Differentiate between economic cost and accounting cost.

Solution

Economic cost and accounting cost differ mainly in whether implicit costs are included.

Accounting cost: it includes only the explicit costs — the actual money payments recorded in the firm's books, such as wages, rent and materials.
Economic cost: it includes both explicit and implicit costs, i.e. the money payments plus the imputed value of the owner's own resources (implicit wages, implicit rent), so economic cost = accounting cost + implicit cost. Economists count what the owner gives up, not just what is paid out.