The following is cost information for the Creamy Crisp Donut Company:

Entrepreneur's potential earnings as a salaried worker = $50,000
Annual lease on building = $22,000
Annual revenue from operations = $380,000
Payments to workers = $120,000
Utilities (electricity, water, disposal) costs = $8,000
Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000
Entrepreneur's forgone interest on personal funds used to finance the business = $6,000

Refer to the data. Creamy Crisp's total economic costs are:

Creamy Crisp Donut Company total economic costs is $206,000.

The Firm's Accounting Cost is $150,000

The Firm's Accounting Profit is its Revenue Less its Accounting Costs = $380,000 minus $150,000 = $230,000

The Firm's Economic Profit on the Other Hand is its Revenue Less its Economic Costs = $380,000 minus $206,000 = $174,000

Explanation:

Economic Costs is a term used by Economists to consider the true recognizable costs of taking on a particular course of Action or Venture or Project.

This implies, that Economic Costs = Accounting Costs + Opportunity/Implicit Costs of Projects/Ventures Foregone.

Whereas Accounting Costs recognizes costs attributable ONLY to the project or Venture a Business or Individual have invested in, Economic Costs goes a step further to include the Lost Benefit of not considering the alternatives to the Venture/Project currently undertaken.

From the data provided

A. Our Accounting Costs are:

Total Accounting Costs = $150,000

B. Our Implicit/Opportunity Costs are:

Total Implicit/Opportunity Costs = $56,000

This therefore puts our Economic Costs as $206,000 (i.e. Accounting Costs + Implicit/Opportunity Costs)

Notice we didn't consider the Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000. This is because it doesn't relate to the Current Venture of Creamy Crisp Donut Company and neither does it relate to an opportunity the entrepreneur had to forego to run the existing Donut Company.

In the Future he may choose to run both businesses concurrently or forego of one. But until then it doesn't account yet as an opportunity foregone but a POTENTIAL earning.

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