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What is the difference between zero accounting profit and zero economic profit?

Published in Business and Finance 2 mins read

The key difference between zero accounting profit and zero economic profit lies in how they account for opportunity costs.

Accounting Profit

  • Definition: Accounting profit is the profit calculated by subtracting explicit costs (e.g., wages, rent, materials) from total revenue.
  • Focus: This focuses on the actual monetary expenses incurred by a business.
  • Example: If a company has $100,000 in revenue and $100,000 in explicit costs, it has zero accounting profit.

Economic Profit

  • Definition: Economic profit takes into account both explicit and implicit costs, which include the opportunity cost of using resources.
  • Focus: This considers the potential earnings a business could have made by using its resources in an alternative way.
  • Example: If a company has $100,000 in revenue, $100,000 in explicit costs, and its owner could have earned $20,000 by working elsewhere, the company has a -$20,000 economic profit.

Summary

  • Zero accounting profit means a business is breaking even based on its explicit costs.
  • Zero economic profit means a business is earning exactly what it could have earned by using its resources in another way. This is considered a normal rate of return.

In essence, a business with zero accounting profit might seem successful, but it could be losing out on potential profits. In contrast, a business with zero economic profit is using its resources efficiently, even if its accounting profit is not as high as it could be.

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