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Economic Profit - Essay Example

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Economic profit is a better measure of profit than accounting profit because it considers opportunity cost and other hidden costs which are ignored by accounting profit (Black, 2003). Economic profit is positive if the value of output is greater than all explicit and implicit…
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Economic Profit

Download file to see previous pages... A firm such as firm A which uses old technology will incur more costs and earn less revenue.
In measuring economic profit, one-time event is considered as part of the elements of economic profit because a profit is a profit whether recurring or not (Black, 2003). Extraordinary and non-recurring items are taken into consideration.
Money provided by relatives to get the business started is considered as a starting capital which is a cost because there is an opportunity cost of how to use such money. So, they are subtracted from the value of output to get the economic profit.
Off-balance sheet expenses are also treated as costs which are subtracted from the value of outputs because they reduce economic profit. They may not be included in the firm’s balance sheet but they are included as explicit costs in measuring economic ...Download file to see next pagesRead More
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