– Micro made simple
– Economic Costs vs. Accounting Costs
A firm’s “accounting costs” are all the financial costs it incurs to produce output. For example, for Pauline’s Pies—a business that makes frozen pizzas—accounting costs would include rent, labor, ingredients, utility bills, insurance, and any licensing fees the business must pay. A firm’s “accounting profit” (or loss) is equal to the firm’s revenue, minus the firm’s accounting costs.
The concept of economic profit is crucial because firms make decisions based on economic profits rather than accounting profits. That is, firms want to maximize their economic profits rather than accounting profits. Since our focus is economics and not accounting, we use the term “costs” to mean “economic costs” and “profit” to mean “economic profit” unless otherwise indicated.