What is economic profit?

Economic profit or added economic value is the amount of money that a person or commercial profits as a result of a particular enterprise after also considering opportunities. It is different from the accounting profit, because it only does not measure the net profit of the company, but also considers how much a business or individual could be carried out by monitoring other businesses. If these businesses were more profitable, even the company that generated accounting profit could lead to economic loss.

Economic profit calculation can sometimes be difficult because it is not always possible to know the profits that other businesses could bring. However, when a person or company knows about another potential profit, the calculation is quite simple. For example, if an individual decided to leave a job that paid $ 100,000 (USD) to start business, this individual would calculate his economic profit by comparison, also known as normal profit, the company per $ 100,000 he gave up to do business. IfD This business would result in $ 120,000 in US dollars, then economic profit would be $ 20,000 - the individual earned $ 20,000 more than he could keep his original work.

The key to the successful calculation of economic profit is to know the opportunities for investment. In the above example, it was easy, because the individual who opened the company knew he gave up the salary. But this is not always. For example, if we reverse the example and the company owner decides to sell the company to take a job for $ 100,000 a year, it will be difficult to calculate economic profit, because it is difficult to know how much the business could be made. Although the company still exists and the previous owner knows how profitable it was this year, there is no way to find out whether the continuing involvement of this person could allow the company to make more or perhaps even less.

So, although the ekonOmicky profit provides a more robust description of the actual profitability of the trade enterprise, usually it is not as easy to calculate as the accounting profit is. It includes occasional costs of the company and therefore corresponds to more variables than normal profit data. But because the cost of the opportunity is always speculative, knowing real economic profit can be difficult.