Glossary
Accounting Profit
The profit calculated by subtracting only explicit costs from total revenue. It represents the financial gain reported on a firm's income statement.
Example:
A software company with 200,000 in salaries and rent has an accounting profit of $300,000.
Economic Loss
Occurs when a firm's total costs (including implicit costs) exceed its total revenue, resulting in a negative economic profit.
Example:
A new startup that spends more on operations and forgone opportunities than it earns in revenue is experiencing an economic loss.
Economic Profit
The profit calculated by subtracting both explicit and implicit costs from total revenue. It provides a more complete picture of a firm's true profitability.
Example:
If a freelance graphic designer earns 60,000 at a corporate job, their economic profit is $20,000 after accounting for the opportunity cost.
Explicit Costs
Direct, out-of-pocket expenses that a firm pays for resources, such as wages, rent, and raw materials.
Example:
The monthly rent for a restaurant's kitchen space is an explicit cost.
Implicit Costs
The opportunity costs of using resources that a firm already owns, representing the value of the next best alternative forgone.
Example:
The income a business owner could have earned by working for someone else instead of running their own company is an implicit cost.
Normal Profit
A state where economic profit is zero, meaning the firm is earning just enough to cover all its explicit and implicit costs, including the opportunity cost of the owner's time and capital.
Example:
If a small coffee shop's revenue exactly covers its rent, beans, wages, and the owner's forgone salary from their previous job, it is earning a normal profit.
Supernormal Profit
Profits that are greater than normal profit, meaning the firm's economic profit is positive. These are also referred to simply as economic profits.
Example:
A tech company that develops a groundbreaking new app and earns significantly more than all its explicit and implicit costs is making a supernormal profit.
Total Costs (TC)
The sum of all expenses incurred by a firm in producing goods or services, including both explicit and implicit costs.
Example:
A t-shirt company's total costs would include the fabric, labor, rent, and the owner's forgone salary from their previous job.
Total Revenue (TR)
The total amount of money a firm receives from selling its goods or services before any costs are deducted.
Example:
If a lemonade stand sells 100 cups of lemonade at 200.