Economic Profit Calculator
Enter total revenue, explicit costs and implicit costs to see economic profit, accounting profit and the economic margin.
Updated
Economic Profit Calculator
Our Economic Profit Calculator shows whether a business earns more than its owner's time and money could earn somewhere else. Type the total revenue, the explicit costs from the books and the implicit costs, the income given up by running this business. It returns economic profit along with accounting profit, total costs and the economic margin. It suits economics students, owners deciding whether a venture is worth keeping, and anyone comparing two uses of capital.
Quick answer
Economic profit is total revenue − explicit costs − implicit costs: with revenue of 420,000, explicit costs of 260,000 and implicit costs of 95,000, 420,000 − 260,000 − 95,000 = 65,000.
- Explicit costs: recorded payments such as wages, rent, materials, interest and taxes.
- Implicit costs: opportunity costs, such as a salary or interest the owner gives up.
- Zero result: normal profit, the resources earn what they could earn elsewhere.
- Negative result: an economic loss, even when the books show a profit.
What Is Economic Profit?
Economic profit is total revenue minus all costs, both explicit and implicit. Explicit costs are the payments a business records. Implicit costs are opportunity costs: the income its owners give up by putting their own time, money, land or buildings into this business and not into the next best alternative.
Because it charges for every resource used, economic profit answers a sharper question than accounting profit. It tells you whether the business is the best use of what has been put into it. A positive figure means it earns more than the alternative; a negative figure means the owner would be better off doing something else.
Economic Profit Formula
= total revenue
− explicit costs
− implicit costs
Revenue minus explicit costs is accounting profit, so the same formula can be written in two steps:
= accounting profit
− implicit costs
- Total revenue: all income from sales and other sources in the period.
- Explicit costs: out-of-pocket costs with a record behind them, such as wages, rent, materials, interest, depreciation and taxes.
- Implicit costs: the value of the next best use of resources the owner already has, such as a forgone salary or the return the owner could earn on their savings.
How to Calculate Economic Profit
An owner runs a design studio with revenue of 420,000 in a year and explicit costs of 260,000. To run it, they turned down a job paying 80,000 and put 150,000 of savings into the business, which could have earned 10% a year (15,000) elsewhere:
= 95,000
420,000 − 260,000 − 95,000
= 65,000
- Find accounting profit. 420,000 − 260,000 = 160,000.
- Add up the implicit costs. 80,000 + 15,000 = 95,000.
- Subtract them. 160,000 − 95,000 = 65,000.
- Find the margin if needed. 65,000 ÷ 420,000 × 100 ≈ 15.48%.
Economic profit is 65,000. The studio covers the salary and interest the owner gave up and still earns 65,000 more, so it is the better choice.
Where the Revenue Goes
The second bar is drawn to scale. Explicit costs take about 62% of revenue and implicit costs about 23%, which leaves 65,000 as economic profit.
Economic Profit vs Accounting Profit
Accounting profit stops after explicit costs. Economic profit also charges for implicit costs, so it is always equal to or lower than accounting profit. With the studio figures:
| Line | Amount |
|---|---|
| Total revenue | 420,000 |
| − Explicit costs | 260,000 |
| Accounting profit | 160,000 |
| − Implicit costs | 95,000 |
| Economic profit | 65,000 |
Accounting profit is what appears on the income statement and is used for tax and reporting. Economic profit is used for decisions, such as whether to start, keep or close a business. To work out the first figure on its own, use the Accounting Profit Calculator.
What Counts as an Implicit Cost
| Item | Enter as |
|---|---|
| Salary the owner gave up | Implicit |
| Interest lost on owner savings | Implicit |
| Rent lost on an owned building | Implicit |
| Unpaid work by family | Implicit |
| Wages, rent and bills paid | Explicit |
| Loan interest, taxes | Explicit |
| Money already spent (sunk) | Leave out |
An implicit cost is never paid out, so there is no invoice for it. Estimate it from the best alternative you actually had: a real job offer, the interest rate on a savings account, or the rent a tenant would pay. Count only the single best alternative, not every option, and use the same period for all three figures.
Economic Profit Examples
A bakery at normal profit. Revenue of 210,000 and explicit costs of 150,000. The owner left a job paying 55,000 and put in 50,000 of savings that could earn 10% (5,000):
= 0
The books show a profit of 60,000, but economic profit is 0. The bakery earns exactly what the owner would get elsewhere, which economists call normal profit.
A software consultancy. Revenue of 380,000, explicit costs of 120,000, and two partners who each turned down salaries of 70,000:
= 120,000
Economic profit is 120,000, a margin of about 31.58%. The partners earn well above their outside offers.
A family farm. Revenue of 640,000 and explicit costs of 520,000. The family could rent out its land for 90,000 a year, and its unpaid labour is worth 85,000:
= −55,000
Accounting profit is a healthy 120,000, yet economic profit is −55,000, about −8.59% of revenue. Renting the land out and working elsewhere would leave the family 55,000 better off.
Normal Profit and Economic Loss
| Result | Meaning |
|---|---|
| Positive | Economic profit: the business earns more than the next best use of its resources. |
| Zero | Normal profit: the resources earn exactly what they could earn elsewhere. |
| Negative | Economic loss: the resources would earn more in another use. |
A zero result is not a failure. It means the owner is paid in full for their time and money. In a perfectly competitive market, economic profit draws new firms in and economic losses push firms out, so in the long run economic profit tends towards zero. Lasting economic profit usually points to something rivals cannot copy, such as a brand, a patent or a cost advantage.
What Raises or Lowers Economic Profit
Starting from the studio example, each change below is made on its own:
| Change | Profit |
|---|---|
| Starting point | 65,000 |
| Revenue up by 30,000 | 95,000 |
| Explicit costs down 15,000 | 80,000 |
| Savings rate 5%, not 10% | 72,500 |
| Job offer up by 20,000 | 45,000 |
The last two rows change nothing in the books, yet they move economic profit. A better outside offer raises the implicit cost, so the same business becomes a weaker choice. Lower interest rates do the opposite.
Economic Profit and Economic Value Added
Large companies measure economic profit as economic value added (EVA). The implicit cost is the cost of the capital investors have put in:
− WACC × invested capital
NOPAT is net operating profit after tax and WACC is the weighted average cost of capital. A company with NOPAT of 900,000, invested capital of 6,000,000 and a WACC of 9% has an EVA of 900,000 − 540,000 = 360,000. For this version, use the Economic Value Added Calculator.
What the Result Leaves Out
- Estimates. Implicit costs are judgements about an alternative you did not take, so the result is only as good as those estimates.
- Non-money benefits. Independence, enjoyment or the chance of future growth are not counted, though they may matter to the owner.
- Risk. A riskier business should earn more than a safe alternative; add a risk premium to the forgone return if needed.
- One period only. A new business often shows an economic loss at first. Look at several periods together.
The result is for education and planning and is not financial or tax advice.
Key Terms
- Economic profit
- Revenue minus explicit and implicit costs.
- Accounting profit
- Revenue minus explicit costs only.
- Explicit cost
- A recorded payment, such as wages or rent.
- Implicit cost
- Income given up by not using a resource elsewhere.
- Opportunity cost
- The value of the next best alternative.
- Normal profit
- Economic profit of zero.
- Economic loss
- Economic profit below zero.
How to Use the Economic Profit Calculator
- Enter total revenue. Type the revenue earned in the period, such as 420,000.
- Enter explicit costs. Type the total of recorded costs for the same period, such as 260,000. Include wages, rent, materials, interest and taxes.
- Enter implicit costs. Type the income given up by using your own time and money, such as a forgone salary of 80,000 plus 15,000 of lost interest, 95,000 in all.
- Read and copy the result. Economic profit appears as you type, with the working, accounting profit, total costs, the economic margin and a bar showing costs against profit. Press Copy to copy it, or Clear or Esc to start again.
Example: revenue of 380,000 with explicit costs of 120,000 and implicit costs of 140,000 gives an economic profit of 120,000.
Who Can Use This Calculator?
Frequently Asked Questions (FAQs)
How do you calculate economic profit?
Subtract both explicit costs and implicit costs from total revenue. Equivalently, find accounting profit (revenue minus explicit costs) and subtract implicit costs from it.
What is the economic profit formula?
Economic profit = total revenue − explicit costs − implicit costs, which is the same as accounting profit − implicit costs.
What is the economic profit on 420,000 of revenue with 260,000 of explicit costs and 95,000 of implicit costs?
It is 65,000, because 420,000 − 260,000 − 95,000 = 65,000. Accounting profit is 160,000 and the economic margin is about 15.48%.
What are implicit costs?
Implicit costs are opportunity costs that are not paid out, such as the salary an owner gives up, the interest their savings could earn or the rent an owned building could bring in.
What is the difference between economic profit and accounting profit?
Accounting profit subtracts only explicit costs. Economic profit also subtracts implicit costs, so it is never higher than accounting profit.
What does zero economic profit mean?
It means normal profit: the business earns exactly what its owner could earn by using the same time and money in the next best way. The owner is fully paid for their resources.
Can economic profit be negative when accounting profit is positive?
Yes. If implicit costs are larger than accounting profit, the books show a profit but there is an economic loss, and the resources would earn more elsewhere.
Why does economic profit tend to zero in the long run?
In a perfectly competitive market, positive economic profit attracts new firms and losses push firms out. Entry and exit continue until firms earn only normal profit.
Is the Economic Profit Calculator free?
Yes. It is free to use, with no sign-up and no limit on how many times you use it.
Sources
- OpenStax. Principles of Economics 3e, 7.1 Explicit and Implicit Costs, and Accounting and Economic Profit.
- Lumen Learning. Microeconomics: Costs and Profit.
- Corporate Finance Institute. Economic Profit.
- Wall Street Prep. Economic Profit.
- WallStreetMojo. Economic Profit.
- Wikipedia. Profit (economics).
- Wikipedia. Implicit cost.
- Wikipedia. Opportunity cost.
- Wikipedia. Economic value added.
Try our Economic Profit Calculator to see whether a business beats the next best use of its time and money.