total cost, including both explicit and implicit costs. The difference is important because even though a

business pays income taxes based on its accounting profit, whether or not it is economically successful

depends on its economic profit.

WORK IT OUT

Calculating Implicit Costs
Consider the following example. Eryn currently works for a corporate law firm. She is considering opening her

own legal practice, where she expects to earn $200,000 per year once she establishes herself. To run her own

firm, she would need an office and a law clerk. She has found the perfect office, which rents for $50,000 per year.

She could hire a law clerk for $35,000 per year. If these figures are accurate, would Eryn’s legal practice be

profitable?

Step 1. First you have to calculate the costs. You can take what you know about explicit costs and total them:

Step 2. Subtracting the explicit costs from the revenue gives you the accounting profit.
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