---
title: "Economic Profits — AP Microeconomics Definition & Exam Guide"
description: "Economic profit is total revenue minus all costs, explicit AND implicit. Learn how it drives firm entry/exit and why it hits zero in the long run on the AP Micro exam."
canonical: "https://fiveable.me/ap-micro/key-terms/economic-profits"
type: "key-term"
subject: "AP Microeconomics"
unit: "Unit 4"
---

# Economic Profits — AP Microeconomics Definition & Exam Guide

## Definition

In AP Microeconomics, economic profit is total revenue minus total costs counting both explicit costs (out-of-pocket) and implicit costs (opportunity costs). It's positive only when a firm earns more than normal profit, and firms respond to it, not accounting profit.

## What It Is

[Economic profit](/ap-micro/key-terms/economic-profit "fv-autolink") is what's left when you subtract ALL costs from total revenue. The trick is that "all costs" includes implicit costs, the opportunity costs you give up by running this business instead of doing something else. Think the salary you could've earned elsewhere, the [interest](/ap-micro/unit-5/intro-factor-markets/study-guide/pwArfJpGkiQNHkjkRJe8 "fv-autolink") your invested money could've made, or compensation for risk (EK CBA-2.C.2). Because implicit costs are baked in, economic profit is a tougher bar to clear than accounting profit.

Here's the key idea the CED hammers on: firms respond to economic profit, not accounting profit (EK CBA-2.C.1). When economic profit is positive, a firm is doing better than its next-best alternative, so it stays and others want in. When it's zero, the firm is earning exactly normal profit, just enough to cover all costs including the implicit ones. That's not failure. Zero economic profit means you're doing just as well here as anywhere else, so you stay put. Negative economic profit (an [economic loss](/ap-micro/unit-3/firms-short-run-long-run-decisions/study-guide/JGfrWQLNXKtC7OWmxCvF "fv-autolink")) signals you'd be better off doing something else, so firms exit.

## Why It Matters

This term spans [Unit 3](/ap-micro/unit-3 "fv-autolink") and Unit 4, which is exactly why it's a workhorse on the exam. In Topic 3.4 you define and calculate the types of profit ([AP Micro](/ap-micro "fv-autolink") 3.4.A, 3.4.B, 3.4.C), learning that firms make entry and exit decisions based on economic profit. That same logic powers the long-run story across every market structure. In Topic 4.4, monopolistically competitive firms can earn positive, negative, or zero economic profit in the short run, but free entry and exit drive economic profit to zero in the long run (EK PRD-3.B.10, AP Micro 4.4.A). In Topic 4.3, price discrimination is all about a firm grabbing extra economic profit by capturing consumer surplus (EK PRD-3.B.8, AP Micro 4.3.A). Once you see economic profit as the signal that drives entry and exit, the long-run equilibrium of perfect competition AND monopolistic competition both make sense.

## Connections

### [Normal Profit (Unit 3)](/ap-micro/key-terms/normal-profit)

[Normal profit](/ap-micro/key-terms/normal-profit "fv-autolink") is the zero-economic-profit point. When a firm covers all its costs including implicit ones, accounting profit is positive but economic profit is exactly zero, and that's normal profit. They're two ways of describing the same break-even-on-opportunity-cost spot.

### [Implicit Costs (Unit 3)](/ap-micro/key-terms/implicit-costs)

[Implicit costs](/ap-micro/key-terms/implicit-costs "fv-autolink") are the entire reason economic profit and accounting profit differ. Accounting profit ignores them; economic profit subtracts them out. If you forget implicit costs, you'll calculate the wrong profit on the exam every time.

### Monopolistic Competition Long-Run Equilibrium (Unit 4)

Free entry erodes any positive economic profit until firms earn zero economic profit in the long run, where demand is tangent to ATC. This is the same entry-and-exit mechanism from perfect competition, just with a downward-sloping [demand curve](/ap-micro/key-terms/demand-curve "fv-autolink").

### Price Discrimination (Unit 4)

A firm with market power uses price discrimination to convert consumer surplus into economic profit. With perfect price discrimination, the firm produces where price equals marginal cost but pockets all the surplus, so economic profit is maximized and deadweight loss disappears.

## On the AP Exam

Expect both calculation and reasoning. On MCQs you'll be asked things like "what type of profit occurs when total revenue equals total cost?" (answer: normal profit, zero economic profit) and what happens in the long run when a perfectly competitive firm earns economic profit (new firms enter, price falls, economic profit goes to zero). On FRQs, you'll calculate profit or loss from a graph or table by finding (P − ATC) × Q at the profit-maximizing quantity. The 2019 monopoly FRQ opened with a firm "currently earning positive economic profit," and the 2021, 2023, and 2024 FRQs all built long-run stories where entry or exit pushes economic profit toward zero. Your job: identify whether economic profit is positive, negative, or zero, shade the correct rectangle, and explain which way firms enter or exit in response.

## Economic Profits vs Accounting Profit

Accounting profit = total revenue − explicit costs only. Economic profit = total revenue − explicit costs − implicit costs. Because economic profit also subtracts opportunity costs, it's always less than or equal to accounting profit. A firm can have positive accounting profit while having zero or negative economic profit, and the CED is clear that firms respond to economic profit, not accounting profit.

## Key Takeaways

- Economic profit subtracts both explicit and implicit costs from total revenue, so it sets a higher bar than accounting profit.
- Zero economic profit equals normal profit, and it means the firm is doing exactly as well here as in its next-best alternative, so it stays.
- Firms respond to economic profit, not accounting profit, when deciding whether to enter or exit a market (EK CBA-2.C.1).
- Free entry and exit drive economic profit to zero in the long run in both perfect competition and monopolistic competition.
- Calculate profit or loss as (Price − ATC) × Quantity at the profit-maximizing output level.
- Price discrimination lets a firm with market power turn consumer surplus into extra economic profit.

## FAQs

### What is economic profit in AP Micro?

Economic profit is total revenue minus total costs, where total costs include both explicit (out-of-pocket) and implicit (opportunity) costs. It's positive only when a firm earns more than normal profit, and it's the signal firms actually respond to when deciding to enter or exit a market.

### Is zero economic profit a bad thing?

No. Zero economic profit means the firm is earning normal profit, covering every cost including implicit opportunity costs. The firm is doing exactly as well as it could anywhere else, so it has no reason to leave. It's the normal long-run outcome in competitive markets.

### How is economic profit different from accounting profit?

Accounting profit only subtracts explicit costs, while economic profit also subtracts implicit costs like the opportunity cost of the owner's time and capital. So economic profit is always less than or equal to accounting profit, and a firm can have positive accounting profit but zero economic profit.

### What happens to economic profit in the long run?

In perfectly competitive and monopolistically competitive markets, positive economic profit attracts new firms. Entry increases supply and lowers price until economic profit falls to zero. Losses cause exit until the remaining firms break even at zero economic profit.

### How do you calculate economic profit on an FRQ?

Find the profit-maximizing quantity where MR = MC, read the price off the demand curve and the per-unit cost off the ATC curve, then compute (Price − ATC) × Quantity. If price is above ATC you have positive economic profit; if it's below, you have an economic loss.

## Related Study Guides

- [4.3 Price Discrimination](/ap-micro/unit-4/price-discrimination/study-guide/Al6taBRp9MAtsUByw8DJ)

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