Economic Profit vs. Accounting Profit

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Economic Profit vs. Accounting Profit

  1. 1. My Business Venture Comparing Economic Profit to Accounting Profit
  2. 2. Total Revenues – Total Costs = Profit or Loss <ul><li>Price X Quantity </li></ul><ul><li>Normal Profit : Opportunity Cost of Entrepreneur. </li></ul>
  3. 3. My Business Venture RED'S PHAT BURRITOS
  4. 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. 5. Did I really make accounting profits? What did my accountant forget? <ul><li>It turns out I could have worked for the summer at Sears selling refrigerators </li></ul>SEARS NET WAGES $2900 FORGONE INTEREST ON START UP CAPITAL $100 Total Implicit Costs $3000
  6. 6. 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 Economic Profit Implicit costs (including a normal profit) Explicit Costs Accounting costs (explicit costs only) Accounting Profit
  7. 7. WHAT WAS THE OPPORTINITY COST OF RUNNING MY BUSINESS? <ul><li>DID I MAKE AN ECONOMIC PROFIT WITH PHAT BURRITOS? </li></ul>Accounting Profit $2000 Implicit Costs $3000 Economic Profit - ($1000)
  8. 8. THE END

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