Problem
Production and costs are the primary building components on the supply side of the market. From the previous week, we know that consumer behavior forms the basis for the demand curves. This week, we will look at how production behavior by firms is behind the supply curve. A critical part of production decisions is profit. Many people think of profit in the terms of accounting profit, i.e., the difference between revenues from sales and the cost of production. However, when managers make production decisions they also look at economic profit that, unlike accounting profit, takes into consideration the costs of foregoing an investment in another activity (referred to as opportunity costs). Provide an example (preferably from an actual business operation) that demonstrates the differences in economic profit and accounting profit. You should include opportunity costs (explicit and implicit) in the comparison. Using your actual profit calculations explain why there is a difference in the bottom-line measured profits and why it is important to look at both.