Question

How do accounting costs relate to economic costs

Answer 1

Accounting costs are explicit costs. These costs are actually incurred and paid on course of the business. For example, raw material, salaries, interest paid, factory/office rent and marketing/advertising expenses.

Implicit cost, on the other hand, are benefits giving up by selecting one alternative instead of another. For examples, interest given up on saving or salary foregone by leaving a job to run own company.

The relationship is: Economic cost = Accounting costs + Implicit costs

Hence, if implicit costs exist (and are positive), accounting costs are less than economic costs.