Video summary

Types of Profit- Micro Topic 3.4

Main summary

Key takeaways

Educational

Topic

Difference between accounting profit and economic profit; why implicit (opportunity) costs matter when evaluating business decisions.

Key concepts

  • Explicit costs: out‑of‑pocket costs of running a business (e.g., license, equipment, ingredients). Used by accountants.
  • Implicit costs: non‑cash opportunity costs (value of the owner’s time, foregone wages, forgone return on alternative investments). Used by economists when measuring total cost.
  • Accounting profit: total revenue minus explicit costs only.
  • Economic profit: total revenue minus both explicit and implicit costs. Economic profit can be negative even when accounting profit is positive.
  • Zero economic profit: also called normal profit — the business covers all explicit costs and exactly compensates the owner for opportunity costs.

How to calculate and interpret (step-by-step)

  1. Calculate explicit (out‑of‑pocket) costs
    • Sum fixed explicit costs (e.g., licenses, equipment).
    • Add variable explicit costs (cost per unit × quantity).
  2. Calculate total revenue (TR)
    • TR = price (P) × quantity sold (Q).
  3. Compute accounting profit
    • Accounting profit = TR − explicit costs.
  4. Estimate implicit costs (opportunity costs)
    • Include forgone wages for the owner’s time, forgone returns from alternative investments, and other subjective opportunity values.
  5. Compute economic profit
    • Economic profit = TR − (explicit costs + implicit costs).
  6. Interpret results
    • Positive accounting profit but negative economic profit → business earns cash profit but is worse than the next‑best alternative once opportunity costs are included.
    • Economic profit = 0 → firm covers all explicit and implicit costs (normal profit).
    • Include implicit costs in decision‑making even though they are subjective.

Worked example (ice cream vendor)

Scenario: Kevin sells ice cream cones.

  • Fixed explicit costs:
    • Business license: $100
    • Used cart: $500
    • Total fixed explicit = $600
  • Variable explicit cost:
    • $0.50 per cone × 500 cones = $250
  • Total explicit cost = $600 + $250 = $850
  • Total revenue = $2.00 per cone × 500 cones = $1,000
  • Accounting profit = $1,000 − $850 = $150 (positive)
  • Assume implicit costs (time, forgone wages/investment) = $500
  • Economic profit = $1,000 − ($850 + $500) = −$350

Conclusion: Accountants would report a $150 profit; economists would report a $350 loss. The difference is the implicit cost.

Note: A positive accounting profit does not guarantee economic profitability once opportunity costs are included.

Classroom notes / instructor emphasis

  • In this course, “cost” will generally include both explicit and implicit costs unless otherwise specified.
  • Economics problems typically focus on economic profit (explicit + implicit), not accounting profit, unless the teacher asks otherwise.
  • Implicit costs are subjective and harder to quantify, but they should still be considered for sound decision‑making.

Speakers / sources featured

  • Jacob Clifford — presenter / narrator (explains concepts and runs the example)
  • Kevin — fictional business owner used in the ice cream example
  • Also referenced: accountants and economists (as perspectives/roles) and unnamed people briefly shown being videotaped

Original video