How to Calculate Economic Profit (vs Accounting Profit)
Economic profit equals total revenue minus both explicit and implicit costs — accounting profit minus implicit (opportunity) costs.
Formula
Steps
- 1Find total revenue. TR = price × quantity sold.
- 2Subtract explicit costs. Out-of-pocket payments: wages, rent, materials. TR minus explicit costs = accounting profit.
- 3Subtract implicit costs. The opportunity costs of the owner's own resources — forgone salary, forgone interest on invested funds.
- 4Interpret the result. Economic profit > 0 attracts entry; = 0 is normal profit (resources earn exactly their next-best return); < 0 signals exit in the long run.
Worked example
A shop earns $120,000 in revenue with $70,000 of explicit costs: accounting profit = $50,000. If the owner gave up a $45,000 salary to run it, economic profit = 120,000 − 70,000 − 45,000 = $5,000.
Frequently asked questions
What is normal profit?
Zero economic profit — revenue covers all explicit and implicit costs, so the owner earns exactly what their resources would in the next-best use. Firms are content to stay.
Why can accounting profit be positive while economic profit is negative?
Accounting ignores implicit costs. A $50,000 accounting profit is an economic loss if the owner gave up a $60,000 job to earn it.
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