What costs and revenues do economists include when calculating profit that accou

Question

What costs and revenues do economists include when calculating profit that accountants don’t include? Give an example of each.
A. Economists and accountants calculate profit with all the same costs and revenues. The only difference is that economists work with predicted costs and revenues for the future whereas accountants work with costs and revenues from previous years.
B. In addition to the explicit costs and revenues used by accountants, economists include all implicit costs and revenues when calculating profit. This means that they include labor costs and expected changes in sales.
C. In addition to the explicit costs and revenues used by accountants, economists include all implicit costs and revenues when calculating profit. This means that they include opportunity costs and changes in the value of any assets owned by the firm.
D. In addition to the implicit costs and revenues used by accountants, economists include all explicit costs and revenues when calculating profit. This means that they include labor costs and changes in the value of any assets owned by the firm.

Explanation / Answer

C. Accounting profit is revenue - explicit costs. Economic profit is revenue - explicit costs - implicit costs. Basically, economists take into account the opportunity costs within the business too, e.g. is the owner making the best decision possible by running the business? Economic profit can be negative even if accounting profit is positive.

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