The economic problems that all persons, businesses and countries face are resources are scarce, however people want unlimited resources.
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The economic problems that all persons, businesses and countries face are resources are scarce, however people want unlimited resources. The differences in the way a market process verses a command process attempt to deal with the basic economic problem is either through a market process, an unplanned not organized by any central authority but is controlled by the supply and demand of goods and services (Investopedia, 2014). On the other hand, the command process is organized by the government who has ownership and directs the factors of production such as land, capital and resources (Investopedia, 2014). Moreover, the difference is between division of labor and the factors determining prices. Economic profits are determined by economic principles not generally accepted accounting principles (GAAP) and costs are deducted from revenues. Economic profits use implicit costs, considered opportunity cost are usually the company’s own resources such as company-owned buildings, equipment and self-employment resources. Economic profit is used to see the value of the company for example, the performance metric. Unlike the accounting profit, that uses gains and losses and is calculated through GAAP. The accounting profits are a company’s total revenue reduced by the explicit costs of producing goods and services (Investopedia, 2015). The explicit costs are direct monetary movement and expenses such as the cost of raw materials, employee wages, transportation, rent and interest on capital (Investopedia, 2015). The accounting profits has a limit to time periods such a fiscal quarter or year. It is mainly used for income tax purposes, financial statement preparations and financial performances. For example, the importance of taking into account the opportunity costs in investing decisions is if a company had $150,000 in revenues and $50,000 in explicit costs, the accounting profit would be $100,000. The same company has $25,000 in implicit or opportunity costs; its economic profit would be $75,000 (Investopedia, 2015).
What is the difference between market economy and a command economy? (2014,
October) Retrieved January 9, 2017, from http://www.investopedia.com/
What is the difference between economic profit and accounting
profit? (2015, March) Retrieved January 9, 2017, from http://www.investopedia.com/