A firm earns economic profit when total profit exceeds normal profit.
Normal profit is the minimum profit that a firm must earn in order to stay in business. It is equal to the opportunity cost of the resources used by the firm. Opportunity cost is the value of the best alternative that is forgone when a choice is made. In the case of a firm, the opportunity cost of the resources used by the firm is the income that the firm could earn if it used those resources in another way.
Economic profit is the total profit that a firm earns after accounting for all costs, including both explicit and implicit costs. Explicit costs are the costs that a firm incurs in order to produce its goods or services, such as the cost of labor, materials, and rent. Implicit costs are the costs that a firm incurs but does not directly pay for, such as the opportunity cost of the time and money that the firm’s owners invest in the business.
A firm earns economic profit when its total revenue exceeds its total costs, including both explicit and implicit costs. This means that the firm is earning more than it needs to stay in business. Economic profit is a measure of the firm’s efficiency and success.