How Is The Concept Of A Normal Return On Investment Related To The Distinction Between Business And Economic Profit?

Question

How Is The Concept Of A Normal Return On Investment Related To The Distinction Between Business And Economic Profit?

2 Answers

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Answer 1

Basically difference between the business profit (also known as accounting profit) and economic profit is that in economic profit, profit or loss is calculated by subtracting opportunity cost of the inputs used from the revenue of sales. On the other hand, accounting or business profit is the difference between the total revenue and total costs incurred to earn that revenue. Now, in business accounting normal return is the minimum profit that is required to cover the costs of inputs and all of the expenses associated with it. It can be a profit just greater than the breakeven profit (which is zero). On the other hand, economic profit is just a forgone cost estimation. Therefore, normal profit is required in business profit and not in economic profit, which is one of the differences between the two types of profits.

Answer 2

The difference between the business and economic profit is that in economic profit, profitor loss is calculated by subtracting the opportunity cost of the inputs used from the revenue ofsales.Conversely, business profit is the difference between total revenue and total costs incurredto earn that revenue.The normal return is the minimum that is required to cover the cost ofinputs and all the expenses associated with it.It can be a profit that is just greater than thebreakeven point; which is zero.The normal return on investment is included as part of profit bybusiness managers and accountants but as a part of cost by economists.Thus, business profitminus the normal return on investment or implicit costs equals economic profit.It is economicprofit that is important in allocating society’s scare resources among competing uses, buteconomic profit is just cost estimation.