Economic profit is defined as?

Economic profit is defined as the difference between total revenue and the opportunity costs associated with production. This concept extends beyond simple accounting profit by considering not only direct costs (such as wages and materials) but also the costs of forgoing the next best alternative when resources are allocated. In other words, economic profit provides a broader picture of profitability by incorporating implicit costs, which reflect the foregone benefits that could have been obtained if resources were used in their next best alternative.

For instance, if a business owner decides to operate a café instead of renting that space to another business, the economic profit accounts for the income that could have been generated from renting the café out, in addition to the actual costs of running the café itself. This perspective is essential for understanding the true profitability and sustainability of business decisions in an economic context. Thus, identifying economic profit helps businesses determine if they are truly earning more than they would in their best alternative use of resources.