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Home Profit Definition of Profit


Definition of Profit:


Profit is a basic concept in market economy. Profit acts as an incentive mechanism for business investment. Higher profits provide incentives for business growth. Profit also acts as an automatic signal for the allocation and reallocation of scarce resources. Profit which is the hub of all economic activities has no precise definition of its own. In fact it is the most controversial topic of economic theory. To get an accurate idea of profit, it is necessary to first distinguish gross profit from net profit.


Difference Between Gross Profit and Net Profit:


Definition of Gross Profit:


Gross profit is the surplus which accrues to a firm when it deducts its total costs in producing products from its total income received from the sale of goods. In producing goods, a firm incurs explicit costs and implicit costs. In the ordinary language, the term profit is used in the sense of gross profit. The main elements of gross profit of a firm are as under:


Elements and Example of Gross Profit:


(i) Explicit costs: A firm's explicit costs are the actual cash payments it makes to those who provide resources. For example, rent is paid on land hired, wages are paid to the employees, interest is paid on capita!. In addition to this, a firm also pays insurance premium, and taxes and sets aside depreciation charges.


(ii) Implicit costs: Implicit costs are the opportunity costs of using resources owned by the firm or provided by the firm's owners. To the firm, the implicit costs are the money payments that self employed resources could have earned in their best alternative uses.


For example, you are working as a manager in a shoe factory and getting $30000 per month as salary. Now you establish your own firm. You must include your salary of $30000, while calculating cost. Implicit costs include (a) rent on entrepreneur's own land (b) interest on his own capital (c) wage of the entrepreneur which he could earn in alternative occupation.


Formula For Gross Profit:


Gross Profit = Total Revenue - Total Explicit Costs


Definition of Net Profit:


Net profit is the profit which accrues to an entrepreneur for his functions as an entrepreneur. These functions include risk bearing ability, innovating spirit, bargaining ability etc. Net profit is the reward of an entrepreneur for (i) organizing a business and undertaking risk (ii) his bargaining ability with the customers (iii) adopting new techniques of production (iv) monopoly gains if any (v) windfall gains due to sudden rise in the prices of goods.


Formula For Net Profit:


Net Profit = Total Revenue - (Total Explicit Costs + Total Implicit Costs)

Relevant Articles:

Definition of Profit
Difference Between Accounting Profit and Economic Profit
Theories of Profit
Should Profit Be Controlled

Principles and Theories of Micro Economics
Definition and Explanation of Economics
Theory of Consumer Behavior
Indifference Curve Analysis of Consumer's Equilibrium
Theory of Demand
Theory of Supply
Elasticity of Demand
Elasticity of Supply
Equilibrium of Demand and Supply
Economic Resources
Scale of Production
Laws of Returns
Production Function
Cost Analysis
Various Revenue Concepts
Price and output Determination Under Perfect Competition
Price and Output Determination Under Monopoly
Price and Output Determination Under Monopolistic/Imperfect Competition
Theory of Factor Pricing OR Theory of Distribution
Principles and Theories of Macro Economics
National Income and Its Measurement
Principles of Public Finance
Public Revenue and Taxation
National Debt and Income Determination
Fiscal Policy
Determinants of the Level of National Income and Employment
Determination of National Income
Theories of Employment
Theory of International Trade
Balance of Payments
Commercial Policy
Development and Planning Economics
Introduction to Development Economics
Features of Developing Countries
Economic Development and Economic Growth
Theories of Under Development
Theories of Economic Growth
Agriculture and Economic Development
Monetary Economics and Public Finance

History of Money

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