Profit (Economic)

Plain definition

Economic profit is total revenue minus all opportunity costs, including both explicit accounting costs and the implicit value of the owner's time and capital.

In economics

Economic profit is the signal for resource allocation: positive economic profit attracts entry, while losses cause exit, driving long-run competitive markets toward zero economic profit — where firms still earn a normal accounting profit covering opportunity costs.

Example

A shop earns $200,000 revenue with$ 150,000 accounting costs and $60,000 in foregone salary and interest: accounting profit is$ 50,000 but economic profit is -$10,000.

Common confusion

Economic profit is usually smaller than accounting profit because it subtracts implicit opportunity costs that accounting ignores; zero economic profit does not mean the firm is failing.