Economic profit
Definition
Economic profit refers to the total revenue earned by a firm minus both explicit and implicit costs. It measures the profitability of a business after considering all costs, including opportunity costs.
Analogy
Think of economic profit as your allowance. If you earn $10 from doing chores but had to spend $5 on supplies and also gave up the opportunity to earn $3 by going out with friends, your economic profit would be $2 ($10 - $5 - $3).
Related terms
Accounting Profit: Accounting profit only considers explicit costs (e.g., wages, rent) and does not include implicit costs like opportunity cost.
Normal Profit: Normal profit is the minimum level of profit needed for a firm to stay in business. It covers both explicit and implicit costs.
Supernormal Profit: Supernormal profit refers to profits that exceed normal profits. It indicates that a firm is earning more than what is necessary to cover all costs.
"Economic profit" appears in:
Study guides (3)
Additional resources (3)
Practice Questions (5)
- What is economic profit?
- A firm's economic profit is calculated by subtracting which of the following costs from its accounting profit?
- When a firm earns a normal profit, it means that its economic profit is?
- A firm's accounting profit can be greater than its economic profit when?
- A firm's economic profit is negative when?
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