Continuing this example, let's look at your economic profit. The difference is that the previous calculations didn't consider the income you gave up to start the business.

This is a real cost, one that it would be a mistake to ignore. Considering the forgone income of not taking that great job, your total cost would be $210,000 and your economic profit would be -$30,000. That is, you would have an economic loss for the first year. Unfortunately, the IRS wouldn't see it this way, but it's still the right way to look at it if we're to understand economic decision making. (One reason the IRS doesn't do this is that forgone opportunities are very difficult to observe and thus to prove. However, individuals are usually very aware of their own forgone opportunities.)

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