What is economic profit?


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Economic profit is the difference between total revenue and total economic cost.  Total revenue is measured as the sales receipts of a firm, that is, price times quantity sold.  The economic cost of any activity may be thought of as the highest valued alternative opportunity that is foregone.  To attract economic resources to some activity, the firm must pay a price for these factors (labour, capital and natural resources), that is, sufficient to convince the owners of these resources to sacrifice other alternatives and commit the resources to this use.  Thus, economic costs may be thought of as opportunity costs, or the costs of attracting a resource from its next best alternative use. Accordingly, the term economic cost refers to all costs, both explicit and implicit, including a normal return (profit) for owners of the financial resources.


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