Profit and its types



Profit is a factor income that is enjoyed by an entrepreneur for taking risks and bearing uncertainties. Profit cannot be fixed in advance of the production. It is the residual amount left over after all the other factor incomes have been paid.

                  According to Henry Grayson, “Profit may be considered as a reward for innovations, a reward for accepting risks and uncertainties, and market imperfections.”

                   Profit is the residual income of the business after all the explicit and implicit wages,  costs, interest, rent have been paid. Implicit and explicit costs are those costs which occur in a company after a business transaction. Explicit costs are those costs that are recorded in business documents. They are also known as direct or accounting costs. Implicit costs are generally described as opportunity cost or the loss of an opportunity in a given time or situation. They are not really shown or recorded as cost. They are also known as implied costs or economic costs. The profit as a reward of the entrepreneur, the fourth factor of production, has the following features:-
  • Profit is earned by the entrepreneur as a reward for bearing risk and uncertainty.
  • Profit is a residual income and not a contractual income.
  • Profit may be positive, zero, or negative while all the other factors are always positive.
  • Profit is not a fixed income.
  • Profit fluctuates over a period of time.
                           Following are the two concepts of profit:-

1. Gross profit:-

The difference between the total revenue and total explicit cost is called gross profit. Gross profit is also called business profit. It is the residual part of the total revenue of a firm which is available to it when all the payments to the factors of production and all the obligations (liability) i.e. tax, depreciation, etc. have been met.

                            Gross profit = Total revenue – Explicit cost

The main components of gross profit are rent, wage, interest, depreciation, insurance charges, net profit, etc.

2. Net profit:-

Net profit can be defined as the difference between total revenue and the total cost including both explicit and implicit cost. It is also known as economic profit or pure profit or just profit. The net profit is the amount obtained by deducting implicit costs, depreciation charges, insurance charges from total revenue.

                        Net profit = TR-TC

The main components of net profit are the reward of risk-taking, reward for uncertainty-bearing, reward for ability, the reward for innovations, monopoly gains, and windfall gains.

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