A profit is the difference between the revenue that an economic entity has received from its outputs and the opportunity costs of its inputs. It equals to total revenue minus total cost, including both explicit and implicit costs. Different from accounting profit, it only relates to the explicit costs which appear on a firm's financial statements. An accountant measures the firm's accounting profit as the firm's total revenue minus only the firm's explicit costs. An economist includes all opportunity costs, both explicit and implicit cost, when analyzing a firm. Therefore, economic profit is smaller than accounting profit. For a business to be profitable from an economist's standpoint, total revenue must cover all the opportunity cost.
Normal profit is often viewed in conjunction with economics profit. Normal profits in business refer to a situation where a company generates revenue that is equal to the total costs incurred in its operation, thus allowing it to remain operational in a competitive industry. It is the minimum profit level that a company can achieve to justify its continued operation in the market where there is competition. In order to determine if a company has achieved normal profit, they first have to calculate their economic profit. If the company's total revenue is equal to its total costs, that means its economic profit is equal to zero ,then the company is in a state of normal profit. It must be noted that normal profit occurs when resources are being used in the most efficient way at the highest and best use. Normal profit and economic profit are economic considerations while accounting profit refers to the profit a company reports on its financial statements each period.
Economic profits arise in markets which are non-competitive and have significant barriers to entry, i.e. monopolies and oligopolies. The inefficiencies and lack of competition in these markets foster an environment where firms can set prices or quantities instead of being price-takers, which is what occurs in a perfectly competitive market.
In a perfectly competitive market when long-run economic equilibrium is reached, an economic profit becomes non-existent , because there is no incentive for firms either to enter or to leave the industry.
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