Final answer:
Economic profit in pure competition is calculated as price minus average total cost multiplied by quantity. It reflects the opportunity costs of all resources, including implicit costs, and allows firms to determine their profitability in a competitive market.
Step-by-step explanation:
The method of calculating economic profit in pure competition is price minus average total cost multiplied by quantity. Economic profit is different from accounting profit because it considers both explicit and implicit costs, reflecting the opportunity costs of all resources employed by the firm. The formula for calculating economic profit is total revenues minus total costs, which includes implicit costs.
Firms in perfect competition face a perfectly elastic demand curve; therefore, they are price takers and can sell any number of units at the market price. This means that when determining quantity to produce and sell, a firm will calculate its total revenue based on the market price and then subtract its total cost, which is the sum of average cost times the quantity produced, to determine economic profit.