Types of Profit
Introduced| English | Meaning |
|---|---|
| implicit costs/ɪmˈplɪsɪt kɒsts/ | The value of resources the owner already owns and uses — no money changes hands. |
| explicit costs/ekˈsplɪsɪt kɒsts/ | Payments made to others for resources used in production, such as wages, rent or purchased materials. |
| opportunity cost/ɒpəˈtjuːnɪti kɒst/ | The value of the best alternative forgone when a choice is made. |
| accounting profit/əˈkaʊntɪŋ ˈprɒfɪt/ | Total revenue minus explicit accounting costs, without deducting the opportunity costs of resources supplied by the owner. |
| economic profit/ˌiːkəˈnɒmɪk ˈprɒfɪt/ | Total revenue minus all economic costs, including explicit payments and the opportunity costs of owned resources. |
| normal profit/ˈnɔːml ˈprɒfɪt/ | The minimum return needed to keep an entrepreneur's resources in their current use, included in economic opportunity cost. |
Two ways to measure profit
- An accountant and an economist look at the same cafe and disagree about its profit.
- Neither is wrong — they simply count different costs.
- The gap between them is one of the most useful ideas in economics.
- It decides whether a business should keep going, or do something else entirely.
Explicit and implicit costs
- Explicit costs 显性成本 are real money paid out — wages, rent, materials. They show up on a bill.
- Implicit costs 隐性成本 are the value of resources the owner already owns and uses — no money changes hands.
- The key implicit cost is the opportunity cost 机会成本 of the owner's own time and money.
Explicit or implicit?
Explicit costs are money actually paid out; implicit costs are the opportunity cost of resources the owner already owns.
Accounting vs economic profit
- Accounting profit 会计利润 = total revenue − explicit costs only.
- Economic profit 经济利润 = total revenue − (explicit and implicit costs).
- So economic profit is always smaller than accounting profit.
- Normal profit 正常利润 is when economic profit is exactly zero — the owner covers every cost, including opportunity cost.
Accounting profit equals:
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Accountants subtract only the explicit (paid-out) costs.
Economic profit is always smaller than (or equal to) accounting profit.
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Economic profit subtracts implicit costs as well, so it cannot be larger.
Maria's revenue is 200,000; explicit costs are 130,000; the salary she gave up (implicit cost) is 50,000. What is her economic profit?
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Economic profit = 200,000 − 130,000 − 50,000 = 20,000.
When economic profit is exactly zero, the firm earns ______ profit.
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Normal profit means every cost — including opportunity cost — is just covered.
The signal to enter or exit
- Positive economic profit → the firm beats its next-best option, so new firms enter.
- Negative economic profit (a loss) → the owner could do better elsewhere, so firms exit.
- Zero economic profit (normal profit) → no reason to enter or leave.
Firms in a market are earning positive economic profit. Over time:
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Positive economic profit beats the next-best option, so new firms are attracted to enter.
Match each economic-profit signal to what firms do.
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Economic profit is the entry/exit signal because it already includes opportunity cost.
Accounting profit subtracts only explicit costs; economic profit subtracts implicit costs too, so it is smaller. Normal profit = zero economic profit. Economic profit is the right signal: positive attracts entry, negative forces exit.
Write from accounting profit of 35
- Revenue is 80. Explicit costs are 45. The forgone wage is 20.
- Find accounting profit and economic profit.
Revenue is 80, explicit costs are 45 and the forgone wage is 20. What are accounting profit and economic profit?
80 minus 45 is 35, and 35 minus 20 is 15.
What is the economic profit?
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Accounting profit 35 minus the forgone wage 20 is economic profit 15.