Any one can show me about economic profit (cost): Does economic cost include depreciation? According to question 2&3 in practice problems for reading 16 (p126), I think it do not. Thus which kind of cost (accounting or economic) include it? Can economic cost be greater than accounting cost? In competitive market, when firm sells goods at price as same as ATC, it does not have economic profit but still have accounting profit? This issue makes me a lot of confuse. Thank for all of reply.
Economic profit is Total Revenue - Opportunity cost. The latter has explicit and implicit components. Depreciation is an example of implicit opportunity cost, so yes it does affect economic (and accounting) profit. Yes, economic cost can be greater than accounting cost. In fact, this is the case more often than not. As for questions 2&3, I think you’re missing the forest for the trees. The key point to notice is that the equipment has no resale/scrap value so the purchase cost is sunk (i.e. you can’t retrieve any part of it). Since that’s the case, it makes sense to operate the machine as long as it generates revenue in excess of operating cost. Lastly, yes, a firm that makes no economic profit can have a positive accounting profit, which goes back to the first point above. Hope this helps.
Thank you for your insightful reply. Can you explain me one more thing? The cost apprear on financial report is accounting or economic cost? (or something in the middle of them !??) A company operates at P = ATC has accounting profit because accounting cost dose not include depreciation?
Any one can help me!?
Financial reports typically deal with accounting costs, because it’s hard to do otherwise. Economic costs involve hard-to-measure implicit costs (eg. normal profit) that would further complicate the stated goal of producing fair, objective, comparable reports. A company that operates at P=ATC has no economic profit. Technically, that’s all you can conclude. Because economic costs, however, tend to be higher than accounting costs, a zero economic profit usually implies some positive accounting profit. Note that this will not be the case if opportunity cost is negative.