Economic Profit

Definition

Economic profit = Accounting profit - opportunity cost Accounting profit = Revenue - explicit costs Opportunity cost = The return that you could’ve earned from the best alternative use of the same resources (e.g. interest, wage, profit elsewhere)

Why it matters

Q: In LR, the economic profit이 0, but why the firm doesn’t leave the market right away? A: Zero economic profit means the firm already earns a normal profit here: exactly what it could earn elsewhere. Leaving would not make it better off, and new firms have no reason to enter either, so entry and exit stop → LR equilibrium (Short-run and Long-run Equilibrium).

Links: Short-run and Long-run Equilibrium, Perfect Competition, Monopoly