Accounting profit vs economic profit | APⓇ Microeconomics | Khan Academy

Summary

The video script discusses Sally's hamburger business, detailing its accounting profit and economic profit. Sally sells 5,000 hamburgers monthly at $5 each, incurring costs for supplies, employees, and utilities. Her accounting profit is calculated as $9,500 per month. However, considering opportunity costs, including potential rental income and her alternative salary as an accountant, her economic profit becomes negative $1,500 per month. This suggests it's not rational for Sally to continue the business based on the given financial data.

Takeaways

• 🍔 Sally's business sells 5,000 hamburgers per month at $5 each, generating $25,000 in total revenue.
• 💼 Sally's cost of supplies (goods sold) is $10,000 per month for ingredients like bread, meat, and lettuce.
• 👨‍🍳 She pays her two employees, Mike and Raj, $2,500 each per month, totaling $5,000 for labor costs.
• 🏠 Utilities for the restaurant cost $500 per month.
• 💰 The accounting profit is calculated as total revenue minus explicit costs, resulting in $9,500 per month.
• 🏢 Sally could earn additional income by renting her building for $5,000 per month if she didn't run the business.
• 📈 Her opportunity cost includes the potential earnings from renting the building and her salary as an accountant, $6,000 per month.
• 🔢 The economic profit considers both explicit and implicit costs, leading to a negative $1,500 per month.
• 🤔 Economic profit is always lower than accounting profit because it includes opportunity costs.
• 🚫 Based on the information provided, it is not rational for Sally to continue running her burger business due to the negative economic profit.

Q & A

What is the monthly revenue of Sally's business?

The monthly revenue of Sally's business is $25,000, calculated by multiplying the number of hamburgers sold (5,000) by the price per hamburger ($5).

How much does Sally spend on supplies for the hamburgers?

Sally spends $10,000 per month on supplies for the hamburgers, which is calculated by multiplying the number of hamburgers (5,000) by the cost per hamburger ($2).

What are the total monthly wages Sally pays to her employees?

Sally pays a total of $5,000 per month to her employees. This includes $2,500 each to Mike and Raj.

What is the monthly cost of utilities for the restaurant?

The monthly cost of utilities for the restaurant is $500.

What is the accounting profit of Sally's business?

The accounting profit of Sally's business is $9,500 per month, which is calculated by subtracting the total costs (supplies, employee wages, and utilities) from the total revenue.

What is the opportunity cost of Sally running the business instead of renting out her building?

The opportunity cost of Sally running the business instead of renting out her building is $5,000 per month, which is the potential rental income she foregoes.

How much could Sally earn per month if she worked as an accountant instead of running the business?

If Sally worked as an accountant instead of running the business, she could earn $6,000 per month.

What is the total opportunity cost Sally incurs by running her burger business?

The total opportunity cost Sally incurs by running her burger business is $11,000 per month, which includes the potential rental income and her potential earnings as an accountant.

What is the economic profit of Sally's business when considering opportunity costs?

When considering opportunity costs, the economic profit of Sally's business is negative $1,500 per month, calculated by subtracting the opportunity costs from the accounting profit.

Based on the information provided, is it rational for Sally to continue running her burger business?

Based on the information provided, it is not rational for Sally to continue running her burger business because her economic profit is negative, indicating that the opportunity costs outweigh the accounting profit.

What additional information might change the rationality of Sally continuing her burger business?

Additional information such as personal satisfaction, flexibility, or other non-financial benefits Sally might gain from running her own business could change the rationality of continuing the burger business, as these would affect the calculation of her overall utility or satisfaction.