Economic Profits

Definition

Economic profits refer to the total revenue earned by a firm minus all explicit and implicit costs. It takes into account both the opportunity cost of resources used and the normal rate of return.

Related terms

Accounting Profits: Accounting profits only consider explicit costs, such as wages and rent, while ignoring implicit costs like the opportunity cost of using owner's capital.

Normal Rate of Return: The normal rate of return is the minimum level of profit required to keep a business running in order to cover both explicit and implicit costs.

Supernormal Profits: Supernormal profits are economic profits that exceed the normal rate of return. They indicate that a firm is earning more than enough to cover its costs.