Economic Profit (Or Loss)

Loading the player...

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).

RELATED TERMS
  1. Isoquant Curve

    A graph of all possible combinations of inputs that result in ...
  2. Accumulated Earnings and Profits

    An accounting term applicable to stockholders of closely held ...
  3. Underlying Profit

    A term used to describe the actual reflection of a company's ...
  4. Normal Profit

    An economic condition occurring when the difference between a ...
  5. Revenue

    The amount of money that a company actually receives during a ...
  6. Cost Of Carry

    Costs incurred as a result of an investment position. These costs ...
Related Articles
  1. Economics

    Calculating Economic Profit

    Economic profit is the difference between the revenue a firm earns from sales and the firm’s total opportunity costs.
  2. Economics

    What Is The Difference Between Revenue And Profit?

    Think of revenue as the top line of a company’s income statement. Profit is the infamous bottom line.
  3. Markets

    EVA: Conclusion

    By David Harper, (Contributing Editor - Investopedia Advisor) Contact David Economic profit - otherwise known as "Economic Value Added" (EVA™) is based on classic financial theory, and, ...
  4. Markets

    Fundamental Analysis: The Income Statement

    By Ben McClureThe income statement is basically the first financial statement you will come across in an annual report or quarterly Securities And Exchange Commission (SEC) filing. It also contains ...
  5. Economics

    Is Net Income The Same As Profit?

    Net income and profit both deal with positive cash flow, but there are important differences between the two concepts.
  6. Markets

    EVA: Overview

    By David Harper, (Contributing Editor- Investopedia Advisor) Contact David Examining the components of economic profit and studying the finer points of its calculation require an understanding ...
  7. Term

    The Difference Between Gross and Net Profit Margin

    To calculate gross profit margin, subtract the cost of goods sold from a company’s revenue; then divide by revenue.
  8. Markets

    Profitability Indicator Ratios

    Learn about profit margin analysis, effective tax rate, return on assets, return on equity and return on capital employed.
  9. Economics

    Explaining Accounting Profit

    Accounting profit is the net earnings of a business as calculated under Generally Accepted Accounting Principles (GAAP).
  10. Economics

    What Is Opportunity Cost And Why Does It Matter?

    Economists suggest that the "opportunity cost" of any decision, the value of the next-best alternative, is crucial to making sound choices.
RELATED FAQS
  1. What's the difference between economic value added (EVA) and total revenue?

    Understand the difference between economic value added and total revenue. Learn what each type measures and how it indicates ... Read Answer >>
  2. What's the difference between economic value added (EVA) and economic rent?

    Understand the difference between economic value added and economic rent. Learn what each economic principle is used to measure ... Read Answer >>
  3. How can a company improve its Economic Value Added (EVA)?

    Find out about some of the ways a company could try to improve its economic profit, also known as its economic value added, ... Read Answer >>
  4. What is the difference between economic profit and accounting profit?

    Learn the differences between economic profit and accounting profit and how these aspects can provide insight into a company's ... Read Answer >>
  5. How do analysts and investors interpret Economic Value Added?

    Understand how economic value added (EVA) is interpreted by analysts and investors and how to calculate this important metric ... Read Answer >>
  6. What is the difference between profitability and profit?

    Calculating company profit and profitability are not one and the same, and investors should understand the difference between ... Read Answer >>
Hot Definitions
  1. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  2. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  3. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  4. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  5. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
  6. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
Trading Center