Carolines accountant however will not show this 15000 as a cost because no

Carolines accountant however will not show this 15000

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even though it is an implicit cost. Caroline's accountant, however, will not show this  $15,000 as a cost because no money flows out of the business to pay for it. To further explore the difference between economists and accountants, let's change  the example slightly. Suppose now that Caroline did not have the entire $300,000 to  buy the factory but, instead, used $100,000 of her own savings and borrowed  $200,000 from a bank at an interest rate of 5 percent. Caroline's accountant, who only 
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measures explicit costs, will now count the $10,000 interest paid on the bank loan  every year as a cost because this amount of money now flows out of the firm. By  contrast, according to an economist, the opportunity cost of owning the business is  still $15,000. The opportunity cost equals the interest on the bank loan (an explicit  cost of $10,000) plus the forgone interest on savings (an implicit cost of $5,000). 13-1d Economic Profit Versus Accounting Profit Now let's return to the firm's objective: profit. Because economists and accountants  measure costs differently, they also measure profit differently. An economist measures  a firm's  economic profit  as the firm's total revenue minus all the opportunity costs  (explicit and implicit) of producing the goods and services sold. An accountant  measures the firm's  accounting profit  as the firm's total revenue minus only the firm's  explicit costs. Figure 1  summarizes this difference. Notice that because the accountant ignores the  implicit costs, accounting profit is usually larger than economic profit. For a business  to be profitable from an economist's standpoint, total revenue must cover all the  opportunity costs, both explicit and implicit. Economic profit is an important concept because it is what motivates the firms that  supply goods and services. As we will see, a firm making positive economic profit will  stay in business. It is covering all its opportunity costs and has some revenue left to  reward the firm owners. When a firm is making economic losses (that is, when  economic profits are negative), the business owners are failing to earn enough  revenue to cover all the costs of production. Unless conditions change, the firm  owners will eventually close down the business and exit the industry. To understand  business decisions, we need to keep an eye on economic profit. Quick Quiz Farmer McDonald gives banjo lessons for $20 an hour. One day, he spends 10 hours planting $100 worth of seeds  on his farm. What opportunity cost has he incurred? What cost would his accountant measure? If these seeds yield  $200 worth of crops, does McDonald earn an accounting profit? Does he earn an economic profit?
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