Economic Profit

Economic Profit (or Loss)

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. Sometimes referred to as economic value added (EVA).

Investopedia explains Economic Profit (or Loss)

This should not be confused with accounting profit, which is what most people mean when they refer to profit. In calculating economic profit, opportunity costs are deducted from revenues earned. Opportunity costs are the returns not realized by using the chosen inputs. As a result, there can be a significant accounting profit with little to no economic profit. For example, say you invest $100,000 to start a business and in that year earn $120,000 in profits. Your accounting profit would be $20,000. However, say that in the same year, instead of starting the business, you could have worked for someone else and earned $45,000. Therefore, you have an economic loss of $25,000 (120,000 - 100,000 - 45,000).

Related Terms:
• Economic Value Added—EVA
• Economies of Scale
• Opportunity Cost
• Profit Margin
• Revenue