Explain how it can be that something that an accountant calls a profit is actual

Question

Explain how it can be that something that an accountant calls a profit is actually a cost from the economist's point of view. What is the difference between economic and accounting profits? Explain Ronald Coase's explanation for why firms exist. Using the model developed in Chapter 7 of the textbook, explain what is meant by the idea of an "optimum-size firm." What forces would make firms in one industry on average larger than firms in another industry (e.g. grocery stores are generally much larger than beauty parlors)? Production Costs in the Short-run and the Long-run In the competitive model, the short-run supply curve a firm is its marginal cost curve (above minimum average variable cost) and the market supply curve is the horizontal summation of those marginal cost curves across all firms. Since marginal cost curves are short-run supply curves must also be upward-sloping. Why what is it that causes this to be true in the short-run? In the long-run, a firm's cost of production are shown by the long-run average cost curve. What forces explain the typical shape of the long-run average cost curve? How are the law of diminishing returns and diseconomies of scale different? How is the shape of the long-run average cost curve related to what the firms in an industry will look like: will there be lots of firms or just a few, or perhaps even just one? Will all the firms be about the same size or will firms of different size coexist? (How do you know?)

Explanation / Answer

1.A

An accountant calls a profit is actually a cost from the economist’s point of view. It is because of opportunity cost concept. In this concept, two alternatives are chosen to consider or to select one particular alternative.

Suppose there are two alternatives---engaging in a business or to go to college for higher education. If the higher education is chosen the tentative accounting profit out of business would be the opportunity cost for selecting higher education.

Accounting profit = Total revenues – Total expenses

Economic profit = Accounting profit – Opportunity cost

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