Economic Profit
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Economic profit is total revenue minus explicit and implicit costs.
Translation: What's our true profit, while considering forgone income?
Economic Profit = Total Revenue - (Explicit + Implicit)- Explicit Cost = Stated cost of the action we're choosing to take
- Implicit Cost = Value we miss out on from the next-best alternative we pass up
You run a bakery and earn $50,000 in revenue while incurring $10,000 in expenses. You could've earned a salary of $35,000 if you chose to work a full-time job instead.
Total Revenue = $50,000
Explicit Costs = $10,000
Implicit Costs = $35,000Economic Profit = Total Revenue - (Explicit + Implicit)
Economic Profit = $50,000 - ($10,000 + $35,000)
Economic Profit = $50,000 - $45,000
Economic Profit = $5,000In other words, we're earning $5,000 more than we could've by doing anything else. We are truly profiting from our choice of running our bakery, compared to the next-best alternative of working the job.
When given costs, revenues, profits, etc. and asked to calculate economic profit...
Can you locate the total revenue from the action you're choosing to take?
Can you extract the costs with a defined value from the action you're choosing to take?
Can you calculate the value/profit/income from the next-best alternative being passed up?
Can you find the difference between total revenue and both total explicit + implicit costs?