Economic Profit vs. Accounting Profit

1. My Business VentureMy Business Venture
Comparing Economic Profit to Comparing Economic Profit to
Accounting ProfitAccounting Profit

2. Total Revenues – Total Costs = Total Revenues – Total Costs =
Profit or LossProfit or Loss
Price X Quantity Price X Quantity
Normal ProfitNormal Profit: Opportunity Cost : Opportunity Cost
of Entrepreneur. of Entrepreneur.

3. My Business VentureMy Business Venture

4. TOTAL REVENUE
2000 BURRITOS SOLD @ $5.00 = $10,000
TOTAL EXPENSES
CITY PERMIT $2000
PAYMENT TO FORMER STUDENT TO MAKE BURRITOS
$3000
PAYMENT TO REDDY RENTS FOR EQUIPMENT: (Capital, Fridge,
Cash register, Utensils, ect.)
$2000
Payment to Mpls. Industrial Food Supply$1000
TOTAL COST $8000
ACCOUNTING PROFITS:
(total revenue – total cost)
$2000

5. Did I really make accounting profits? What
did my accountant forget?
It turns out I could have
worked for the summer at
Sears selling refrigerators
SEARS
NET WAGES $2900
FORGONE INTEREST ON
START UP CAPITAL
$100
Total Implicit Costs $3000

6. Economic
Profit
Implicit costs
(including a
normal profit)
Explicit
Costs
Accounting
costs (explicit
costs only)
Accounting
Profit
Economic (opportunity) Costs
T
O
T
A
L
R
E
V
E
N
U
E
Profits to an
Economist
Profits to an
Accountant
ECONOMIC COSTS

7. WHAT WAS THE OPPORTINITY COST
OF RUNNING MY BUSINESS?
DID I MAKE AN ECONOMIC PROFIT
WITH PHAT BURRITOS?
Accounting Profit $2000
Implicit Costs $3000
Economic Profit - ($1000)

8. THE ENDTHE END