A firm is said to be making an economic profit when its average total cost is less than the price of the product at the profit-maximizing output. The economic profit is equal to the quantity output multiplied by the difference between the average total cost and the price.
Economic profit differs from standard profit in that it is considered excessive. It is accepted that any investment requires some profit to make a venture worthwhile, and economists refer to this as accounting profit which covers the opportunity costs of a venture. Economic profit, then, is any earnings above this necessary level. A state of perfect competition would see no economic profit, for if any exist in an industry it will attract new investors and start-ups until all economic profit disappears.
Long-lasting economic profit is thus viewed as a inefficiency caused by monopolies or some other form of market failure.
Economic profit is sometimes referred to as supernormal profit.
See also Economic Profit for the accounting meaning of the term.