Final answer:
Accounting profit is calculated by subtracting explicit costs from total revenues, resulting in a profit of $50,000 for the scenario described. Economic profit is different as it also takes into account implicit costs, potentially leading to an economic loss if these costs are high enough.
Step-by-step explanation:
To calculate a firm's accounting profit, you would subtract the total explicit costs from the total revenues. In the example provided, the firm had sales revenue of $1 million and spent $600,000 on labor, $150,000 on capital, and $200,000 on materials. Therefore, the calculation for the accounting profit would be:
Accounting Profit = Total Revenues - Explicit Costs
Accounting Profit = $1,000,000 - ($600,000 + $150,000 + $200,000)
Accounting Profit = $1,000,000 - $950,000
Accounting Profit = $50,000
This result represents the firm's accounting profit, which in this case is $50,000. It's important to remember that economic profit is different from accounting profit as it also subtracts implicit costs. For true economic profit, the formula is:
Economic profit = Accounting Profit - Implicit Costs
For the given scenario, if the implicit costs were, for example, $30,000, then economic profit would be $50,000 - $30,000 = $20,000.
However, if explicit and implicit costs were to exceed total revenues, the firm would realize an economic loss. In the extended example providing a different scenario, if the total revenues are $200,000 with explicit costs of $85,000 and implicit costs of $125,000, the firm would face an economic loss:
Economic profit = Total Revenues - Explicit Costs - Implicit Costs
Economic profit = $200,000 - $85,000 - $125,000
Economic profit = -$10,000 per year
Here, the firm has an economic loss of $10,000 yearly.