Chapter 7, Problem 1RQ

To determine

The difference between accounting and economic costs.

Explanation of Solution

The direct cost of running a business is known as accounting cost. The economic cost includes the opportunity cost and the accounting cost incurred by a firm. The difference between the economic cost and the accounting cost is the opportunity cost. The profits that a firm enjoys include the accounting profit and the economic profit. The accounting profit is estimated as the difference between the total revenue and the accounting cost. The economic profit can be calculated as the difference between the total revenue and the economic cost.

Economics Concept Introduction

Economic cost: Economic cost refers to the sacrifice involved in performing an activity or selecting a decision. The economic cost is the addition of explicit cost and implicit cost.

Accounting profit: Accounting profit is calculated by subtracting only the explicit cost from the total revenue of a firm.

Economic profit: Economic profit is calculated by subtracting both implicit cost and explicit cost from the total revenue of a firm.