Final answer:
Profitability is the ability of a business to earn more than its costs. Two critical types of profit are accounting profit, which considers explicit costs only, and economic profit, which includes both explicit and implicit costs. This distinction helps determine a business's financial health and its decisions on operations and growth.
Step-by-step explanation:
Profitability refers to the extent to which a business earns more than it spends. This involves generating a surplus of revenue after accounting for all costs involved in the business's operations. There are two key types of profit definitions that are important for businesses: accounting profit and economic profit. Accounting profit is calculated by subtracting explicit costs (the direct expenses a company incurs) from total revenue. In contrast, economic profit deducts both explicit and implicit costs (the opportunity costs of a company’s resources) from total revenue. Businesses must understand both types of profit to determine their overall financial success and their ability to continue operating or to make strategic decisions regarding expansion or exiting the industry.