Opportunity CostThis is the opportunity cost to the firm of using its own plant and equipment. If it did not use the plant and equipment it self, the firm could rent them to some other firm and earn the market rental rate. By using the plant and equipment it self, them firm gives up the opportunity to earn this rental income. That decision transforms the foregone rental income into a cost, as far as the firm is concerned.

If the firm does rent its plant and equipment in a competitive rental market, the rent includes a normal profit to the owner of the capital assets. For this reason, economists include an allowance for the normal rate of return on investment as part of the rental cost of capital services.

Equivalently, the opportunity cost to a firm of using a wholly owned plant and equipment is what the firm would have had to pay to rent them. Provided the rental markets for plants and equipment are competitive-a strong assumption-these two definitions of rental cost are equivalent.

Accountants treat the normal rate of return as a profit. From an economic point of view, the normal return on an investment is part of the opportunity cost of production-a return that is necessary to get the owners of the capital assets to commit them to production in the market. Economic profit is any accounting profit over and above the normal rate of return on an investment.