What is the definition of economic profit?

Economic profit is defined as the difference between total revenue and total economic costs. This definition is crucial because it encompasses both explicit and implicit costs. Explicit costs are the direct, out-of-pocket expenses that a firm incurs, such as wages, rent, and materials. Implicit costs represent the opportunity costs of using resources in one way instead of another, such as the potential income the owner could have earned if they had chosen a different business venture or investment.

By using total economic costs in the calculation of economic profit, we gain a more comprehensive view of a firm's profitability. It reflects not just the visible costs involved in production but also the non-monetary costs associated with forgoing alternative opportunities. Recognizing this broader framework allows businesses to assess their performance more accurately and make informed decisions about resource allocation.

Other options do not fully capture this perspective. For example, focusing solely on explicit costs would ignore opportunity costs and lead to an incomplete understanding of a firm's profitability. Similarly, total revenue alone does not communicate how well a firm is really doing when accounting for all the costs it incurs.