What Is Economic Profit?
An economic profit is the difference between the revenue received from sales and the explicit costs of producing its goods and services, as well as any opportunity costs.
Opportunity costs are a type of implicit cost determined by management and will vary based on different scenarios and perspectives.
Key Takeaways
- Economic profit is the financial amount that remains after subtracting both explicit costs and opportunity costs from revenue.
- Opportunity costs are the profits that a business misses out on when choosing to pursue one business venture over another.
- Economic profit is used for internal analysis and is not required for transparent disclosure.
- Accounting profit is straightforward and precise: revenue minus explicit costs.
- While theoretical, economic profit computations can help a company size up and choose between potential business ventures.
Investopedia / Mira Norian
Understanding Economic Profit
Economic profit is often analyzed in conjunction with accounting profit. Accounting profit is the profit that a company shows on its income statement. It is also known as “net income.”
Accounting profit measures actual money inflows versus money outflows and is part of the required financial reporting and transparency of a company.
Economic profit, on the other hand, is not