1. What Are Economic Profits?

Economic profits represent the difference between a firm's total revenue and its total costs, including both explicit costs (direct out-of-pocket expenses) and implicit costs (opportunity costs of resources owned by the firm).

2. How Economic Profits Are Calculated

The calculator uses the economic profits formula:

Where:

• Total Revenue — All income from sales of goods/services
• Explicit Costs — Direct monetary payments (wages, rent, materials)
• Implicit Costs — Opportunity costs of using owned resources

Key Difference: Unlike accounting profits, economic profits consider both explicit and implicit costs, providing a more complete picture of true profitability.

3. Importance of Economic Profits

Decision Making: Economic profits help determine whether resources could be better employed elsewhere. Positive economic profits indicate the current use of resources is optimal.

4. Using the Calculator

Instructions: Enter total revenue and both cost types in USD. All values must be non-negative. The calculator will compute economic profits (which may be positive, zero, or negative).

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: Can economic profit be negative?
A: Yes, negative economic profit suggests resources could generate higher returns elsewhere.

Q3: What are examples of implicit costs?
A: Owner's forgone salary, return on personal capital invested, rental income from owned property used in business.

Q4: Why is zero economic profit significant?
A: It indicates normal profit - the business is earning exactly its opportunity costs, typical in perfectly competitive markets.

Q5: How do economic profits affect long-run decisions?
A: Persistent positive profits attract competition, while negative profits lead to exit from the industry.