Final answer:
Economic profit is earned when a company's revenues are higher than both explicit and implicit costs, offering a comprehensive measure of true profitability. The formula is Total Revenues minus Explicit Costs minus Implicit Costs. A firm earns economic profit if its product price exceeds the average total cost.
Step-by-step explanation:
Economic profit is earned when a privately owned firm's revenue exceeds both its explicit and implicit costs. Unlike accounting profit, which only deducts explicit costs from the total revenues, economic profit provides a more comprehensive view by also considering implicit costs, such as the opportunity cost of alternative uses of resources owned by the company.
The formula to calculate economic profit is:
Economic profit = Total Revenues - Explicit Costs - Implicit Costs.
For instance, if a company's total revenue is $200,000, explicit costs are $85,000, and implicit costs are $125,000, the economic profit would be calculated as follows:
Economic Profit = $200,000 - $85,000 - $125,000 = -10,000.
A negative result indicates a loss. Moreover, a firm earns an economic profit when the price of its products is greater than the average total cost (ATC). If the price equals the ATC, the firm earns zero economic profit, and if the price is less than the ATC, the firm incurs a loss.