Profit is a crucial concept in economics, representing the financial gain from business activities. It is defined as the difference between revenue and costs, expressed mathematically as:

Profit = Revenue - Cost

Understanding the distinction between revenue and profit is essential. Revenue refers to the total income generated from sales, without considering any expenses. In contrast, profit is what remains after all costs have been deducted from revenue. This fundamental difference is key to grasping financial performance.

In this context, there are two primary types of profit that are calculated:

1. Accounting Profit: This is the profit calculated by accountants, which considers only explicit costs—those direct expenses that involve actual cash outflows. The formula for accounting profit can be expressed as:

Accounting Profit = Revenue - Explicit Costs

2. Economic Profit: Economists take a broader view by including both explicit and implicit costs, which represent the opportunity costs of using resources in one way rather than another. The formula for economic profit is:

Economic Profit = Revenue - Explicit Costs - Implicit Costs

By incorporating opportunity costs, economic profit provides a more comprehensive understanding of profitability. As we progress, we will engage in practice problems to calculate both accounting and economic profit in various scenarios. Following this, we will explore costs from a different perspective, moving beyond the explicit and implicit classifications.