Summary of "Types of Profit- Micro Topic 3.4"

Topic

Difference between accounting profit and economic profit; why implicit (opportunity) costs matter when evaluating business decisions.

Explicit costs: out‑of‑pocket costs of running a business (e.g., license, equipment, ingredients). Used by accountants.
Implicit costs: non‑cash opportunity costs (value of the owner’s time, foregone wages, forgone return on alternative investments). Used by economists when measuring total cost.
Accounting profit: total revenue minus explicit costs only.
Economic profit: total revenue minus both explicit and implicit costs. Economic profit can be negative even when accounting profit is positive.
Zero economic profit: also called normal profit — the business covers all explicit costs and exactly compensates the owner for opportunity costs.

Calculate explicit (out‑of‑pocket) costs
- Sum fixed explicit costs (e.g., licenses, equipment).
- Add variable explicit costs (cost per unit × quantity).
Calculate total revenue (TR)
- TR = price (P) × quantity sold (Q).
Compute accounting profit
- Accounting profit = TR − explicit costs.
Estimate implicit costs (opportunity costs)
- Include forgone wages for the owner’s time, forgone returns from alternative investments, and other subjective opportunity values.
Compute economic profit
- Economic profit = TR − (explicit costs + implicit costs).
Interpret results
- Positive accounting profit but negative economic profit → business earns cash profit but is worse than the next‑best alternative once opportunity costs are included.
- Economic profit = 0 → firm covers all explicit and implicit costs (normal profit).
- Include implicit costs in decision‑making even though they are subjective.

Scenario: Kevin sells ice cream cones.

Fixed explicit costs:
- Business license: $100
- Used cart: $500
- Total fixed explicit = $600
Variable explicit cost:
- $0.50 per cone × 500 cones = $250
Total explicit cost = $600 + $250 = $850
Total revenue = $2.00 per cone × 500 cones = $1,000
Accounting profit = $1,000 − $850 = $150 (positive)
Assume implicit costs (time, forgone wages/investment) = $500
Economic profit = $1,000 − ($850 + $500) = −$350

Conclusion: Accountants would report a $150 profit; economists would report a $350 loss. The difference is the implicit cost.

Note: A positive accounting profit does not guarantee economic profitability once opportunity costs are included.

In this course, “cost” will generally include both explicit and implicit costs unless otherwise specified.
Economics problems typically focus on economic profit (explicit + implicit), not accounting profit, unless the teacher asks otherwise.
Implicit costs are subjective and harder to quantify, but they should still be considered for sound decision‑making.

Jacob Clifford — presenter / narrator (explains concepts and runs the example)
Kevin — fictional business owner used in the ice cream example
Also referenced: accountants and economists (as perspectives/roles) and unnamed people briefly shown being videotaped