A Small Business Owner's Economic Profit Analysis
What is the owner's economic profit, and how is it calculated?
Understanding Economic Profit
The formula for calculating economic profit is as follows:
EP = Total Revenue - Explicit Costs - Implicit Costs
Given values:
Total revenue = $95,000
Explicit costs = $50,000
Implicit costs (opportunity cost) = $40,000
Plugging in the values:
EP = $95,000 - $50,000 - $40,000
EP = $5,000
Therefore, the owner's economic profit is $5,000. This calculation shows that the business owner is earning more than he would have by working for someone else, but there is still room for improvement to cover implicit costs and increase profitability.