Final answer:
Accounting profit is total revenue minus explicit costs, used for tax reports, while economic profit subtracts both explicit and implicit costs from total revenue, providing a fuller picture of a firm's profitability. Economic profit is typically used by entrepreneurs to determine resource allocation among business ventures.
Step-by-step explanation:
Privately owned firms are motivated to earn profits, which is the difference between revenues and costs. There are three main concepts of profit: accounting profit, economic profit, and normal profit.
Accounting profit is calculated by subtracting explicit costs (like wages, rent, and materials) from total revenue. This measures the cash transactions involved and is the figure reported for tax purposes. Normal profit is the minimum amount of profit needed for a company to remain competitive in the market; it's essentially the opportunity cost of the entrepreneur's time and resources.
On the other hand, economic profit is calculated by subtracting both explicit and implicit costs (like the opportunity cost of capital) from total revenue. Implicit costs are the costs of resources owned by the firm that could be used elsewhere if not for the current venture.
When entrepreneurs allocate resources between different business ventures, they typically look at economic profit. This is because it gives a more comprehensive understanding of a firm's profitability by taking into account the full cost of resources used in production, including those resources the firm already owns.