Banking

In economics, economic profit is the difference between a company's total revenue and its opportunity costs. It is the increase in wealth that an investor has from making an investment, taking into consideration all costs associated with that investment including the opportunity cost of capital.

Definition
Normal profit is a component of the firm's opportunity costs. The time that the owner spends running the firm could be spent on running another firm. This is normal profit: the return the entrepreneur can expect to earn or the profit that the 1 business owners considers necessary to make running the business worth his/her while. When a firm earns positive economic profits, we say returns to entrepreneurial ability are supernormal. In the short run, a firm earning subnormal profits (i.e. an economic loss) can continue to do business as long as revenues cover average variable costs. In a perfect market, positive economic profits cannot be sustained in the long run as more firms enter the market and increase competition.
An economic profit arises when revenue exceeds the opportunity cost of inputs, noting that these costs include the cost of equity capital that is met by "normal profits." A business is said to be making an accounting profit if its revenues exceed the accounting cost of the firm.
All enterprises can be stated in financial capital of the owners of the enterprise. The economic profit may include an element in recognition of the risks that an investor takes. It is often uncertain, because of incomplete information, whether an enterprise will succeed or not. This extra risk is included in the minimum rate of return that providers of financial capital require, and so is treated as still a cost within economics. The size of that return is commensurate with the riskiness associated with each type of investment, as per the risk-return spectrum.
"Normal profits" arise in circumstances of perfect competition when economic equilibrium is reached. At equilibrium, average cost equals marginal cost at the profit-maximizing position. Since normal profit is economically a cost, there is no economic profit at equilibrium. In a single-goods case, a positive economic profit happens when the firm's average cost is less than the price of the product or service at the profit-maximizing output. The economic profit is equal to the quantity of output multiplied by the difference between the average cost and the price.
Economic profit does not occur in perfect competition in long run equilibrium. Once risk is accounted for, long-lasting economic profit is thus viewed as the result of constant cost-cutting and performance improvement ahead of industry competitors, or an inefficiency caused by monopolies or some form of market failure.
Positive economic profit is sometimes referred to as supernormal profit or as economic rent.
The social profit from a firm's activities is the normal profit plus or minus any externalities that occur in its activity. A firm may report relatively large monetary profits, but by creating negative externalities their social profit could be relatively small.
Profitability is a term of economical efficiency. Mathematically it is a relative index – a fraction with profit as numerator and generating profit flows or assets as denominator.