When a company makes zero economic profit, it means that its total revenues are exactly equal to its total costs, including both explicit and implicit costs. In simpler terms, the company is breaking even.
Economic profit differs from accounting profit, which only considers explicit costs (the direct costs of running the business). Economic profit takes a broader view by also incorporating opportunity costs — the value of the next best alternative use of the resources employed by the company.
For instance, if a business generates $100,000 in revenue and incurs $100,000 in explicit costs (like salaries, rent, and materials) while also giving up a potential opportunity that could have earned it $20,000, the total costs would be $120,000. In this case, the business would show a negative economic profit even though its accounting profit appears to be zero. Therefore, a zero economic profit indicates that the company is covering all its costs, but it’s not making any extra profit above and beyond what it could have earned elsewhere.
In a competitive market, zero economic profit signifies that resources are being allocated efficiently, as firms are earning just enough to stay in business without creating an incentive for new firms to enter the market. This can often be seen in industries where competition is high, and profit margins are thin.