As a farmer, you contemplate growing either potatoes or tomatoes. You like the outlook for potatoes and decide to plant them. After the harvest, you review your numbers (revenue and costs) and declare a profit of £100K per hectare of potatoes. You also note that given the current market price of tomatoes, you would have made £90K per hectare if you had chosen to plant tomatoes.

You happily tell your accountant friend about your success, and they congratulate you on achieving a £100K per hectare profit. Then, you call your economist friend and tell them about your success, but they say you made a £10K profit per hectare from growing potatoes.

Who is right: the accountant or the economist?

The economist is correct when considering opportunity cost, defining profit as the difference between the revenue from the chosen option and the forgone revenue from the next best alternative. The accountant is looking at just the financial gain from the potatoes, not considering the tomatoes as an alternative.

The economist considers the opportunity cost of choosing one option over another. In this scenario, by choosing to plant potatoes, the farmer made £100K per hectare, whereas planting tomatoes would have yielded £90K per hectare. The economist would argue that the true profit from planting potatoes is the additional revenue earned over the next best alternative, which is the profit from planting potatoes (£100K) minus the forgone profit from planting tomatoes (£90K), resulting in a £10K per hectare profit.

The accountant would look at the accounting profit, which is the total revenue from selling the potatoes minus the explicit costs of growing them. If this amount comes to £100K per hectare, then from an accounting standpoint, the farmer made a £100K profit per hectare by planting potatoes.

The key difference lies in the economist's consideration of economic profit, which accounts for opportunity cost—the next best alternative forgone, whereas the accountant focuses on the actual financial gain made from the business activity without factoring in the potential earnings from the next best alternative.