Costs and Profits
Firms arrive at what they call profits by taking the revenues they obtain
from selling their output and subtracting all the costs associated with their
inputs. When all costs have been correctly deducted, the resulting profits
are the return to the owners’ financial investment in the firm.
The robotic equipment used inside an auto assembly plant is an example
of capital. These machines deliver a flow of capital services to the firm
that uses them.
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Economic Versus Accounting Profits
Compared with accountants, economists use somewhat different concepts
of costs and profits. When accountants measure profits, they begin with
the firm’s revenues and then subtract all of the explicit costs incurred by
the firm. By explicit costs, we mean the costs that actually involve a