1. What is Economic Profit?

Economic Profit is the difference between a company's accounting profit and its opportunity costs. It measures the true economic performance of a business 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
• Opportunity Cost — The value of the next best alternative foregone

Explanation: While accounting profit only considers monetary costs, economic profit includes the opportunity cost of resources used in production.

3. Importance of Economic Profit

Details: Economic profit helps businesses determine whether they are allocating resources efficiently and whether they should continue current operations or pursue alternative opportunities.

4. Using the Calculator

Tips: Enter accounting profit and opportunity cost in dollars. Both values must be positive numbers.

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 includes both explicit and 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: How is opportunity cost calculated?
A: Opportunity cost is the potential benefit from the next best alternative use of resources.

Q4: Why is economic profit important for decision making?
A: It helps businesses understand if they're truly creating value beyond what they could earn elsewhere.

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