Question

What is the diffdrence b/w accounting cost and economic cost?

Answer 1

Accounting Costs

The costs associated with running a business clearly depend on the type of business you are running. But, generally speaking, we can probably name a few of the costs any business has to deal with at some point in time. There is the cost of labor — someone has to get paid for doing work. Even if it's just you running your own business, you need to make money. There's equipment or materials— since you are selling something, you either need materials to make your product or equipment to create the content you sell.

All of these costs are called accounting costs. Accounting costs are those costs that have a specific monetary value you need to pay in order to receive the associated benefit. Accounting costs are also called explicit costs. Explicit costs are those stated costs that occur in exchange for a defined good or service.

Economic Costs

Economic costs include accounting costs, but they also include opportunity costs. Opportunity costs are the benefits you could have received if you had chosen on course of action, but that you didn't because you went with another option. An example is probably helpful here. Imagine you own a building and you use it as a warehouse for materials and finished products. If you weren't using that building, you could lease it for $3,000 per month. By using it as storage, you are missing out on the $3,000 in opportunity costs.

You are probably thinking, 'Okay, but if I did that where would I store my materials and products?' Great question, and this really highlights why it is important to know the opportunity costs of your decisions. If you would have to lease another building, say for $4,000 a month, then the opportunity cost of $3,000 is well worth the tradeoff. Or, if you could limit the amount of material and product you needed to store and find a place to lease for $1,000 per month, you may want to consider doing that — and then actually making a $2,000 accounting profit.

Opportunity costs are also called implicit costs, since they are costs of doing business, but not ones that ends up coming out of your bank account or on financial statements. They are just implicit in doing business.