3.6 Types of Profit

Accounting vs. Economic Profit

Accounting profit = total revenue − explicit costs (actual money paid out, like wages and rent). Economic profit = total revenue − (explicit costs + implicit costs). Implicit costs are opportunity costs of using owned resources, like forgone salary or forgone rent. Economic profit is always ≤ accounting profit because it subtracts more costs.

Normal Profit

Normal profit occurs when economic profit equals zero — total revenue exactly covers both explicit and implicit costs. This means the firm earns just enough to keep its resources in the current use; the owner's opportunity cost is fully covered. Normal profit signals a firm is doing 'just fine' economically, even though accounting profit may still be positive.

Interpreting Profit Signals

Positive economic profit attracts new firms into a market (long-run entry). Negative economic profit (economic loss) pushes firms to exit. Zero economic profit (normal profit) means no incentive to enter or exit — this is the long-run equilibrium condition in perfectly competitive markets.

Key terms

Accounting profit

Total revenue minus explicit costs only.

Economic profit

Total revenue minus both explicit and implicit costs.

Implicit costs

Opportunity costs of using self-owned resources (e.g., forgone salary, forgone rent).

Normal profit

Occurs when economic profit = 0; revenue just covers all explicit and implicit costs.

Profit signal for entry/exit

Positive economic profit → firms enter; negative economic profit (loss) → firms exit; zero economic profit → no entry or exit.

Try an AP-style question

What is economic profit?

1. $10,000
2. −$10,000
3. $200,000
4. $80,000