# Economic Profit Formula

Finance Formulas / July 14, 2018 / Aniyah Booth

When you make a down payment on a purchase and use a loan to pay for the remainder, you instantly reduce the amount of interest you pay over the lifetime of the loan. For example, if you borrow $100,000 on a loan with a 5% interest rate, you owe $5,000 in interest in the first year of the loan alone. However, if you have a $20,000 down payment, you only need to borrow $80,000. As a result, during the first year, your interest is only $4,000, saving you $1,000 in the first year alone. Thus, it pays to have a sizable down payment on your mortgage as it will save you thousands of dollars in interest over the lifetime of the loan.

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The personal debtequity ratio is often used in financing, as when an individual or small business is applying for a loan. This form of DE essentially measures the dollar amount of debt an individual has for each dollar of equity they have. DE is very important to a lender when considering a candidate for a loan, as it can greatly contribute to the lender’s confidence (or lack thereof) in the candidate’s financial stability.

The debt ratio is shown in decimal format because it calculates total liabilities as a percentage of total assets. As with many solvency ratios, a lower ratios is more favorable than a higher ratio.

In the short run, a firm can make an economic profit. However, if there is economic profit, other firms will want to enter the market. If the market has no barriers to entry, new firms will enter, increase the supply of the commodity, and decrease the price. This decrease in price leads to a decrease in the firm’s revenue, so in the long-run, economic profit is zero. An economic profit of zero is also known as a normal profit. Despite earning an economic profit of zero, the firm may still be earning a positive accounting profit.

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