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.
