what is economic profit 
an economic profit is the difference between the revenue received from sales and the explicit costs of producing its goods and services as well as any opportunity costs opportunity costs are a type of implicit cost determined by management and will vary based on different scenarios and perspectives investopedia mira norianunderstanding economic profiteconomic profit is often analyzed in conjunction with accounting profit accounting profit is the profit that a company shows on its income statement it is also known as net income accounting profit measures actual money inflows versus money outflows and is part of the required financial reporting and transparency of a company economic profit on the other hand is not recorded on a company s financial statements nor is it required to be disclosed to regulators investors or financial institutions economic profit can be used in a what if analysis companies and individuals may choose to consider economic profit when they are faced with choices involving production levels or other business alternatives economic profit can provide a proxy for foregone profit considerations the calculation for economic profit can vary by entity and scenario in general it can be captured as follows if you excluded the opportunity costs from this equation you d get simply the accounting profit however when you subtract the opportunity costs as well the economic profit results it can serve as a comparison to other options that could have been undertaken by a company for better or worse companies state their explicit costs on the income statement the accounting profit on the bottom line of the income statement is the net income after subtracting for direct indirect and capital costs the cost of goods sold is the most basic explicit cost used in analyzing per unit costs thus in the equation above a company could also break down its opportunity costs by units to arrive at a per unit economic profit individuals starting their own business might use economic profit as a proxy for their first year of business since they have given up some prior opportunity with large entities business managers can potentially look more intricately at gross operating and net profit versus economic profit at different phases of the business operations economic profit vs accounting profitaccounting profit or net income is determined by subtracting all costs from revenue for a particular accounting period economic profit is determined by going a step further and subtracting opportunity costs as well the former represents an actual figure that s included on financial statements the latter can be used by company management to determine how effective its business decisions were it can also be used before actions are taken to decide on the best business strategy to put to work here s a quick reference chart that summarizes the differences between economic profit and accounting profit advantages and disadvantages of economic profitspecial considerationsopportunity costs can be used for deeper analysis of business decisions specifically when alternatives are available companies may look at opportunity costs when considering production levels for different types of products that they produce collectively but in varying quantities opportunity costs are somewhat arbitrary and are a type of implicit cost they can vary depending on management s estimations and market circumstances generally opportunity cost will be the accounting profit that could have been achieved by making an alternative choice examples of economic profitan individual starts a business and incurs startup costs of 100 000 during the first year of operation the business earns revenue of 120 000 this results in an accounting profit of 20 000 however if the individual had stayed at her previous job she would have made 45 000 in this example the individual s economic profit is equal to this calculation only considers the first year of business if after the first year costs decrease to 10 000 then the economic profit outlook would improve for future years if economic profit comes out to zero the company is said to be in a state of normal profit in using economic profit in comparison to gross profit a company may look at different types of scenarios in this case gross profit is the focus and a company would subtract the opportunity cost per unit if a company generates 10 per unit from selling t shirts with a 5 cost per unit then its gross profit per unit for t shirts is 5 however if it could have produced shorts with revenue of 10 and costs of 2 then there would be an opportunity cost of 8 as well all things being equal the company could have earned 3 more per unit if they had produced shorts instead of t shirts thus the 3 per unit is considered an economic loss companies can use this type of analysis to decide on production levels more complex scenario analysis of profits may also factor in indirect costs or other types of implicit costs depending on the expenditures involved in doing business as well as different phases of a business cycle 