Types of Profit
Introduced| English |
|---|
| implicit costs/ɪmˈplɪsɪt kɒsts/ |
| explicit costs/ekˈsplɪsɪt kɒsts/ |
| opportunity cost/ɒpəˈtjuːnɪti kɒst/ |
| accounting profit/əˈkaʊntɪŋ ˈprɒfɪt/ |
| economic profit/ˌiːkəˈnɒmɪk ˈprɒfɪt/ |
| normal profit/ˈnɔːml ˈprɒfɪt/ |
Two ways to measure profit
- An accountant and an economist look at the same cafe and disagree about its profit.
- Neither is wrong — they simply count different costs.
- The gap between them is one of the most useful ideas in economics.
- It decides whether a business should keep going, or do something else entirely.
Explicit and implicit costs
- Explicit costs 显性成本 are real money paid out — wages, rent, materials. They show up on a bill.
- Implicit costs 隐性成本 are the value of resources the owner already owns and uses — no money changes hands.
- The key implicit cost is the opportunity cost 机会成本 of the owner's own time and money.
Explicit or implicit?
Explicit costs are money actually paid out; implicit costs are the opportunity cost of resources the owner already owns.
Accounting vs economic profit
- Accounting profit 会计利润 = total revenue − explicit costs only.
- Economic profit 经济利润 = total revenue − (explicit and implicit costs).
- So economic profit is always smaller than accounting profit.
- Normal profit 正常利润 is when economic profit is exactly zero — the owner covers every cost, including opportunity cost.
Accounting profit equals:
Accountants subtract only the explicit (paid-out) costs.
Economic profit is always smaller than (or equal to) accounting profit.
Economic profit subtracts implicit costs as well, so it cannot be larger.
Maria's revenue is 200,000; explicit costs are 130,000; the salary she gave up (implicit cost) is 50,000. What is her economic profit?
Economic profit = 200,000 − 130,000 − 50,000 = 20,000.
When economic profit is exactly zero, the firm earns ______ profit.
Normal profit means every cost — including opportunity cost — is just covered.
The signal to enter or exit
- Positive economic profit → the firm beats its next-best option, so new firms enter.
- Negative economic profit (a loss) → the owner could do better elsewhere, so firms exit.
- Zero economic profit (normal profit) → no reason to enter or leave.
Firms in a market are earning positive economic profit. Over time:
Positive economic profit beats the next-best option, so new firms are attracted to enter.
Match each economic-profit signal to what firms do.
Economic profit is the entry/exit signal because it already includes opportunity cost.
Accounting profit subtracts only explicit costs; economic profit subtracts implicit costs too, so it is smaller. Normal profit = zero economic profit. Economic profit is the right signal: positive attracts entry, negative forces exit.