Accounting profits

Accounting profits - Accounting profits, economic profits,...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Accounting profits, economic profits, and normal profits. The difference between explicit and implicit costs is crucial to understanding the difference between accounting profits and economic profits. Accounting profits are the firm's total revenues from sales of its output, minus the firm's explicit costs. Economic profits are total revenues minus explicit and implicit costs. Alternatively stated, economic profits are accounting profits minus implicit costs. Thus, the difference between economic profits and accounting profits is that economic profits include the firm's implicit costs and accounting profits do not. A firm is said to make normal profits when its economic profits are zero. The fact that economic profits are zero implies that the firm's reserves are enough to cover the firm's explicit costs and all of its implicit costs, such as the rent that could be earned on the firm's building or the salary the owner...
View Full Document

Ask a homework question - tutors are online