What Is Economic Profit?
Economic profit measures the true profitability of a business by subtracting both explicit costs and implicit (opportunity) costs from total revenue. Unlike accounting profit, which only deducts actual cash outlays, economic profit asks whether the resources tied up in the business could have earned more elsewhere. A positive economic profit means the venture is creating value above the next-best alternative use of its resources.
How to Use This Calculator
Enter three figures: your total revenue, your explicit costs (rent, wages, materials, utilities — money you actually pay out), and your implicit costs (the foregone salary, interest, or rent you could have earned by deploying your time and capital elsewhere). The calculator returns your economic profit along with total costs and your accounting profit for comparison.
The Formula Explained
The core equation is $$\text{Economic Profit} = \text{Total Revenue} - (\text{Explicit Costs} + \text{Implicit Costs})$$ Accounting profit, by contrast, is \(\text{Total Revenue} - \text{Explicit Costs}\). The gap between the two is exactly the implicit cost. When economic profit is zero, the business earns a "normal profit" — it covers all costs including opportunity cost.
Worked Example
Suppose a freelancer earns $100,000 in revenue. Explicit costs (software, office, taxes) are $60,000. By staying freelance they give up a $20,000 salaried job — their implicit cost. Total costs = $$\$60{,}000 + \$20{,}000 = \$80{,}000$$ Economic profit = $$\$100{,}000 - \$80{,}000 = \mathbf{\$20{,}000}$$ Accounting profit is $$\$100{,}000 - \$60{,}000 = \$40{,}000$$ The freelancer is still better off, but by $20,000 once opportunity cost is counted.
FAQ
What are implicit costs? They are opportunity costs — the value of the best alternative forgone, such as a salary you could have earned or interest on capital you invested in the business.
Why can economic profit be negative while accounting profit is positive? Because implicit costs are added to the cost side. A business can be cash-positive yet still earn less than its resources would elsewhere.
What does zero economic profit mean? It indicates a normal profit: the firm covers all explicit and implicit costs and exactly matches the return of its next-best alternative.
