Economic Profit Calculator: Economic vs Accounting Profit with Opportunity Costs

How it works

Accounting profit = total revenue − explicit costs · Implicit costs = income given up + (own capital × alternative return) + rent given up + other opportunity costs · Economic profit = total revenue − explicit costs − implicit costs = accounting profit − implicit costs

Accounting profit is what the books show: revenue minus the costs you actually pay, such as rent, wages, materials and interest. Economic profit also subtracts implicit costs, the value of what you give up by running this business instead of using your time, money and property in their best alternative. Typical implicit costs are the salary you could earn in a job, the interest or return your invested savings could earn elsewhere, and the rent you could collect on a building you own and use. Economic profit answers a different question from accounting profit: not “does it make money?” but “does it make more money than my next-best option?”. A positive figure means the business beats your alternatives. Zero is called normal profit: you earn exactly what your resources would earn elsewhere, which is still a reasonable result. A negative figure is an economic loss even when the accounts show a profit. The calculator values your capital at the return you enter, adds the other opportunity costs, and shows both views side by side with the revenue needed to break even economically. This is the microeconomics measure for an owner or a small business. For a company’s economic value added (EVA), which charges a weighted average cost of capital on all invested capital, use the EVA calculator. Results are pre-tax, and opportunity costs are estimates, so try a range of values.

Worked example

You could earn $125,000 a year in a job. Instead you run your own practice with $200,000 of revenue and $85,000 of explicit costs (office rent and a clerk’s salary), and you have $40,000 of your savings in the business that could earn 4% elsewhere. Accounting profit is $200,000 − $85,000 = $115,000. The capital’s opportunity cost is $40,000 × 4% = $1,600, so implicit costs are $125,000 + $1,600 = $126,600. Economic profit = $115,000 − $126,600 = −$11,600: an accounting profit, but an economic loss, so you would earn $11,600 more in the job. You would need $211,600 of revenue to break even economically.

Sources: OpenStax Principles of Economics 3e, 7.1 Explicit and implicit costs, and accounting and economic profit · Omni Calculator: Economic profit (explicit and implicit costs)

Frequently asked questions