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In economic theory, profit is the surplus earned above the normal return on capital. Profits emerge as the excess of total revenue over the opportunity cost of producing the good. Thus, a firm earning zero economic profits is still earning a normal or competitive return. Positive economic profits therefore indicate that a firm is earning more than the competitive norm.

Economic profits are not the same as accounting profits. In accounting, profits are simply the excess of revenues over the explicit costs of obtaining the revenues. Costs are not calculated as opportunity costs and do not include a normal return on capital. Moreover, accountants calculate different categories of profits which may differ from country to country.

For purposes of competition policy, the problem is that positive economic profits may (but not necessarily) indicate the existence of monopoly power. However, economic profits are not observable and use must be made of accounting profits. Positive accounting profits may reflect nothing other than a normal or competitive return.

Source Publication:
Glossary of Industrial Organisation Economics and Competition Law, compiled by R. S. Khemani and D. M. Shapiro, commissioned by the Directorate for Financial, Fiscal and Enterprise Affairs, OECD, 1993.

Cross References:


Statistical Theme: Financial statistics

Created on Thursday, January 3, 2002

Last updated on Sunday, March 17, 2002