Question

3. Differentiate between accounting profit and economic profit. My friend who owns a bicycle shop, says he needs to make more selling his inventory than he could earn by putting his money in the stock market. Does he understand the difference between accounting profit and economic profit? Explain.

Answer 1

3 : Difference between accounting profit and economic profit are :

• Accounting profit means that revenue minus Explicit cost where as economic profit means that revenue minus Explicit and implicit cost in logical manner where as Economic profit means that taking into account Explicit as well as implicit cost into an account.  
• Accounting profit are easy to compute as compute to economic profit.
• Accounting profit does not taking opportunity cost into an account where as economic profit includes opportunity cost of next best alternative.

As she has been doing bicycle business but it does not earn income as much Amount invested in the stock market. If your friend check economic profit than it is quite less than accounting profit and than he makes a decision that investing in the stock market is quite profitable.so, if your friend understands the meaning of economic profit than he quits bicycle business in logical manner.