annual revenue $5,000

explicit expenses (labor plus other costs) $4,250

annual accounting profit=$750

What John could earn by recycling cans instead is $1000. But, he prefers running a café–to the tune of a $275 a year that he would be willing to pay for the privilege. So his opportunity cost is $725.

He’s making a small economic profit of $25 ($750 minus $725) so he should stay in the café business.

On the other hand, if the amount he could earn by recycling cans went up by more than that amount, he’d be willing to switch....

The calculations don’t change if he invests his own money in equipment instead of borrowing it–even though his explicit costs go down (he doesn’t have to pay interest), his opportunity cost (what he could have earned in interest on his own money if he hadn’t invested it in equipment) is exactly equivalent (note this is a somewhat unrealistic assumption...it usually costs more to borrow money than you can get by loaning it at interest).

If he did not have the preferences described above (namely that its worth $275 to him to run a café) he would need an additional $275 in economic profit to be motivated to stay in the café business.

7. Unskilled workers in a cotton-growing region...

...can work in a factory for $6,000 a year or be tenant farmers.

If tenant farmers, they can raise $20,000 worth of cotton, but must pay $10,000 in rent, and pay additional costs of $4,000 a year. So they have $6,000 worth of accounting profit.

If government subsidies for fertilizer, irrigation and marketing tripled their yields and cotton prices remained unchanged, their revenue would go up to $60,000.

More workers would choose to be tenant farmers, which would increase the demand for land and drive rents up.

It’s highly likely that in the long run, only landlords would benefit. Their rents they charge might increase to $50,000 (the original $10,000 plus the extra $40,000 in revenue from cotton.