Welcome to a new semester of Economics. We are currently studying the basics of the Free Enterprise System. One of the most important characteristics of a free enterprise system is the profit incentive which we have discussed in class. In our class discussions we did not get into the difference between accounting profit and economic profit. Therefore, I would like to offer you an extra credit enrichment opportunity. Click on the link below to watch the following video and post a comment summarizing what you learned about this topic for up to 5 extra credit points.
Economic Profit vs. Accounting Profit
I am eagerly awaiting your insightful comments. :)
ReplyDeleteBasically what I got out of this video is that accounting profit is the amount of money left one after all the expenses are paid in a business. Economic profit is all the money that was paid and/or given up to run a business. So a business can be profitable from an accounting standpoint, but not from an economic stand point.
ReplyDeleteSlightly off-topic: If you turn on closed captioning on the video some of what the program comes up with is pretty amusing (just going to throw that out there) ;)
Good work, Jena. You grasped the main idea. Five extra credit points are coming your way.
DeleteChrissy T
ReplyDeleteThis video was very informative on the differences between Economic and Accounting profit! Simply stated, the accounting profit of a business is the revenue minus the expenses being paid to keep the business running. The profit outcome (pre tax profit) is the amount of money the business owner will end up receiving after paying all of the necessary fines. for example, a restaurant owner may bring in $500,000 a year. However, after subtracting all of the money being paid for labor, equipment, space, and food, the business owner may only take in $50,000 as a pre tax profit. Economics profit, on the other hand, is the sales revenue minus all of the costs including the opportunity costs of the situation. For example, a doctor could leave his medical occupation and open a restaurant, having a revenue of $500,000 but only ending up with a $50,000 profit. This doctor, who previously made $150,000 a year, would be basically losing $100,000 a year! Often times, if calculating the profits through economic profiting, the outcome is a negative number. It does not make sense to run a firm through economic profiting, and many businesses calculate profits through accounting profits. Through accounting terms, in this situation, the restaurant owner is profitable, but through economic terms, the restaurant owner is not profitable.
DeleteChrissy, your summary includes all of the main ideas in the video. You have earned your 5 extra credit points.
DeleteI found this video to be very helpful in learning economics. This video outlined the profit that you can make from a buiness. I personally would want to use an accounting profit method because the outcome is much more and it makes sense to run the buisnes. From a economic standpoint you aren't making as much because of all the costs you have to make that don't make any profit. So i personally would chose to run my buisness in an accounting manner.
ReplyDeleteAbby, I don't think you grasped the main idea. Take a look at Jena's and Chrissy's summaries. Anyway, I will give you 1 extra credit point for the attempt.
DeleteThis video stated about Economis and Accounting. I learned that the profit outcome is what the owner will end up getting out of his/or her profit. The owner has to first spend his money on the oraganization then get money from it. If that doesn't work then the owner automatically lose's a ton of money. This showed me that if you make an investment make sure the store/resturant will work and be successful before you start.
ReplyDeleteJess, I don't think you grasped the main idea. Take a look at Jena's and Chrissy's summaries. Anyway, I will give you 1 extra credit point for the attempt.
DeleteThis video informed me on both economic and accounting profit making. The accounting method would make more sense to use when owning a business such as a resturant and using the method helps establish if the business is worth owning. The video explain to me how to calculate pre tax profit. The video talks about both explicit and inplicit opportunity cost and why you would need both for economic profit. the accounting method just focuses on the business itslef where as the economic method focused on both the business and the wages forgone on a job.
ReplyDeleteJessy, I think you picked up on some of the information but I'm not sure you grasped the main idea. It is not a matter of choosing accounting vs. economic profit. They both apply in every situation but they measure profit differently. I will give you 3 extra credit points.
DeleteThis video helped me better understand how a business owner would be able to keep track of whether or not they are making a profit. At first, I thought the Accounting Profit was reasonable and a good outcome for the profit. However, when other variables were taken into account, such as the example of the doctor not practicing in order to run the restaurant, the Economic Profit was not practical. Even though the Accounting Profit was a reasonable profit to live by, the Economic Profit showed that potential was being wasted and it would not be efficient to keep the business running the current way. Overall, I think the video helped me to understand more clearly a reasonable profit to make in a business, and how to know if your profit is reasonable.
ReplyDeleteGood summary, Jackie. You understand the difference between the two types of profit and why economic profit is a useful piece of information. You have earned 5 extra credit points.
DeleteAfter watching the video, I concluded that running a business has more to it than you think. It has many added expenses that cost money. In the end you can make money if you are successful. So it can be profitable. On the economic side of things it is not really considered profitable. I found the video helpful with understanding that they both apply in business situations.
ReplyDeleteEconomic Profit: Can be viewed as all the money that was put forward to run a business. It can also be looked at as the money that was lost in the system of running a business.
Accounting Profit: is the amount of money that is left over when a business has paid all the expense necessary.
The video also talked about the expense that you face if you start off with $500,000 and you subtract money for the other expenses such as the cost of the food, the cost of labor, the building rent and the equipment rent in the end you are left with $50,000 (pre tax profit)
Shannon-
DeleteYou have grasped the basic idea of both Economic and Accounting profit. I will give you 3 extra credit points.
This video helped me understand that accounting profit is the amount of money left in a business after all other expenses are paid. On the other hand, economic profit is all the money that was paid to actually run the business. Therefore it does not make sense to run a business off of economic profit, because in terms of accounting profit the business may be profitable, but the same business may be unprofitable in terms of economic profit.
ReplyDeleteCaroline, you have correctly described accounting profit but I think you missed the point of economic profit involving opportunity cost. I will award you 2 extra credit points.
DeleteAfter watching this video I have learned a better understanding of the difference between economic profit and accounting profit. Accounting profit is calculated by taking all of your expenses and subtracting them from your revenue. That total is your pretax profit. Economic profit is taking that same calculation but looking at it in a different way. Economic profit takes your pretax profit and compares it to the wage you made at your previous job before you opened up your business. If the profit is higher than your previous wage the business is successful and worth continuing, but if it is lower than your previous wage economic profit tells you that it is not worth it to continue.
ReplyDeleteAndrea-
DeleteYou almost have the main ideas down. You just missed the point that economic profit considers opportunity costs which accounting profit ignores. This opportunity cost might be a job that you give up to open up the business or it could be something else like a competing business opportunity that you are not pursuing. I have given you 4 extra credit points. Good work.
Mrs. H.
This video about Profit helped me be able to separate the differences between Accounting and Economic Profits. It showed me how to distinguish a reasonable and efficent wat to make a profit and how to keep your Profit and business running reasonably. The video taught me how a owner of an enterprise record his profit. Since the Economic Profit was a partially efficent way of making a profit with the examples shown in the video. Although, Economic showed that they take opportunity costs into thought. The Accounting Profit showed to be more efficent and useful to create a profit. Except the fact that Accounting seemed to make it more efficent, Economic Profit showed that the it was a misuse of resources and wouldn't work to keep an enterprise successful.
ReplyDelete