Class Discussion... Continued (5 minutes)

Consider:

Economic Profit = TR - TC

Where:

TR = Total Revenue (Sales receipts - or price x quantity)

TC = Total Cost (Opportunity cost of resources land, labor, capital and entrepreneurs)

Accounting Profit is the difference between total revenue and explicit costs. Explicit costs constitute every expense that is referred to as a direct cost. A direct cost can be accounted for with receipts from a market transaction such as leased land, purchased fertilizer, hired labor, purchased equipment etc. In fact, an explicit cost is the opportunity cost of using resources owned by others and thus, money is exchanged and is typically used in accounting cost.

Economic Profit is the difference between total revenue and economic costs. Economic costs include both direct and indirect (implicit) costs. An indirect or implicit cost is an expense that might not be accounted for with a receipt from a market transaction (such as using your own time, plot, house, children etc.). In fact, an implicit cost is the opportunity cost of using resources owned by the entrepreneur (or the firm) and thus, no money is exchanged.