How is economic profit defined?

Economic profit is defined as total revenue minus total costs, encompassing both explicit and implicit costs. This concept is crucial in understanding how firms evaluate their profitability in consideration of not just the direct expenses associated with their operations (explicit costs), such as wages, rent, and materials, but also the opportunity costs of the resources they use (implicit costs), which represent the foregone income from alternative uses of those resources.

This comprehensive approach reflects the true economic impact of business decisions by considering all costs associated with production and opportunity for earning income. As a result, a positive economic profit indicates that a firm is not only covering all costs but also generating additional income that could have been earned through alternative investments or usages of its resources. In contrast, the other options do not capture the full scope of costs involved in a business’s operations, thereby leading to an incomplete understanding of profitability.