![]() ![]() Thus, the difference between economic profits and accounting profits is that economic profits include the firm's implicit costs and accounting profits do not.Ī firm is said to make normal profits when its economic profits are zero. ![]() Alternatively stated, economic profits are accounting profits minus implicit costs. Economic profits are total revenues minus explicit and implicit costs. Accounting profits are the firm's total revenues from sales of its output, minus the firm's explicit costs. The difference between explicit and implicit costs is crucial to understanding the difference between accounting profits and economic profits. When economists discuss costs, they have in mind both explicit and implicit costs.Īccounting profits, economic profits, and normal profits. These implicit costs are not regarded as costs in an accounting sense, but they are a part of the firm's costs of doing business, nonetheless. As another example, consider the owner of a firm who works along with his employees but does not draw a salary the owner forgoes the opportunity to earn a wage working for someone else. For example, a firm that uses its own building for production purposes forgoes the income that it might receive from renting the building out. Wages paid to workers, payments to suppliers of raw materials, and fees paid to bankers and lawyers are all included among the firm's explicit costs.Ī firm's implicit costs consist of the opportunity costs of using the firm's own resources without receiving any explicit compensation for those resources. A firm's explicit costs comprise all explicit payments to the factors of production the firm uses. The relationship between costs and profits is therefore critical to the firm's determination of how much output to produce.Įxplicit and implicit costs. The production of output, however, involves certain costs that reduce the profits a firm can make. The firm's primary objective in producing output is to maximize profits. Labor Demand and Supply in a Perfectly Competitive Market.Equilibrium in a Perfectly Competitive Market.Monopolistic Competition in the Long-run.Demand in a Perfectly Competitive Market.Classical and Keynesian Theories: Output, Employment.
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