Lesson preview · Economic Foundations
Economic vs Accounting Cost
~7 min · Free to read
Meet Bob. He inherited his family’s restaurant and proudly tells everyone it clears 7,000 dollars in profit every month. His accountant agrees — the books look great. His economist friend frowns and says Bob is actually losing money. They’re both reading the same numbers. So who’s right? They’re using two different definitions of cost — and the gap between them is one of the most important ideas in economics.
Key Term
Accounting Cost
The out-of-pocket payments where money actually changes hands — rent paid, wages paid, materials bought. These are the costs that show up on a financial statement. Sometimes called explicit costs.
Key Term
Economic Cost
Accounting cost PLUS the income you give up by not using your own resources somewhere else: the rent the building could earn, the salary you could earn at another job, the interest your savings could collect.
These are implicit costs — real costs, but no money changes hands.
The true cost of running a business — what’s paid out plus what’s silently given up.
Implicit costs are the opportunity costs of using resources you already own. No money moves, but you’re still ‘paying’ — because you’re giving up the next-best use of those resources. The accountant ignores them. The economist counts them. Try Bob’s books for yourself:
Two profits, same revenue, different costs:
- Accounting profit = Revenue − Accounting cost
- Economic profit = Revenue − Economic cost
Bob’s accounting profit is a tidy +7,000 dollars. His economic profit — once you count what he gave up — is −9,200 dollars. He’d actually be richer leasing the building, taking a chef job, and putting his savings in the bank.
Tip
Sniff test for implicit costs
Ask: ‘Is this resource owned by the business owner? Could it be used or rented somewhere else?’ If yes, there’s an implicit cost — even though no money is moving.
Trap · Common Misconception
Zero economic profit is normal
If Bob’s economic profit hit exactly zero, he wouldn’t be ruined — he’d be earning exactly what his next-best alternative pays. Zero economic profit means ‘breaking even on opportunity cost.’ Negative economic profit is the signal to switch.
Check yourself · no marks
Sarah quits a 90,000 dollar job to start her own business. Is the 90,000 dollar salary she gave up part of her accounting cost or her economic cost?
Commit to one first. Guessing and being wrong beats reading the answer cold.
Worked Example
Marcus runs a food truck. His books show: 4,000 dollars rent on the truck’s parking lot, 3,000 dollars in ingredients, 2,000 dollars in wages for his employee. Marcus also works full-time in the truck (he could earn 3,500 dollars at a restaurant job) and he invested 20,000 dollars of his savings (which would earn 100 dollars/month in a savings account). Find his accounting cost, economic cost, and the gap.
Practice · 1 / 4
Which of the following is an IMPLICIT cost for a business owner (counted by economists, ignored by accountants)?
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