A Small Business Owner's Economic Profit Analysis

07 Jul 2021

What is the owner's economic profit, and how is it calculated?

Understanding Economic Profit

Economic Profit refers to the revenue earned by an enterprise, minus the explicit and implicit costs. In this case, the small business owner earns $95,000 in revenue annually, with explicit annual costs amounting to $50,000. Additionally, if the owner were to work for someone else, he could earn $40,000 annually.

The formula for calculating economic profit is as follows:
EP = Total Revenue - Explicit Costs - Implicit Costs

Given values:
Total revenue = $95,000
Explicit costs = $50,000
Implicit costs (opportunity cost) = $40,000

Plugging in the values:
EP = $95,000 - $50,000 - $40,000
EP = $5,000

Therefore, the owner's economic profit is $5,000. This calculation shows that the business owner is earning more than he would have by working for someone else, but there is still room for improvement to cover implicit costs and increase profitability.

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