Microeconomics 18th Edition by Campbell McConnell, Stanley Brue, Sean Flynn

Exercise 10

How do the concepts of accounting profit and economic profit differ Why is economic profit smaller than accounting profit What are the three basic sources of economic profit Classify each of the following according to those sources:
a. A firm's profit from developing and patenting a new medication that greatly reduces cholesterol and thus diminishes the likelihood of heart disease and stroke.
b. A restaurant's profit that results from the completion of a new highway past its door.
c. The profit received by a firm benefiting from an unanticipated change in consumer tastes.
Accounting profit is what remains of a firm's total revenues after it has paid for all the factors of production employed by the firm (its explicit costs) but not for the use of the resources owned by the business itself. Economists also take into consideration implicit costs-the payment the owners could have received by using the resources they own in some other way. The economist adds these implicit costs to the accountant's explicit costs to arrive at total cost. Subtracting the total cost from total revenue results in a smaller profit (the economic profit) than the accountant's profit.