Question

Tutorial 4 Week 5 Question 3 Compare and contrast Accounting Profit versus Economic Profit . Can firms who earn zero economic profit continue to operate (1.5 marks)? Provide an explanation for your answer (1.5 marks).

Answer 1

Answer-Accounting profit is the difference between the total revenue and the total cost, in which the opportunity cost is excluded whereas economic profit is the type of profit which is the difference between the total revenue and the total cost, it includes the opportunity cost.

*Accounting profit is determined by GAAP whereas economic profit is determined by the economic principles.

*Accounting profit includes the explicit costs only whereas economic profit includes both the implicit as well as explicit costs.

*Accounting profit is used for income tax and for the purpose of financial performance whereas economic profit is used to determine market stay, market exit, and market entry.

A firm that earns zero economic profit can continue to operate because despite earning an economic profit of zero, the firm may still be earning a positive accounting profit.

Example- An increase in demand for new houses drives prices higher and induces entry.