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Opportunity Cost, Economic Profit, and Opening a Bakery

Overhead at a table of economists:

Susan: “They’re making a profit every month”

Mike: “Accounting or Economic profit?”

Table: Erupts in laughter.


I’m thinking about quitting my job as an economics professor and opening up a pie shop. Given my “expertise” in balancing a budget (what everyone thinks I learn when I get my PhD), I’ve estimated that I can make a $500 a month. How did I calculate that $500? Well I projected the number of pies I could sell in a month and subtracted the rent for my shop, the cost of hiring my employees, and all the equipment and ingredients I need. Awesome! I’m making profit of $500 a month or $6,000 a year.*


Now, let’s back up a minute. Should I do that? What else do we need to consider? What about my opportunity cost? Opportunity cost is one of the first terms one learns in their intro to economics class. It is the next best alternative to a decision. What would I be giving up if I quit my job and opened a bakery? Well… my salary as an economics professor!