Final answer:
An Economist defines costs by including both explicit and implicit costs, leading to a measurement of economic profit, while an Accountant calculates costs solely based on explicit costs, leading to accounting profit. The difference between these two approaches is crucial for evaluating the full economic success of a firm, beyond the immediate financial profit or loss indicated by accounting profit.
Step-by-step explanation:
When considering the cost of running a business, there is a notable difference in how an Economist and an Accountant define and calculate costs. This distinction is crucial in understanding the different measures of profit: accounting profit and economic profit. An Accountant focuses on explicit costs, which are direct, out-of-pocket payments for wages, rent, and materials—essentially, the actual cash expenses that affect the company's cash flow.
On the other hand, an Economist looks beyond these explicit costs and includes implicit costs in their analysis. Implicit costs are the opportunity costs of utilizing resources that the company already owns, for which it does not make a direct payment. For instance, this could include the income a business owner forgos by investing time in their own company rather than working elsewhere. Thus, while Accounting profit equals total revenue minus explicit costs, Economic profit considers both explicit and implicit costs, rendering it total revenue minus total cost.
This difference is especially important for assessing a firm's economic success, which relies on its ability to generate economic profit, a measure that includes both explicit and implicit costs. A business pays income taxes based on its accounting profit, but whether it can thrive in the long-term context also depends on its economic profit.
Therefore, while both Accountants and Economists analyze costs and profits, their methodologies and considerations in doing so are fundamentally different, with accountants having a narrower focus on tangible financial expenses and Economists considering the broader economic implications of resource utilization.