Explain the difference between economic profits and accounting profits.
1. Economic profits are profits which deduct from profit not only sales revenue and economic cost, but they also deduct opportunity cost. Opportunity cost would be the economic value of a company's assets and resources (i.e. plant / equipment), had they been employed elsewhere. If a company's assets employed elsewhere would earn more than they are currently earning for a company, opportunity cost may be high.
The example used by the text illustrates a software engineer whose worth in the job market is $200k / year. If this person runs a software company, and the company earns $1,000,000, it must subtract incurred supplies/expenses of $850,000. The owner is left with $150,000 accounting profit. However, when one subtracts the opportunity cost of the income the owner would have earned from an employer ($200k), the true economic profit remaining is - $ 50k. Therefore owning a software company is not......
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