Economic profit
Economic profit is total revenue minus both explicit costs and implicit (opportunity) costs, such as a founder's foregone salary. Accounting profit ignores implicit costs, so a business can earn one while making an economic loss.
What it is
See it move
A founder's consultancy earns €150,000 in revenue with €90,000 of explicit costs, an accounting profit of €60,000. She gave up a €58,000 salary and forgoes €5,000 of interest on €100,000 of invested savings, €63,000 of implicit costs. Economic profit is €60,000 − €63,000 = −€3,000, a healthy accounting profit but an economic loss.
The formula
Variables
- Economic profit (€)
- Total revenue (€)
- Explicit costs (actually paid) (€)
- Implicit costs (opportunity costs of owner-supplied resources) (€)
Deducts both the costs actually paid out and the opportunity cost of owner-supplied resources from revenue.
Check yourself
A founder's business earns revenue of €200,000 with explicit costs of €130,000. To run it, she gave up a job paying €62,000 and invested €150,000 of savings that could otherwise earn 4% interest. What is her economic profit?