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Sources of economic profit

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How do the concepts of accounting profit and economic profit differ? Why is economic profit smaller than accounting profit? What are the three basic sources of economic profit? Classify each of the following according to those sources:

a. A firm's profit from developing and patenting a new medication that greatly reduces cholesterol and thus diminishes the likelihood of heart disease and stroke.
b. A restaurant's profit that results from construction of a new highway past its door.
c. The profit received by a firm benefiting from an unanticipated change in consumer tastes.

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Accounting profit includes only explicit costs, such as labor and materials. Economic profit also includes implicit costs
which are the loss of the use of resources that are used in a particular endeavor. For example, the owners of a business could instead be working for a paycheck and ...

Solution Summary

Accounting vs. economic profit; sources of economic profit