ECONOMIC PROFIT Meaning and
Definition
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Economic profit is a concept in economics that represents the total income earned by a business or individual after deducting all the direct and indirect costs associated with its production or operation. It is a more comprehensive measure of profit compared to accounting profit, as it takes into account not only explicit costs but also implicit costs, such as opportunity costs and the foregone income that could have been earned in the next best alternative use of resources.
To calculate economic profit, one needs to subtract all the explicit and implicit costs from the total revenue generated. Explicit costs include expenses such as raw materials, labor, taxes, and rent, while implicit costs refer to the value of resources used that could be deployed in alternative activities.
If economic profit is positive, it indicates that the business or individual is earning more than the total costs incurred, and therefore is making a profit. Conversely, if economic profit is negative, it suggests that the costs exceed the income earned, resulting in a loss. Economic profit acts as a crucial indicator for businesses and investors to assess the efficiency and profitability of their activities, enabling them to make informed decisions about the continuation, expansion, or discontinuation of particular ventures.
Etymology of ECONOMIC PROFIT
The etymology of the word "economic profit" can be understood by breaking it down into its constituent parts.
The term "economic" comes from the Greek word "oikonomia", which means management of a household or administration of resources. This evolved into the Latin word "oeconomia" and eventually entered the English language as "economy" in the 16th century. In the context of "economic profit", this refers to the broader field of study that examines the production, consumption, and distribution of goods and services.
The word "profit" originated from the Latin word "proficere", which means "to make progress" or "to advance". It was used in the context of financial gain in the late 14th century. In the case of "economic profit", it specifically refers to the excess revenue or income generated by a firm or individual above and beyond the explicit costs of production.
