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.
The Economic Profit formula
Calculator
Enter revenue, explicit costs and implicit costs to get accounting and economic profit.
Price × quantity sold.
Out-of-pocket payments: wages, rent, materials.
Opportunity cost of the owner's own resources, such as a forgone salary or forgone interest.
Revenue covers every explicit and implicit cost with $5,000 left over, so the owner earns more here than in the next-best alternative.
- Accounting profit
- $50,000
- Total economic cost
- $115,000
- Long-run signal
- Positive economic profit, new firms are attracted to enter
Revenue minus explicit costs only. This is the number on the tax return.
Explicit plus implicit costs, what economists count as the real cost of running the business.
How to calculate Economic Profit, step by step
- 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: Economic Profit
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.
What zero economic profit actually means
It sounds like failure and it is not, which is why the phrase appears in so many free-response answers.
The worked example has $120,000 of revenue, $70,000 of explicit costs and a $45,000 salary given up, so economic profit is $5,000. Had the forgone salary been $50,000 instead, economic profit would be exactly zero. The owner would still be taking home $50,000 of accounting profit, which is precisely what the alternative job paid.
So zero economic profit means the resources are earning exactly their next-best return: no better, no worse, and no reason to move them. That is why it is called normal profit, and why it is the long-run outcome in a competitive market. Positive economic profit attracts entry, entry pushes price down, and it keeps happening until the extra is gone.
Reading it off a graph instead of a table
Questions usually ask for the per-unit version, which is price minus average total cost, multiplied by quantity. All three numbers come off the diagram at the profit-maximising quantity, which is where marginal revenue meets marginal cost.
Find that quantity first. Read the price up on the DEMAND curve, not on the marginal revenue curve, which is the single most common mistake on a monopoly diagram. Read average total cost at the same quantity. The rectangle between them is the profit.
If price sits above ATC the rectangle is profit. If price sits below ATC it is a loss, and the shutdown question follows: keep producing in the short run as long as price is above average VARIABLE cost, because the revenue is still covering something toward the fixed cost. Below AVC, shut down.
Economic Profit questions
Does economic profit equal total revenue minus explicit costs minus implicit costs?
Yes. Economic profit = total revenue minus explicit costs minus implicit costs, which also equals accounting profit minus implicit costs. Explicit costs are out-of-pocket payments like wages and rent; implicit costs are the opportunity costs of the owner's own resources.
What is the economic profit formula?
Economic profit = total revenue minus explicit costs minus implicit costs = accounting profit minus implicit costs. In per-unit form it is (P minus ATC) × Q.
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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