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Economic Profit Calculator

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LAST UPDATE: November 28th, 2024

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Profit (from total)

Formula

Economic Profit (from total) = Revenue – (Explicit Costs + Implicit Costs)

Where:

  • Explicit Costs: Out-of-pocket expenses like wages, rent, and materials.
  • Implicit Costs: Opportunity costs, or the benefits you give up by choosing one option over another.

How to calculate economic profit – step by step

Step 1 – Find the total revenue of the company

Step 2 – Find the explicit costs – these are the regular, out of pocket expenses. Wages, rent, materials, anything used to run the company.

Step 3 – Find the implicit costs – these are more difficult to figure out. Implicit costs are often opportunity costs.

Step 4 – Use the formula to calculate economic profit – Take total revenue, and subtract the explicit and the implicit costs.

Example

From Total – Revenue is $500,000 and costs are $400,000.

Profit (from total) = $500,000 – $400,000 = $100,000

Definition – What is economic profit?

In economics, economic profit is the difference between a company’s total revenue and all its costs, including both explicit and implicit costs. This differs from accounting profit, which only considers explicit costs.

Difference Between Economic Profit and Accounting Profit:

  • Accounting Profit: Only considers explicit costs (out-of-pocket expenses).
  • Economic Profit: Includes both explicit and implicit (opportunity) costs.

While accounting profit focuses on financial statements and tax reporting, economic profit helps in assessing whether a business is the best use of resources in a competitive market.

Examples of Economic Profit:

  1. Small Business Example: A bakery makes $120,000 in revenue. After subtracting $90,000 in explicit costs (ingredients, rent, wages), the accounting profit is $30,000. However, if the owner could have earned $10,000,000 working as a professional baseball player, the implicit cost is $10,000,000. Thus, the economic profit is: 120,000−(90,000+10,000,000)=−9,970,000. In this case, the business has a negative economic profit, meaning the owner would have been better off working elsewhere.
  2. Large Business Example: A tech company earns $5 million in revenue, with $3 million in explicit costs (materials, salaries). The company’s accounting profit is $2 million. If the company’s investors could have earned $500,000 by investing their money elsewhere, the implicit cost is $500,000. The economic profit is:5,000,000−(3,000,000+500,000)=1,500,000. This shows a positive economic profit of $1.5 million, meaning the company is using its resources efficiently.

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