The positive difference between total revenue generated by a business and its explicit costs and implicit costs. In other words, it is the positive difference between accounting profit and implicit costs (economic costs):
Economic profit = total revenue – (explicit costs + implicit costs)
Economic profit = accounting profit – implicit costs, where: accounting profit > implicit costs
The total costs subtracted from accounting profit to reach at economic profit provide compensation to the business for risk-taking and the opportunity cost of capital. The economic profit is determined by economic principles and factors, taking into consideration the overall timeline view of the business/ project. In this sense, it is used to determine the proper time for market entry, exit, or stay (as opposed to accounting profit that is calculated based on accounting principles, taking into account a single accounting period, and with an overarching objective: determination of financial performance and income tax calculation).
The economic profit is also known as an economic value added (EVA).
