Economic Profit (Or Loss)

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What is 'Economic Profit (Or Loss)'

The difference between the revenue received from the sale of an output and the opportunity cost of the inputs used. This can be used as another name for "economic value added" (EVA).

BREAKING DOWN 'Economic Profit (Or Loss)'

Don't confuse this with 'accounting profit', which is what most people generally mean when they refer to profit.

In calculating economic profit, opportunity costs are deducted from revenues earned. Opportunity costs are the alternative returns foregone by using the chosen inputs. As a result, you can have a significant accounting profit with little to no economic profit.

For example, say you invest $100,000 to start a business, and in that year you earn $120,000 in profits. Your accounting profit would be $20,000. However, say that same year you could have earned an income of $45,000 had you been employed. Therefore, you have an economic loss of $25,000 (120,000 - 100,000 - 45,000).

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  4. How can a company improve its Economic Value Added (EVA)?

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