A Closer wok at Economic Profit

Economic profit equals total revenue minus total fixed cost, total variable cost, and opportunity cost.

The only difference between the accounting model of profit and the economic model of profit is opportunity cost. In fact, we could say that economic profit is equal to accounting profit minus opportunity cost.

Whenever economic profit is equal to zero, this model tells us that the business is making accounting profit but that its opportunity cost is equal to its accounting profit. Economists refer to this situation as a case where economic profit is equal to the company's opportunity cost.

Whenever economic profit is positive, the company is making so much accounting profit that it more than covers the opportunity cost of the company. Economists refer to this situation as a case where economic profit is greater than opportunity cost.

Whenever economic profit is negative, there are three possible events. One, the company is making negative accounting profit and cannot cover any of its opportunity cost. Two, the company is making zero accounting profit and cannot cover any of its opportunity cost. And three, the company is making positive accounting profit, but not enough to cover all of its opportunity cost. Economists refer to these three situations as cases where economic profit is less than opportunity cost. Most managers relate only to accounting profit. The world would be better served if all managers related to economic profit and the alternative uses (opportunity cost) associated with the resources at their disposal.