ECN 700 Lecture Notes - Lecture 2: John Wiley & Sons, Perfect Competition, Average Variable Cost

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The difference between accounting profit and economic profit is in how total cost is measured. With accounting profit, total cost is measured as total accounting cost while with economic profit, total cost is measured as total economic cost. Accounting cost measures the historical expenses the firm incurred to produce and sell its product while economic cost measured the opportunity cost of the resources that the firm uses to produce and sell its product. If a firm chose to produce and sell a product it could earn a positive accounting profit but negative economic profit. This would occur if the economic cost of the resources used was greater than the accounting cost of the resources used. For example, the firm might purchase resources for million and use these to produce a product when instead the firm could have resold the resources for million.

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