Profit deducts opportunity costs, including implicit costs.
Profit is total revenue minus total cost. Economic cost includes the opportunity cost of resources the owner already controls as well as payments to others. Accounting profit and economic profit can therefore differ. Normal profit is the minimum return needed to keep the entrepreneur and resources in their current use; when that return is included in economic cost, zero economic profit does not mean the owner receives nothing. Compare totals for the same period and avoid deducting an opportunity cost twice.
- Revenue
- Total revenue (TR) is the money received from sales during a stated period, before deducting costs.
- Economic cost
- Explicit costs are payments to others, such as rent or wages. Implicit costs are the value of the owner's next-best alternative use of their own resources, such as earnings given up to run the business. Economic total cost (TC) includes both.
- Economic profit
- Economic profit = total revenue minus economic total cost. Zero economic profit can still cover the owner's next-best return because that opportunity cost has already been counted.
Apply the distinction
Normal profit
Normal profit is the minimum return needed to keep the entrepreneur and their resources in the business. It is included in economic cost. Earning exactly that return therefore gives zero economic profit, not zero reward.
Do not double count
If a cost total already includes the owner's opportunity cost, do not subtract it again.
Accounting measures
Published operating or net profit follows accounting definitions and is not automatically economic profit.
Worked example: The designer's next-best alternative
A designer earns $5,000 revenue in a month and pays $3,000 for materials, rent and other explicit costs. The next-best use of the owner's time would earn $1,500, and this is the only implicit cost specified.
- Revenue less explicit costs is $2,000. It is not the full economic-profit measure in this example.
- Including the $1,500 opportunity cost gives economic cost $4,500 and economic profit $500.
- If revenue instead were $4,500 with these costs unchanged, economic profit would be zero while the owner still receives the equivalent of their next-best return.
- These figures do not prove the same ranking in another month; feasible alternatives and relevant costs may change.
Watch out for this
Zero economic profit means no payment or reward reaches the owner.
The normal return is already included in economic cost. Zero economic profit means no excess above the relevant opportunity-cost return.
Check your understanding
Revenue is $900, explicit costs $600 and the only implicit opportunity cost is $200. What is economic profit?
- $300.
- $100.
- $500.