I’m taking a wacky economics class and I’m really confused by one of the questions from the assignment the teacher gave. Can anyone help me?
Using an illustration explain how a firm might be:
a. Earning an accounting profit and zero economic profit
b. Earning an accounting profit and an economic profit
c. Earning an accounting profit and an economic loss
d. Be sure to explain in each case what will happen to the number of firms in the market place and why it will happen
A company may reflect accounting profit in many ways. For example, lowering the depreciation of assets by increasing the useful life of asset; capitalizing expenses etc…However, these are not true economic profits as these are accounting adjustments only and reflect on the books of the company. A true economic profit comes from the overage about the cost of goods sold as compared to the revenue generated. I hope this helps.