Question

Why does it  always make economic sense for you to start a business if your business can make economic profit. How does economic profit differ from accounting profit? Have you ever considered starting a business? If you were to start your own business someday, describe the revenues and costs you would consider (make sure you are describing economic profit in your analysis). please type answer

Answer 1

ANSWER:

There is a difference between the economic profit and accounting profit. An accounting profit only considers explicit cost, but economic profit considers implicit costs along with the explicit cost. Though, the revenue streams will be same for the accounting profit as well as the economic profit.

• Accounting profit = revenue - explicit cost
• Economic earnings = revenue - explicit cost - implicit cost
• When a business is started then, following revenue and cost streams are considered as a part of economic profit.
• Sales revenue from the sale of goods and services of my business (revenue)
• Cost of raw materials & labor (Explicit cost)
• Rent of the office (Explicit cost)
• Insurance cost (Explicit cost)
• Product licensing cost (Explicit cost)
• Utility cost (Explicit cost)
• Salary forgone (Implicit cost)
• Bonus foregone (Implicit cost)

So,

Economic profit = Sales revenue - Cost of raw materials & labor - Rent of the office - Insurance cost -Product licensing cost - Utility cost - Salary forgone - Bonus foregone