Which factor is subtracted from total output to calculate economic profit?

To calculate economic profit, one must consider both explicit and implicit costs associated with the production of goods and services. Explicit costs include the total wages paid to workers and the total returns paid to capital owners (such as profits paid to investors or interest payments on capital). When determining economic profit, these costs are subtracted from total output or total revenue generated by the business.

The reasoning behind this calculation is rooted in the concept of opportunity costs, which are the potential benefits that one misses out on by choosing one alternative over another. Economic profit reflects the true profitability of a business by accounting for not just the direct costs of production but also the returns that are foregone by employing resources in one way rather than another.

In this context, subtracting both total wages (the explicit costs of labor) and total returns to capital (the costs associated with utilizing capital, which could include interest on loans or returns to equity investors) provides a comprehensive view of all costs that must be accounted for when assessing economic profit. This ensures that all resources are being considered in the calculation, leading to a more accurate representation of the profitability and efficiency of the firm.