1. What is Economic Profit?

Economic profit is the difference between a company's total revenue and the sum of its explicit and implicit costs. Unlike accounting profit, economic profit considers opportunity costs, providing a more comprehensive view of a business's true profitability.

2. How Does the Calculator Work?

The calculator uses the economic profit formula:

Where:

• Total Revenue — All income generated from sales
• Explicit Costs — Direct, out-of-pocket expenses (wages, rent, materials)
• Implicit Costs — Opportunity costs of using owned resources

Explanation: Economic profit accounts for both actual expenses and the potential income that could have been earned if resources were deployed differently.

3. Importance of Economic Profit

Details: Economic profit helps businesses determine whether they're generating returns above their opportunity costs. A positive economic profit indicates the business is outperforming alternative investments, while negative suggests resources could be better used elsewhere.

4. Using the Calculator

Tips: Enter all monetary values in dollars. Include all revenue sources and account for both direct costs and opportunity costs (like owner's time or capital invested).

5. Frequently Asked Questions (FAQ)

Q1: How is economic profit different from accounting profit?
A: Accounting profit only considers explicit costs, while economic profit includes both explicit and implicit opportunity costs.

Q2: What are examples of implicit costs?
A: Owner's forgone salary, return on personal capital invested, or rental income from owned property used in the business.

Q3: Can economic profit be negative?
A: Yes, negative economic profit means the business isn't covering its opportunity costs, suggesting resources might be better deployed elsewhere.

Q4: Why is economic profit important for decision making?
A: It helps evaluate whether a business is truly creating value beyond what could be earned in alternative investments.

Q5: How often should economic profit be calculated?
A: For strategic decisions, it should be evaluated periodically (quarterly or annually) alongside regular accounting metrics.