Overview
The lecture clarifies the shift from accounting profit to economic profit, emphasizing that future discussions will always assume costs include implicit costs.
Accounting vs. Economic Profit
- Accounting profit is total revenue minus explicit (out-of-pocket) costs.
- Economic profit subtracts both explicit and implicit (opportunity) costs from total revenue.
- You may be asked to calculate both, but focus shifts to economic profit going forward.
Implicit Costs and Assumptions
- From now on, the term "cost" will always include implicit costs unless stated otherwise.
- Future chapters assume economic profit in calculations and discussions.
- This assumption is important for upcoming course material and modeling.
Key Terms & Definitions
- Explicit Cost — direct, out-of-pocket payments for inputs to production.
- Implicit Cost — the opportunity cost of using resources owned by the firm.
- Accounting Profit — total revenue minus explicit costs.
- Economic Profit — total revenue minus both explicit and implicit costs.
Action Items / Next Steps
- Remember that "cost" refers to both explicit and implicit costs in future lectures.
- Practice distinguishing and calculating accounting vs. economic profit for upcoming questions.