Economic vs Accounting Profit: Corn or Soybean? That is the question--answered here.

Using data from the US Dept of Agriculture Economic Research Service (USDA-ERS) I made the following two charts (I am in the infant stages of learning Excel, excuse the poor formatting!).

They show the "Accounting Profit"(RED) and "Economic Profit" (BLUE) for Corn and Soybeans in 2013. The distinction between the two is important in AP Microeconomics.

When tallying costs, accountants only care about explicit money costs paid for resources.  When calculating economic costs, economists include implicit Opportunity Costs in addition to money costs.

Economic costs are ALWAYS going to be more than accounting costs, hence economic profits are ALWAYS going to be less than accounting profits. Repeat that until it clicks!

As a recent transplant to the mid-West (Illinois, now Ohio) I have quickly learned that Corn and Soybean require very similar resources to grow---the Opportunity Cost of switching from one to the other is apparently quite low.

Simple observation:  Growing Corn in the "Northern Great Plains" does not seem like a good idea. Soybean returns a higher accounting and economic profit.  Growing Soybean in the "Heartland" seems like a GREAT idea--accounting AND economic profits are high.

Note this data are for 2013.  I drive around Central Ohio quite a bit.  I notice many more fields that had corn last year are now teeming with soybean. Why?

Economic theory (and apparently practice if I can believe my lying eyes!) suggests in a "perfectly competitive" market, the presence of economic profit(s) induces producers to enter that market.

Use these graphs as you wish.  Hope it helps with the concept.

Here are the agricultural regions (SOURCE USDA-ERS):

I found a Microeconomics Unicorn! See the chart here.

A rare treat for an economics teacher.  A chart that quantifies (not completely but enough) the difference between "Economic Costs" which include opportunity costs (implicit costs) as well as money costs (explicit costs), and "Accounting Costs" which include ONLY money costs. 

Source: USDA ERS

Costs of production for U.S. milk decline as the size of the dairy operation (measured by the number of cows) increases.  Based on 2013 data, average total economic costs of milk production—a measure that includes the opportunity costs of land, labor, and other owned resources—fell by nearly 60 percent, from an average of about $50 per hundredweight (cwt) for producers with fewer than 50 cows to about $20 per cwt for those with 1,000 cows or more. Average costs are lower on larger farms because fixed cost items, such as management, land, and other resource costs, are spread across a larger number of cows, and because average output per cow increases along with farm size. Mean output per cow was just over 15,000 pounds among operations with less than 50 cows, while operations with 1,000 or more head averaged more than 23,000 pounds per cow. Higher milk yields on larger farms stem from factors such as better breeding, nutrition, and health management, as well as the ability to access competitively priced supplies of high quality feed inputs.  This chart is based on data found in Milk Cost of Production Estimates. 

This is a key concept in AP Microeconomics that is somewhat difficult to convey to high school aged students.

The vertical difference between the RED and BLUE lines represents the Opportunity Costs to the producer for staying in business.

The price or Marginal Revenue (MR) or Average Revenue (AR), a producer receives must at least equal the RED line for her to "Break Even".  

However, she could still make an Accounting Profit at that price.  Is she?

According to the USDA ERS (HERE) the average price for "all classes of milk" was $20.05 per CWT) in 2013.  Now look back at the graph and draw a straight line across the $20.00 mark denoted on the vertical axis.  Compare that to the RED and BLUE lines.

At that price ONLY the large producers (1000 or more milk cows) are Breaking Even in "Economic" terms BUT making profit in "Accounting" terms.

Notice at about 300 cows the average costs start to drop at a relatively steep rate and production increases quickly.  I assume that is the inflection point where economies of scale really kick in.

Hope this helps with teaching and/or learning about this important concept when the topic of a firm that operates in a "Perfectly Competitive" market.

Nice cost data for a broad array of agricultural commodities. For use in teaching Perfect Competition.

Given my limited editing skills in Excel, I condensed some cost data on various agricultural commodities. All costs are projected costs for the 2014 planting season.

All this and MORE can be found at the terrific US Dept of Agriculture Economic Research center.

It is conveniently organized by cost category:  Variable Costs and Fixed Costs.

What is even more EXTRAORDINARY and helpful when teaching the cost structure of a firm is the fixed costs includes "implicit costs", or Opportunity Costs.

The implicit costs are (1) unpaid labor---the farmers opportunity cost of farming and not doing something else. (2) Capital Recovery (depreciation AND "the rental rate of Capital").  (3) Land---the opportunity cost of using the land for farming the particular commodity as opposed to using it for something else.

Students can quantify and graph the respective cost curves (AVC, AFC, ATC, MC), then find the current market price for a commodity and observe if the "firm/farmer" is making economic profit, loss or "normal profits".  These are all important terms in AP Microeconomics.

Hope this helps in your teaching/learning.

These are the COSTS PER ACRE PLANTED for each commodity.

Explain-er with real life example: The difference between accounting costs and "economic" costs. This is why every one hates economists but love their accountant.

Here is a graph (HT: Big Picture Agriculture) that shows the relationship over time (1972-2012) between the Average Total Cost ("ATC") of producing a bushel of corn  (RED line) and its Market Price (BLUE line).

You can see at various times the ATC exceeds the price and vice versa.  Sometimes they make a profit, sometimes they lose money...So goes the agricultural commodities market and the roller coaster that is farming.

Look at the year 2006.  I inserted a dotted line to show in 2006 the price of a bushel of corn equaled the Average Total Cost of Producing a bushel of corn  The lines intersect at $2.50.  So, the farmer is "breaking even"...right?

Not so fast.  I believe I am making a correct assumption in assuming the creator of this chart included cost data that is ONLY comprised of "Accounting Costs" or "Money Costs".  This simply means explicit costs that are paid for with cash (or credit).  Accountants care only about accounting costs when they tally up the numbers and then subtract them from Revenue to obtain "Accounting Profits".

Economists, on the other hand, care about explicit accounting costs and IMPLICIT opportunity costs---are you surprised? Probably not...

Economists believe that the farmers accountant UNDERESTIMATES the cost of being a farmer because opportunity costs are not added to the the total cost of farming.

Simple example.  Lets say I make $50,000 per year as a teacher but decide to quit teaching and become a farmer.  In the first year I make enough in farming to pay myself $40,000.

This $40,000 is an accounting cost (real money paid to me!). However, economists take it one step further and suggest that I have to account for that lost $10,000 income I experience when I choose to farm.  

My total cost to farm is not $40,000, but $50,000.  Economists add in that $10,000 in foregone income as an implicit cost for me and my farming operation.

Once I add in the additional implicit cost of $10,000 that accountants do not, then my ATC of producing is going to be HIGHER than what you see at ANY POINT in the above graph.

The RED line will shift UP at every given price. 

So, for the most part, profits will be LESS in economic terms as opposed to accounting terms because of the inclusion of implicit opportunity costs.

Go back to 2006 on the graph. If we add in the opportunity cost then the ATC of producing corn will be something MORE than $2.50 and instead of breaking even as accounts would figure. The farmer will experience "economic losses".

My labor is not the only implicit cost economists like to account for.  Go here for a more comprehensive look at the topic.

There has to be an accountant vs economist joke in here somewhere. Because I teach economics I don't have much of a sense of humor, so you tell me a good one.  :)