It is the measure of profit firms typically report firms pay taxes on their accounting profits, and a corporation reporting its profit for a particular period reports its accounting profits. Profit computed using only explicit costs is called accounting profit Profit computed using only explicit costs. include charges that must be paid for factors of production such as labor and capital, together with an estimate of depreciation. Explicit costs Charges that must be paid for factors of production such as labor and capital. An economic loss (negative economic profit) is incurred if total cost exceeds total revenue.Īccountants include only explicit costs in their computation of total cost. We shall see in this section that the model of perfect competition predicts that, at a long-run equilibrium, production takes place at the lowest possible cost per unit and that all economic profits and losses are eliminated.Įconomic Versus Accounting Concepts of Profit and LossĮconomic profit equals total revenue minus total cost, where cost is measured in the economic sense as opportunity cost. New firms can enter any market existing firms can leave their markets. In the long run, a firm is free to adjust all of its inputs.
Describe the three possible effects on the costs of the factors of production that expansion or contraction of a perfectly competitive industry may have and illustrate the resulting long-run industry supply curve in each case.Explain why in long-run equilibrium in a perfectly competitive industry firms will earn zero economic profit.Distinguish between economic profit and accounting profit.
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