Economic Profit (Or Loss)

Economic profit isn’t your grandma’s accounting profit.

Accounting profit and loss only takes into account the numbers with things that had price tags on them...you know, all the stuff that’s on a balance sheet or cash flow statement.

Economic profit and loss is different, because it not only takes into account the usual accounting, but also the opportunity costs of the money spent.

For instance, the accounting profit of a diner would be their inflow of cash from diner customers minus their operating costs (food costs, labor costs, and rent). Say the diner makes $2,000 in accounting profits a month. Economic profit goes beyond and asks, “would you be able to make a higher profit doing something else with the resources you have at your disposal?”

Say the diner owner, Mary, does the math, and finds out her store, given its location, could turn a higher profit of $2,500 if she gutted it and just rented the place out to another business. Mary would have never seen this opportunity if she had only stayed within the confines of accounting profit. Because she looked at her opportunity costs, she could see she was losing potential money to be gained ($500/mo) by running the diner as it was.

Hail Mary! Hail economic profit!