Q:

What is zero economic profit?

A:

According to Dr. Ray Batina of Washington State University, zero economic profit is the profit maximization point. At this point, price is equal to marginal cost. This scenario only applies to a perfectly competitive market.

According to Oregon State University, economic profits and accounting profits are different. Accounting profits are the total revenue minus the total costs. Economic profits are total revenue minus implicit and explicit costs. These include opportunity costs, which are costs a business gives up that are not in the budget, such as a salary from another business in lieu of self-employment. Just because a business has zero economic profits does not mean that the business is not turning an accounting profit. In fact, a firm that produces zero economic profits produces an accounting profit, all else being equal. In the short run, some firms do not maintain zero economic profit. At this point, price is less than average total costs.

According to Penn State University's Department of Energy and Mineral Development, in order for profit maximization of a firm to occur, implicit and explicit costs must equal total revenue. Otherwise, the firm loses money or has too little supply and too great a demand to maintain price in the long run.


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