Overview
Understanding economic profit is essential for evaluating a business's true profitability. Unlike accounting profit, which only considers explicit costs, economic profit accounts for both explicit and implicit costs, providing a more comprehensive view of financial performance. This distinction is c...
Key Terms
Example: If a company sells 100 widgets at $10 each, its total revenue is $1,000.
Example: If a company spends $600 on materials and $200 on labor, its total costs are $800.
Example: Rent, wages, and materials are explicit costs.
Example: If a business owner could earn $50,000 working elsewhere, that is an implicit cost.
Example: Choosing to invest in a new machine instead of saving the money for future use incurs an opportunity cost.
Example: A firm may lower prices to increase sales volume, aiming for higher overall profit.