Economic Profit Calculator

Historical Background

Economic profit (or pure profit) differs from accounting profit because it includes opportunity costs in its calculation. It provides a clearer understanding of a business's profitability by factoring in the value of the next-best alternative that was foregone.

Formula

The formula to calculate economic profit is:

\[ EP = (R - C) \times Q \]

where:

• \( EP \) is the economic profit,
• \( R \) is the average revenue per unit,
• \( C \) is the average cost per unit,
• \( Q \) is the total quantity sold.

Example Calculation

Let's calculate the economic profit using the following data:

• Average revenue per unit: \( R = 15 \)
• Average cost per unit: \( C = 10 \)
• Total quantity sold: \( Q = 1000 \)

Plugging these values into the formula:

\[ EP = (15 - 10) \times 1000 = 5 \times 1000 = 5000 \]

Thus, the economic profit is 5000 currency units.

Common FAQs

1. What is economic profit?
   Economic profit measures the difference between economic revenue and economic costs. It incorporates opportunity costs into the analysis to better gauge the overall profitability.

2. How is economic profit different from accounting profit?
   Accounting profit does not consider opportunity costs, whereas economic profit does, providing a more comprehensive view of a business's profitability.

3. What are some examples of opportunity costs?
   Opportunity costs include lost wages from pursuing a new venture or the foregone interest on an investment used to fund a business.

4. Why should a business consider economic profit?
   Economic profit helps businesses understand if they are making decisions that lead to sustainable growth by accounting for all potential costs and foregone opportunities.