Chapter 8 - The Costs of Production
Accounting and Economic Profit
Suppose that a business incurred implicit costs of $200,000 and explicit costs of $1
million in a specific year. If the firm sold 4,000 units of its output at $300 per unit, its
accounting profits were:
Accounting profits are independent of economic profits.
The firm’s total
revenue was 4000*300 = $1,200,000.
Take the total revenue and subtract the explicit costs of $1
million and you have $200,000.
If I were to ask you about economic profit, the answer would be $0, as you include implicit costs
into your calculations of total costs.
Entrepreneur's potential earnings as a salaried worker = $50,000
Forgone rent on building = $1,200
Annual revenue from operations = $105,000
Payments to workers = $30,000
Utilities (electricity, water, disposal) costs = $20,000
Entrepreneur's forgone interest on personal funds used to finance the business = $1,000
Using the above table calculate the firm’s explicit costs, accounting, economic and
Answer: $50,000; $55,000; $2,800; $52,200.
Explicit costs include the payment to workers and utilities.
Accounting profit is total revenue – explicit costs = 105,000 – 50,000 = 55,000
Economic profit is total revenue – total costs = 105,000 – (50,000 + 50,000 + 1,200 + 1,000) =
Normal profit is Accounting profit – Economic profit =55,000 – 2,800 = 52,200.
Normal profit is