GC 14.5 How to Calculate Economic Profit: Definition & Formula

formulas for calculating accounting and economic profit

Accounting Profit = Total Revenues - Explicit Costs Economic Profit = Accounting Profit - Implicit Costs OR Economic Profit = Total Revenues - (Explicit Costs + Implicit Costs)

accounting profit

a firm's revenue minus its explicit costs. It's often the extra profit left over after considering the next best alternative investment, and can be either positive or negative in value.

how economic profit differs from accounting profit

it also includes implicit costs, which are the opportunity costs equal to what a business or individual gave up in order to do something else These costs are deducted from revenues and are the alternative returns you decided not to pursue

economic profit

the difference between the total revenue received by a business and the total implicit and explicit costs of a firm

explicit costs

the everyday normal costs that you think about when running a business. The actual payments made to others for running a business, such as paying rent, wages, utilities, and purchasing IT equipment. Also purchasing raw materials. wages of the owner are not considered explicit costs