Profit is calculated as the difference between revenues and costs. This is what we call “accounting profit”. In order to calculate “economic profit”, we need to consider “Sunk costs” and “opportunity costs”. The difference between “economic profit” and “accounting” profit is crucial for managerial decisions and is often the reason for the confusion and misunderstandings.
- When we use the term profit…in a typical business situation,…we have a pretty good understanding of what it means.…In this video, we are going to take it a step further…and learn the difference between accounting profit…and economic profit,…and see where sunk costs and opportunity costs fit in.…Profit is calculated as the difference…between revenues and costs.…This is what we call accounting profit.…In order to calculate economic profit,…we also need to consider sunk costs and opportunity costs.…
The difference between economic profit and accounting profit…is crucial for managerial decisions…and is often the reason for confusion and misunderstandings.…In the most simple form, economic profit can be calculated…as accounting profit plus sunk costs…minus opportunity costs.…Let's bring this equation alive…with a few real world examples.…Let's assume you are a book seller…and you have fifteen copies of a cookbook in your warehouse…for which you originally paid 12-dollars per book…and the suggested retail price is 18-dollars.…
- What are customers buying? (demand theory)
- What should we produce? (production theory)
- Which costs do I need to worry about now? (cost theory)
- What market am I in? (competition theory)
- What should we charge for it? (pricing theory)
To understand what managerial economics looks like in practice, Stefan explains how Google's auction-based advertising system employs the principles of game theory and how understanding this can help decision makers to outmaneuver their competitors.
- Using economics to solve business problems
- Understanding price elasticity
- Demand curve shifts
- Economics of scale vs. scope
- Break-even and what-if analysis
- Profit maximization
- Economics in action