Economic Profit Calculator
Calculate true business profitability including opportunity costs and implicit costs
Calculate Economic Profit
Financial Input Parameters
Total income from sales or services
Direct out-of-pocket expenses (wages, rent, materials)
Opportunity costs (foregone salary, capital interest)
Economic Profit Results
Economic Profit Formula Calculation
Economic Profit = Total Revenue - (Explicit Costs + Implicit Costs)
Step 1: Total Opportunity Cost = $0.00 + $0.00 = $0.00
Step 2: Economic Profit = $0.00 - $0.00 = $0.00
Accounting Profit: $0.00 - $0.00 = $0.00
Profit Analysis
Accounting vs Economic Profit
Example: Ice Cream Shop Economic Profit
Business Scenario
Total Revenue: $100,000
Explicit Costs: $60,000
Implicit Costs: $25,000
Accounting Profit: $40,000
Economic Profit: $15,000
Business Status: Economically Viable
Explicit Costs ($60,000)
• Rent: $20,000
• Wages: $25,000
• Ingredients: $10,000
• Equipment: $5,000
Implicit Costs ($25,000)
• Foregone salary: $20,000
• Capital opportunity cost: $5,000
• Time investment value
• Entrepreneurial risk
Economic Analysis
• Revenue: $100,000
• Total Costs: $85,000
• Economic Profit: $15,000
• Decision: Pursue business
Interpretation: With an economic profit of $15,000, this ice cream shop creates true economic value. The business not only covers all explicit costs but also compensates for the opportunity cost of foregone alternatives, making it a financially sound decision.
Cost Components
Explicit Costs
Direct monetary expenses: wages, rent, materials, utilities
Easy to measure and track
Implicit Costs
Opportunity costs: foregone salary, capital returns, time value
Hidden costs requiring estimation
Total Opportunity Cost
Sum of explicit and implicit costs
True cost of business operation
Profit Types Comparison
Accounting Profit: Revenue minus explicit costs only
Economic Profit: Revenue minus all opportunity costs
Normal Profit: Zero economic profit (break-even point)
Supernormal Profit: Positive economic profit
Business Decision Guidelines
Positive Economic Profit: Business creates value - continue operation
Zero Economic Profit: Break-even - evaluate alternatives
Negative Economic Profit: Destroys value - consider exit
Regular Analysis: Monitor changing opportunity costs
Understanding Economic Profit
What is Economic Profit?
Economic profit measures the true profitability of a business by considering both explicit costs (direct expenses) and implicit costs (opportunity costs). It provides a more comprehensive view of whether a business truly creates economic value compared to accounting profit.
Economic Profit Formula
Economic Profit = Total Revenue - (Explicit + Implicit Costs)
Where:
Total Revenue = Income from sales/services
Explicit Costs = Direct monetary expenses
Implicit Costs = Opportunity costs
Key Applications
Investment Decisions
Evaluate whether to start, continue, or exit a business
Resource Allocation
Determine optimal use of time, money, and resources
Performance Analysis
Assess true economic value creation over time
When Economic Profit is Useful:
- ✓Evaluating new business opportunities
- ✓Comparing investment alternatives
- ✓Strategic planning and resource allocation
- ✓Long-term business sustainability analysis
Common Implicit Costs:
- •Foregone salary from alternative employment
- •Interest on invested capital
- •Rental value of owned property
- •Value of time and entrepreneurial effort