The concept of profit is crucial in economics because the goal of companies is to maximize profit. Generally speaking, profit is the difference between what a firm brings in through sales and the cost of producing the output sold. Yet there are multiple ways to calculate cost. As a result, there are multiple ways of calculating profit. Calculating profit can be very helpful for decision-making purposes, as long as the proper measure of profit is used. When calculating profit, economic profit and accounting profit are both considered as different ways to measure the success of a firm.
At A Glance
- Explicit costs take a monetary form and implicit costs take a nonmonetary form. Total economic cost is the sum of all explicit and implicit costs.
Profit is the quantity firms try to maximize. It is the difference between the firm's revenue and the cost of production.
Accounting profit accounts for only explicit costs, while economic profit accounts for explicit and implicit costs.
Economic profit of zero indicates a "normal" level of profit. Positive economic profit can be thought of as exceptionally good, and negative economic profit can be thought of as specifically bad.