Introduction

Economic profit is equal to the total revenue that exceeds the total cost. Economic profit is the extra profit the owner receives above the minimum payment required (the normal profit) by the owner of the firm to stay in the particular business. Economic profit is sometimes called excess profit, abnormal profit, super-normal profit or pure profit.

Given a market price of P, profit is maximised where MC = MR = P. This occurs at a quantity of Q. At Q, the firm's average revenue (AR) per unit of production is P. The average cost per unit  of production is C. At an output level of Q, the firm is making an economic profit per unit of production of P – C. The total profit is given by the area C-P-E-M, which is equal to the profit per unit of output P – C multiplied by the quantity produced Q.

As long as average revenue is greater than average cost, the firm is earning an economic profit.

If AR > AC, then an economic profit is earned.

Alternatively, the area representing total profit can be obtained by subtracting the firm's total cost from its total revenue. The firm's total revenue is equal to the price of the product P multiplied by the quantity produced (and sold) Q. This is equal to the area 0-P-E-Q. The total cost of the firm is equal to the average cost C, multiplied by the quantity Q, and is represented by the area 0-C-M-Q. The difference between these two areas is the economic profit and is represented by the area C-P-E-M.