Economics Supply And Demand Questions Medium
The difference between a normal profit and an economic profit lies in the way they are calculated and the implications they have for businesses.
Normal profit refers to the minimum level of profit necessary to keep a business operating in the long run. It is the profit that covers all explicit costs, including wages, rent, utilities, and other expenses. In other words, normal profit is the opportunity cost of the resources used in a business, including the entrepreneur's time and capital. When a business earns a normal profit, it is essentially breaking even and covering all its costs, without making any additional profit.
On the other hand, economic profit goes beyond covering explicit costs and takes into account the opportunity cost of all resources used, including implicit costs. Implicit costs refer to the opportunity cost of using resources in a particular business instead of their next best alternative use. This includes the foregone income or profit that could have been earned in an alternative venture. Economic profit is calculated by subtracting both explicit and implicit costs from total revenue.
If a business earns an economic profit, it means that it is generating more revenue than the total costs incurred, including both explicit and implicit costs. This indicates that the business is not only covering all its expenses but also earning a surplus above the normal profit level. Economic profit is a measure of the business's success in creating value and generating returns that exceed the opportunity cost of resources used.
In summary, the key difference between normal profit and economic profit is that normal profit covers only explicit costs and represents the minimum level of profit required to keep a business operating, while economic profit considers both explicit and implicit costs and represents the surplus earned above the normal profit level.