But how would a firm stay in business without generating economic profit? A firm can remain in business and continue producing goods and services so long as it is able to pay ALL opportunity cost. One key opportunity cost is a normal profit, the profit entrepreneurship could earn with alternative production. Because accounting profit is generally the combination of normal profit and economic profit, zero economic profit does not mean zero accounting profit.

Revenue Minus Cost

economic profit

=

total revenue - total cost

Sources of Economic Profit

• Market Control: One of the most common reasons for economic profit is market control by a firm. A firm has market control if it can exert some degree of influence, or control, over the market price. Market control, especially that held by monopoly and oligopoly firms, generates profit by inefficiently allocating resources. By controlling the price, a firm is able to generate more revenue, and thus more profit, than it would in a more (perfectly) competitive situation.

  This is NOT a good type of profit for the economy. It is, however, the type of profit most often encountered in the analysis of short-run production.



• Risk: Economic profit is also generated due to the risk of organizing production. Some entrepreneurship is willing to undertake more risky production activities, and in so doing they are rewarded with greater economic profit. Risk profit is generated as a reward for undertaking a risky activity that may or may not succeed, especially launching a new business venture.

  Risk profit is a good type of profit for the economy. Without the prospect of "extra" reward, by way of economic profit, for taking the risk of production, such risky activities would not be pursued. And society would miss out on the resulting benefits.



• Innovation: Firms also receive economic profit as a reward for innovative activity, that is introducing a new product or a technological innovation, also which may or may not succeed. Innovation profit is the reward for entrepreneurship seeking to be first onto the market with a particular good or service.

  Risk profit is also beneficial for the economy. Without the prospect of this economic profit, entrepreneurship would lack the incentive to introduce new products. And society would miss out on the resulting benefits of technological innovations. People might still be living in caves, picking berries, and gnawing on mastodon bones.