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Subject 1. Types of Profit Measures tal accounting costs
Economic profit equals a firm's total revenue minus its total opportunity costs of production.
Economic profit = Total revenue - Total opportunity costs
<span>The total opportunity costs include both explicit and implicit costs of all the resources used by a firm. Implicit opportunity cost is the unearned or nominal profit that the resource-owner did not make from investing in the next best alternative. As a result, you can have a significant accounting profit with little to no economic profit.
Example
Suppose a person uses his own resources, land, capital, and time in the production of goods. The opportunity costs of these resources are shown below:
Accounting Profit = $55,000
Entrepreneur's own forgone salary = $40,000
Foregone interest on capital = $1,000
Foregone rent = $2,000
Economic Profit = 55,000 - 40,000 - 1,000 - 2,000 = $12,000
For publicly traded corporations, economic profit is accounting profit - required return on equity capital.
When economic profit is zero, a firm's acco
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