf format.

What explains the difference between "Economic Costs" and "Economic Benefits" and their Accounting counterparts. What do these characteristics imply for "Rational Economic Behaviour"?

Answer 1

INTRODUCTION -

Economic cost, economic benefit and concerned rational expectation are crucial study parts under the economic theory which we can study and understand as given below-

1.ECONOMIC COST-

economic cost is that cost which not only include the cost of material utilized for the manufacturing process but also the opportunity cost of a person which he could have utilized working somewhere else.economic cost is the combination of explicit cost and implicit cost,whereas accounting profit only undertakes explicit cost.

2.ECONOMIC BENEFIT-

• economic benefit is the profit earned after deducting the economic cost from the revenue generated of the firm.the major difference between accounting and economic and accounting benefit is that accounting benefit only undertakes the calculation of explicit cost like rent,expenses,wages paid etc,whereas economic cost undertakes the calculation of explicit cost as well as implicit cost such as opportunity cost of the entrepreneur.
• economic benefit gives us the true and practical picture of any given situation.

example-

• suppose Jack invested $100000 in a business and engaged himself in the business after one year he was able to generate $20000 as profit which gives around 20% return on the investment.but this concept hold true only in accounting term.
• now suppose instead of starting a business if Jack had purchased bonds of $100000 which could have yield him a return of $6000 per year and Jack could get a job paying him around $1500 per month which could have resulted him annually $18000 and in this way $6000+$18000=$24000.
• in economic term Jack is in loss due to opportunity cost he has suffered by engaging himself in the business.

3.IMPORTANCE FOR RATIONAL ECONOMIC BEHAVIOR-

both the above concepts would help the person to make a comparative and appropriate choice concerned with the project,under which a person would be able to calculate the economic cost and economic benefit so he can finalize whether he/she should undertake the risk to accomplish the task or not.if the opportunity cost is higher then he/she would drop the project and vice versa is also true.

Conclusion-so we can conclude after studying that the above concepts are interdependent and very important for making and analyzing any business dealings.it provides results which are different from accounting perspective but more real and practical in sense.