220k views
1 vote
2. What is the difference between accounting profit and economic profit? What happens if a firm is earning positive economic profit?

User Ilyssis
by
8.4k points

1 Answer

2 votes

Final answer:

Accounting profit considers only explicit costs, while economic profit considers both explicit and implicit costs. If a firm is earning positive economic profit, it has a competitive advantage and is outperforming other firms in the market.

Step-by-step explanation:

Accounting profit and economic profit are two different ways of measuring profit in a business. Accounting profit is calculated by subtracting only explicit costs, such as wages and rent, from total revenue. Economic profit, on the other hand, also takes into account implicit costs, which include the opportunity cost of using resources.

If a firm is earning positive economic profit, it means that the revenue is higher than both explicit and implicit costs. This suggests that the firm is making more profit than what is required for normal returns in the industry. It indicates that the firm has a competitive advantage and is outperforming other firms in the market.

User Stephen Groom
by
8.1k points

No related questions found