Question

Distinguish between accounting and economic profit.

Answer 1

Accounting Profit = Total Revenue - Explicit costs

Economic profit = Total revenue-(Explicit costs+Implicit costs)

So, the accounting profit only takes into consideration the explicit costs of the firm. The explicit costs are those costs which the firm incurs in its day to day operations while running the business and mainly factors payment made, such as wages paid to labors, rent, lease, etc.

On the other hand, economic profit is a broader term than the accounting profit because it also takes into account the implicit costs of the firm.

Implicit costs are those costs which the firm does not incur in its day to day running of business but are imputed as they are the opportunity cost for the firm. It's the firm's cost of the next best alternative which it could have earned from its given factors such as salary forgone.

Accounting profit would always be higher than the Economic profit as it does not include implicit costs.