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September 27, 2020 

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LIMIT PRICING: The strategic behavior process in which a firm with market control sets its price and output so that there is not enough demand left for another firm to enter the market and earn profits. The firm expands its output causing the price to fall, which discourages potential entrants to this market. This practice is most commonly undertaken by oligopoly firms seeking to expand their market shares and gain greater market control.

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ACCOUNTING PROFIT:

The difference between the revenue received by a firm and the explicit accounting cost incurred. This is the profit listed on a firm's balance sheet, appears periodically in the financial sector of the newspaper, and is reported to the Internal Revenue Service for tax purposes. While accounting profit is the "standard" designation of profit used in the business world, economists prefer to use economic profit
More often than not, accounting profit differs from economic profit. In some cases, the two have almost no correlation. The reason rests with the difference between accounting cost and economic cost. Some accounting cost is not an opportunity cost and some opportunity cost is does not show up as an accounting cost.

The primary difference between accounting profit and economic profit rests with normal profit. Normal profit is the profit a firm (that is, entrepreneurship) could receive in an alternative venture. Much like labor incurs an opportunity cost by producing one good rather than another, entrepreneurship foregoes the profit that could be earned in one activity when it undertakes another.

For example, Phoebe Pankovic might be paid $10 an hour to produce Wacky Willy Stuffed Amigos (those cute and cuddly armadillos and tarantulas) to compensate for a $10 wage that could be earned producing Hot Momma Fudge Bananarama Ice Cream Sundaes. In a similar manner, William J. Wackowski, the entrepreneur who organizes the production of Wacky Willy Stuffed Amigos, foregoes profit that could be earned producing another good, such as Hot Momma Fudge Bananarama Ice Cream Sundaes. This foregone profit is an opportunity cost of entrepreneurship and is deducted from revenue to calculate economic profit. However, it is NOT deducted from revenue to calculate accounting profit.

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Recommended Citation:

ACCOUNTING PROFIT, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2020. [Accessed: September 27, 2020].


Check Out These Related Terms...

     | accounting cost | normal profit | economic profit | profit |


Or For A Little Background...

     | entrepreneurship | opportunity cost | explicit cost | implicit cost | economic cost | cost | production | production cost | business | factors of production | microeconomics | short-run production analysis |


And For Further Study...

     | total cost | variable cost | fixed cost | average cost | marginal cost | legal business organizations | firm objectives | opportunity cost, production possibilities | profit maximization |


Related Websites (Will Open in New Window)...

     | American Accounting Association | Internal Revenue Service |


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