Authors libby rittenberg 498

Accountants include only explicit costs in their computation of total
cost. Explicit costs include charges that must be paid for factors of
production such as labor and capital, together with an estimate of
depreciation. Profit computed using only explicit costs is
called accounting profit. It is the measure of profit firms typically report;
firms pay taxes on their accounting profits, and a corporation reporting its
profit for a particular period reports its accounting profits. To compute his
accounting profits, Mr. Gortari, the radish farmer, would subtract explicit
costs, such as charges for labor, equipment, and other supplies, from the
revenue he receives.
Economists recognize costs in addition to the explicit costs listed by
accountants. If Mr. Gortari were not growing radishes, he could be doing
something else with the land and with his own efforts. Suppose the most
valuable alternative use of his land would be to produce carrots, from
which Mr. Gortari could earn $250 per month in accounting profits. The
income he forgoes by not producing carrots is an opportunity cost of
producing radishes. This cost is not explicit; the return Mr. Gortari could
get from producing carrots will not appear on a conventional accounting
statement of his accounting profit. A cost that is included in the economic
concept of opportunity cost, but that is not an explicit cost, is called
an implicit cost.

The Long Run and Zero Economic Profits
Given our definition of economic profits, we can easily see why, in perfect
competition, they must always equal zero in the long run. Suppose there
are two industries in the economy, and that firms in Industry A are earning
economic profits. By definition, firms in Industry A are earning a return
Attributed to Libby Rittenberg and Timothy Tregarthen
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