Skip to content
Finance Calc Kit
Business

Economic Profit Calculator

Calculate economic profit by subtracting explicit and implicit costs from total revenue to measure true economic performance.

Revenue & Opportunity Costs

$
Quick revenue:
$
$

Economic profit

$100,000.00

$500,000.00 revenue minus $400,000.00 total opportunity cost

Accounting profit

$220,000.00

44.00% margin

Total opportunity cost

$400,000.00

Explicit $280,000.00 + implicit $120,000.00

Economic margin

20.00%

Economic profit divided by revenue

Performance status

Supernormal Profit

Earning above competitive alternative returns

Revenue distribution

Revenue$500,000.00
  • Economic profit$100,000.0020.00%
  • Explicit costs$280,000.0056.00%
  • Implicit costs$120,000.0024.00%

How economic profit is calculated

Follow the waterfall from gross revenue and explicit expenses to true economic value creation.

  1. Total opportunity cost

    TCeconomic=Explicit Costs+Implicit CostsTC_{\text{economic}} = \text{Explicit Costs} + \text{Implicit Costs}

    Add explicit out-of-pocket expenses ($280,000.00) to implicit opportunity costs ($120,000.00). Total economic cost is $400,000.00.

  2. Accounting profit

    Accounting Profit=Total Revenue−Explicit Costs\text{Accounting Profit} = \text{Total Revenue} - \text{Explicit Costs}

    Subtract explicit accounting costs ($280,000.00) from total revenue ($500,000.00). Accounting profit is $220,000.00 (44.00% margin).

  3. Economic profit

    Economic Profit=Total Revenue−TCeconomic=Accounting Profit−Implicit Costs\text{Economic Profit} = \text{Total Revenue} - TC_{\text{economic}} = \text{Accounting Profit} - \text{Implicit Costs}

    Subtract total opportunity cost ($400,000.00) from total revenue ($500,000.00). Economic profit is $100,000.00.

  4. Economic margin

    Economic Margin=(Economic ProfitTotal Revenue)×100\text{Economic Margin} = \left(\frac{\text{Economic Profit}}{\text{Total Revenue}}\right) \times 100

    Divide economic profit ($100,000.00) by total revenue ($500,000.00). Economic margin is 20.00%.

Economic profit reflects economic reality by accounting for both explicit cash outlays (wages, rent, materials, utilities) and implicit opportunity costs (owner forgone wages, rental value of owned land, and minimum required equity returns). A zero economic profit represents normal profit, meaning capital and labor earn exactly what they would in their next-best alternative market opportunities.
Report tool

What is economic profit?

Economic profit is the surplus earned by a business after deducting both explicit cash expenses and implicit opportunity costs from total revenue. While traditional financial statements focus purely on accounting profit (net income), economists evaluate whether resources deployed in an enterprise generate greater value than their next-best alternative uses elsewhere in the economy.

If an entrepreneur invests $200,000 of their own savings into a venture and works full-time without taking a market wage, an income statement might show strong profitability. However, once you account for the forgone market salary and the forgone investment return on that capital, true economic profit may be zero or even negative. To analyze your reported book earnings before subtracting opportunity costs, compare your figures with our accounting profit calculator. When evaluating operating earnings before interest charges and income taxes, you can also explore the EBIT calculator.

Economic profit formula and components

In microeconomics and corporate finance, economic profit is expressed as total revenue minus total economic cost (the sum of explicit and implicit costs):

Economic Profit=Total Revenue−(Explicit Costs+Implicit Costs)\text{Economic Profit} = \text{Total Revenue} - (\text{Explicit Costs} + \text{Implicit Costs})

Alternatively, because accounting profit equals total revenue minus explicit costs, economic profit can be stated directly as:

Economic Profit=Accounting Profit−Implicit Costs\text{Economic Profit} = \text{Accounting Profit} - \text{Implicit Costs}

Explicit costs (out-of-pocket expenses)

Explicit costs are tangible, monetary payments made to outside parties to acquire productive resources. These appear as documented line items on general ledgers, tax filings, and income statements. Common explicit costs include:

  • Wages, salaries, and benefits paid to hired employees
  • Raw materials, inventory purchases, and cost of goods sold
  • Office, retail, or warehouse rent paid to landlords
  • Utilities, cloud software subscriptions, and insurance premiums
  • Interest paid on bank loans and credit facilities
  • Depreciation expenses on machinery, fixtures, and technology

Implicit costs (opportunity costs)

Implicit costs represent the forgone financial returns from using self-owned resources inside the business rather than leasing or deploying them in their next-best alternative market application. They involve no cash exchange and never appear on standard accounting ledgers. Key implicit costs include:

  • Forgone owner wages: The salary an entrepreneur could command working in their industry for an established company instead of managing their own firm.
  • Forgone return on invested equity: The interest or investment yield the founder could have earned by placing their capital in diversified index funds, treasury bonds, or real estate. To evaluate your benchmark hurdle rate for equity and debt funding, consult the cost of capital calculator.
  • Forgone rental value of owned property: The market rent an owner could collect by leasing their privately owned warehouse, storefront, or equipment to third parties rather than using it for business operations.

Worked example: Accounting profit vs. economic profit

Consider an attorney who leaves an associate position at a major law firm paying $125,000 per year to launch an independent private legal practice. She invests $50,000 of personal savings that was previously earning 6% annual interest ($3,000 per year) in a money market account.

In her first full year of operations, the firm generates $200,000 in total gross revenue. The firm incurs $50,000 for office lease payments, $25,000 for a paralegal clerk, and $10,000 for legal software, research databases, and utilities. Total explicit costs equal $85,000.

Accounting perspective

Total Revenue: $200,000
Explicit Costs: $85,000 ($50,000 office + $25,000 staff + $10,000 overhead)
Accounting Profit = $200,000 - $85,000 = $115,000

On her tax return and income statement, the firm reports a healthy net income of $115,000 (a 57.5% accounting margin).

Economic perspective

Forgone salary: $125,000
Forgone investment interest: $3,000 ($50,000 at 6%)
Total Implicit Costs: $128,000
Total Opportunity Cost: $85,000 (explicit) + $128,000 (implicit) = $213,000
Economic Profit = $200,000 - $213,000 = -$13,000

Despite showing an accounting profit of $115,000, the attorney experienced an economic loss of $13,000. She took home $115,000 from the practice, which is $13,000 less than the $128,000 combined sum she would have earned by staying at the law firm and keeping her savings invested.

Interpreting the three economic profit outcomes

In classical economics, economic profit serves as the universal signaling mechanism that drives resource allocation, capital flows, and market entry or exit:

1. Supernormal profit (economic profit > 0)

When total revenue exceeds both explicit and implicit costs, the business earns a supernormal or excess economic profit. This signals that capital invested in this specific market generates higher returns than could be achieved anywhere else in the economy with comparable risk. In competitive markets, supernormal profits attract new competitors, which increases industry supply and drives prices back toward long-run equilibrium. To analyze your volume thresholds and unit economics under competitive pricing, use the break-even calculator and the contribution margin calculator.

2. Normal profit (economic profit = 0)

A zero economic profit does not mean the business made zero money. Rather, it means total revenue fully covers all explicit expenses and provides the owner and investors with the exact market rate of return on their labor and capital. The business is sustainable in the long run, and resources are deployed efficiently with no incentive to enter or exit the sector.

3. Economic loss (economic profit < 0)

When total opportunity costs exceed total revenue, the business incurs an economic loss. Even if the firm reports a positive accounting profit, the capital and talent could generate greater wealth in their next-best alternative endeavor. Over time, persistent economic losses lead businesses to reallocate capital, downsize, or exit the industry entirely. If you are building detailed revenue and expense forecasts to restore economic profitability, explore our business budget calculator.

Frequently asked questions

Can a company have positive accounting profit but negative economic profit?
Yes, this occurs frequently. If a business reports $80,000 in accounting profit after explicit expenses, but the owner gave up a $110,000 corporate salary to operate it, the business has an economic loss of $30,000.
Why do economists say zero economic profit is good?
Zero economic profit is called normal profit. It means the company has covered all operating expenses and fully compensated investors and founders for the opportunity cost of their capital and time at prevailing market rates.
What are the most common implicit costs overlooked by founders?
Founders commonly overlook the market salary they would earn as an employee elsewhere, the rental value of personal property or vehicles used for the business, and the compounding investment returns forgone by tying personal cash up in working capital.
How does economic profit relate to Economic Value Added (EVA)?
Economic Value Added is corporate finance terminology for economic profit. EVA calculates net operating profit after tax (NOPAT) minus the dollar cost of total invested capital. To calculate your company wealth creation based on WACC and invested capital, use our Economic Value Added calculator.
Does economic profit include income taxes and interest?
Yes. Income taxes and debt interest are explicit cash expenses paid to governments and lenders. They are deducted alongside operating expenses before evaluating residual economic earnings.

Resources and references

The formulas and methods in this calculator were checked against these independent sources.