Tuesday, December 16, 2008

Accounting vs Economic Profit

I've been ranting about people confusing accounting and economic concept. The following is my attempt to make it clear. (Beware of the crude simplification; but the idea remains).

You have an identical twin -- call him Brother. Both of you have the same skill, education level, and other qualifications. But your jobs are different. You work as an orange seller, while Brother is a newspaper seller. Every morning you go to marketplace, buy 100 oranges at the price of Rp 750 each and sell them for Rp 1,000 an orange. On the other hand, Brother goes to newspaper agent, buys 100 pieces of newspapers at Rp 500 a piece and sell them for Rp 625 each. Assuming you both sell everything, what is your profit? What's Brother's profit?

An accountant will tell you that your profit is (1,000 - 750) x 100 = Rp 25,000 per day. Likewise, Brother profits (625 - 500) x 100 = Rp 12,500 per day.

But the economist will see this a bit differently. He will tell you that Bother is actually losing. Why? Because, given the same potential, he could as well be selling oranges, instead of newspaper. That is, by making the (accounting) profit of Rp 12,500 in newspaper business, he sacrifices getting Rp 25,000 like you in orange business. In net, he makes an economic loss of 12,500 - 25,000 = Rp 12,500 (or in different words: he makes an economic profit of minus Rp 12,500). Using the same logic, you can say that you make an economic profit of Rp 12,500; since by profiting Rp 25,000 in orange business, you (rightly) sacrifice your chance to get Rp 12,500 in newspaper.

1 comment:

Anonymous said...

Ya, tapi kan rezeki udah da yang ngatur Co!, coba kalau si tukang jeruk nggak laku semua jeruknya dan si tukang koran laku semua korannya dan kebetulan ada yang borong korannya buat kampanye dan minta koran lebih banyak lagi. Terlalu simpel amat logikamu. Lalu kalau sama-sama potensinya, semua mau jadi tukang jeruk? Malah nggak laku jeruknya dan jeruk makan jeruk lagi...