1. What is Economic Profit?

Economic profit is the difference between a company's accounting profit and its implicit costs (opportunity costs). It provides a more comprehensive view of profitability by considering both explicit and implicit costs.

2. How Does the Calculator Work?

The calculator uses the economic profit formula:

Where:

• Accounting Profit — Total revenue minus explicit costs
• Implicit Costs — Opportunity costs of using resources

Explanation: While accounting profit only considers monetary transactions, economic profit accounts for what could have been earned if resources were deployed differently.

3. Importance of Economic Profit

Details: Economic profit helps businesses understand true profitability by considering alternative uses of capital. A positive economic profit indicates the business is outperforming its next best alternative.

4. Using the Calculator

Tips: Enter accounting profit and implicit costs in dollars. Both values must be positive numbers. The result shows whether the business is creating value beyond its opportunity costs.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between economic and accounting profit?
A: Accounting profit only considers explicit monetary costs, while economic profit also considers implicit opportunity costs.

Q2: Can economic profit be negative?
A: Yes, negative economic profit means the business would be better off pursuing its next best alternative.

Q3: What are examples of implicit costs?
A: Owner's time, capital invested, building space that could be rented out, etc.

Q4: Why is economic profit important for decision making?
A: It helps determine whether resources are being used in their most valuable way.

Q5: How does economic profit relate to normal profit?
A: When economic profit is zero, the business is earning exactly its opportunity costs (normal profit).