Question

1. How does accounting profit differ from economic profit? Explain why accounting profit is more useful for paying your taxes while economic profit is more useful for deciding whether you should continue to stay in business. Give an example of an implicit cost and an example of implicit revenue.

2. What is the distinction between the microeconomic short run and the microeconomic long run? How do these definitions relate to specific periods of calendar time?

Answer 1

Answer 1 :Difference between Accounting profit and economic profit :

• Accounting profit means difference between revenue less total cost ( Explicit cost) where as economic profit means difference between total revenue minus total cost including oppournity cost.
• Accounting profit= Total revenue- total cost(Explicit cost) where as Economic profit = Total revenue - total cost (Explicit cost +Implicit Cost)
• Accounting profit is easy to compute where as economic profit is quite complicated.
• Accounting profit is earned when revenue exceeds explicit cost where as economic profit is earned when profit obtained after exceeding oppournity cost.

Accounting profit are used to realized to know about the particular firm working status. Company total profit has been calculated with related to its production and how much income has been used for the production of an good in the firm at particular time duration. So taxes,financial statement and review of financial performance has been seen in accounting profit where as Economic profit is used to determine in deciding which alternative is best. Economic profit is used to determine the value of the business/ decision. If economic profit is positive than it is worth to continoue with same decision.

Here, Implicit cost means oppournity cost of using personal resources. Example : If a person has particular piece of land than they are dong business there or giving it for a rent than the implicit cost is reciving rent from piece of land.

Example of Implicit Revenue ; As there is increase in the value of the machineary in the business.

Answer 2 : Short run and long run are two time period that is used to determine the position of the particular firm during simple time duration.

• In short run time period there are factor of production where some factor are fixed and others are variable where as in long run time period all factors of production are variable.
• In short run time period firm is not able to produce at there full capacity where as in long run time period of time firm is able to produce at there full capacity and earn economics of scale
• In short run micro economic period firm cannot entry or exist from an industry where as in long run there is more flexibility and have excess to go in or out depending on there development capability.
• In short run time period all decision are easily reversed where as in long run time period decision are not reversed.
  The short time period does not depend upon the specific duration of time but rather it is unique to the firm, industry or economic variable where as long run time period does not mean that it is specific to particular time duration.

In simple words, short run time duration period is different depending upon firm to firm or country to country . For example Ship building firm short run duration is 10 years where as Soap firm short run time duration is 1 year. where as In long run the time period also varies. In short run some factor of production are fixed where as in long run all factors become variable.