How profits differ from rewards of other factors?


What the entrepreneur receives in return of his function Is called profit. Profit is difference between total revenue and total cost. This profit is called gross profit. Thus the excess of total revenue over and above explicit costs in a given period is called gross profits. These explicit costs are payments made to others for the capital equipment, materials, labour and other services.

The gross profit consists of (1) Pure profit which are rewarded for bearing risk and uncertainty (2) Wages of management and supervisory work done by the entrepreneur himself (3) normal return or interest on self-owned capital invested by him in his own business.

(4) The rent on self-owned land or factory building employed by him in his own business. Thus


Gross Profit = Total revenue – Total explicit cost.

Net Profit = Gross profit – Total implicit cost = Net Profit = Gross Profit – (Total implicit cost + total explicit cost)

Characteristic features of Profit:

(1) Residual Income: –


Profit is a residual income. The rest of the total revenue after distributing on three factors of production goes to the entrepreneur’s treasury for his special function. Thus it accrues to the entrepreneur after all types of payments have been made. Thus profit is a remaining income.

(2) Profit is non contractual Income: –

Profit is non contractual in nature. It is not contractual like wage and rent. Rent and wage must be paid to land and labour otherwise they cannot be available for production of output. Besides the wage and rent can be known before hand. The amount is known in advance.

But non-contractual income cannot be known in advance. No entrepreneur can be certain about the amount of profit before the final production and sale of output. The profit may be abnormal or normal depending upon the function, risk, uncertainly undertaken in the business.


(3) More fluctuations in profits: –

Profits very often fluctuate. The fluctuation of profit is more than other factors’ income i.e. rent, interest and wages. There are ups and downs in the level of profit.

(4) Profits can be Zero or Negative: –

Profits as the reward for entrepreneur’s functions is different from wage, rent and interest. Profit is a residual income, it can be zero or negative. If money after distributing the share of three factors of product, these may not be any residue. In such a case entrepreneurs get zero or negative profit. In other words he sustains loss, land, labour, capital earn positive income for their service? That is why wage rent and interest can not be zero.


(5) Abnormal profit is non-functional :-

Normal profit is a functional return. The entrepreneur gets normal profit because of his entrepreneurial function. So also other factors get functional income like wage, rent and interest. But abnormal profit is purely non functional. This profit arises because of risks and uncertainty chance and nature of mark Revenue over the normal profit. For abnormal profit nobody performs any function.

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