whats the difference?
Normal profit is what you need to earn to cover all the costs, including opportunity cost. It’s the profit you get when all your resources are being used efficently and couldn’t be put to better use. Economic profit is any amount beyond normal profit. That is, normal profit => ec profit=0.
Does normal profit include opportunity cost? I thought it was the same as accounting profit.
Analyze_This Wrote: ------------------------------------------------------- > Does normal profit include opportunity cost? I > thought it was the same as accounting profit. It does include opportunity costs. Economic profit equals revenue minus opp. costs of inputs used. You can find a longer explanation in sites such as investopedia.com: What Does Economic Profit (Or Loss) Mean? The difference between the revenue received from the sale of an output and the opportunity cost of the inputs used. Investopedia explains Economic Profit (Or Loss) Don’t confuse this with ‘accounting profit’, which is what most people generally mean when they refer to profit. In calculating economic profit, opportunity costs are deducted from revenues earned. Opportunity costs are the alternative returns foregone by using the chosen inputs. As a result, you can have a significant accounting profit with little to no economic profit. An example: Say you invest $100,000 to start a business, and in that year you earn $120,000 in profits. Your accounting profit would be $20,000. However, say that same year you could have earned an income of $45,000 had you been employed. Therefore, you have an economic loss of $25,000 (120,000 - 100,000 - 45,000).
Think of economic profit as total revenue minus total cost; the ‘total cost’ includes opportunity cost as well (i.e. the value of some alternative forgeone). Accounting profits do NOT consider opportunity costs.