Concept
Profit (economics)
Overview
In economics, profit is the difference between revenue that an economic entity has received from its outputs and total costs of its inputs, also known as "surplus value". It is equal to total revenue minus total cost, including both explicit and implicit costs.
It is different from accounting profit, which only relates to the explicit costs that appear on a firm's financial statements. An accountant measures the firm's accounting profit as the firm's total revenue minus only the firm's explicit costs. An economist includes all costs, both explicit and implicit costs, when analyzing a firm. Therefore, economic profit is smaller than accounting profit.
Normal profit is often viewed in conjunction with economic profit. Normal profits in business refer to a situation where a company generates revenue that is equal to the total costs incurred in its operation, thus allowing it to remain operational in a competitive industry. It is the minimum profit level that a company can achieve to justify its continued operation in the market where there is competition. In order to determine if a company has achieved normal profit, they first have to calculate their economic profit. If the company's total revenue is equal to its total costs, then its economic profit is equal to zero and the company is in a state of normal profit. Normal profit occurs when resources are being used in the most efficient way at the highest and best use. Normal profit and economic profit are economic considerations while accounting profit refers to the profit a company reports on its financial statements each period.
Economic profits arise in markets which are non-competitive and have significant barriers to entry, i.e. monopolies and oligopolies. The inefficiencies and lack of competition in these markets foster an environment where firms can set prices or quantities instead of being price-takers, which is what occurs in a perfectly competitive market.
In a perfectly competitive market when long-run economic equilibrium is reached, economic profit would become non-existent, because there is no incentive for firms either to enter or to leave the industry.
Overview adapted from Wikipedia (CC BY-SA 4.0; see the article history for authors).
In the original texts
Passages from public-domain books where Profit (economics) is discussed.
It is this surplus only which is neat or clear profit. What is called gross profit, comprehends frequently not only this surplus, but what is retained for compensating such extraordinary losses. The interest which the borrower can afford to pay is in proportion to the clear profit only.
Adam Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations
names the idea; a chapter is titled for it; states what it is; opens on it
The revenue or profit arising from stock naturally divides itself into two parts; that which pays the interest, and which belongs to the owner of the stock; and that surplus part which is over and above what is necessary for paying the interest. This latter part of profit is evidently a subject not taxable directly. It is the compensation, and, in most cases, it is no more than a very moderate compensation for the…
Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations
names the idea; a chapter is titled for it; states what it is; opens on it
But to infer from this that it is regulated by entirely the same principles as other wages, would be to push the analogy too far. It is wages, but wages paid by a commission upon the capital employed. If the general rate of profit is 10 per cent, and the rate of interest 5 per cent, the wages of superintendance will be 5 per cent; and though one borrower employ a capital of 100,000_l_., another no more than 100_l_…
John Stuart Mill, Essays on some unsettled Questions of Political Economy
names the idea; a chapter is titled for it; states what it is; opens on it
A line of division may be passed through the returns in all these branches of the industry, separating what is wages from what is profit. Then it can be easily imagined that all the returns on one side, representing profits, go to capitalists, no matter whether they are thousands in number, or only one capitalist typifying the rest, or a single corporation acting for many small capitalists. § 5. The Rate of Profit…
John Stuart Mill, Principles of Political Economy
names the idea; a chapter is titled for it; states what it is
For example:-- "The revenue derived from labor is called wages; that derived from stock by the person who manages or employs it is called profit. The revenue which proceeds from land is called rent and belongs altogether to the landlord. The revenue of the farmer is derived partly from his labor and partly from his stock....
Friedrich Engels, Landmarks of Scientific Socialism
names the idea; states what it is; opens on it
Philosophers who discussed Profit (economics)
Related ideas
Opposing perspectives
Place in the tradition
Part of Communism.