MEANING AND BASIC CONCEPTS OF PROFIT

Ø  MEANING AND CONCEPTS OF  PROFIT 1

Ø  MICRO ECONOMICS/BUSINESS ECONOMICS 2

Ø  SHASHI AGGARWAL ECONOMICS AND LAW CLASSES

Ø  CONCEPT OF PROFIT

• MEANING OF PROFIT

1. PROFIT IS A FACTOR INCOME ATTRIBUTED TO THE ENTREPRENEUR
2. AS THE ENTREPRENEUR SETS UP THE BUSINESS AND BEARS THE UNCERTAINTY OR RISK
3. THE INCOME WHICH HE GETS IS CALLED PROFIT

• MEANING

1. PROFIT AS A SURPLUS INCOME: PROFIT MAY BE DEFINED AS THE DIFFERENCE BETWEEN FIRM’S TOTAL REVENUE AND ITS TOTAL COST. IT IS POSITIVE RESIDUE. HE MAKES FURNITURE AT THE COST OF 8,000 AND SELLS IT AT 10,000 AND THEN PROFIT=10,000-8000=20000
2. PROFIT AS A REWARD FOR ENTREPRENEURSHIP SERVICES:-PROFIT MAY BE CONSIDERED A REWARD FOR MAKING

1. INNOVATIONS
2. A REWARD FOR BEARING RISK
3. MARKET IMPERFECTIONS

• CONCEPT OF PROFIT
• GROSS PROFIT =TR-EXPLICIT COST
• EXPLICIT COSTS ARE OUT OF POCKET COSTS WHICH ARE PAID.
• TOTAL REVENUE IS 20,000
• TOTAL EXPENSES PAID IN THE FORM OF RENT,WAGES,INTEREST IS 10,000 THEN GROSS PROFIT =10,000
• CONSTITUENT OF GROSS PROFIT
• CONSTITUENTS OF GROSS PROFIT:-

1. INTEREST ON ENTREPRENEUR'S OWN CAPITAL
2. WAGES OF ENTREPRENEUR’S LABOUR
3. RENT ON ENTREPRENEUR'S LAND
4. DEPRECIATION CHARGES
5. INSURANCE CHARGES
6. ECONOMIC OR PURE PROFIT

• CONCEPT OF NET PROFIT
• NET PROFIT = GROSS PROFIT –IMPLICIT COSTS
• ECONOMIC PROFIT= TOTAL REVENUE-TOTAL COST
• TOTAL COST=EXPLICIT COST + IMPLICIT COST
• IMPLICIT COST IS THE COST OF SELF SUPPLIED FACTORS
• RENT ON ENTREPRENEUR’S OWN LAND+INTEREST ON OWN CAPITAL + WAGES ON  ENTRPRENEUR’S OWN LABOUR
• ELEMENTS OF PURE PROFIT/ECONOMIC RENT
• ELEMENTS OF NET PROFIT:-

1. REWARD FOR TAKING RISK : RISK OF UNCERTAINTY OF MARKET CONDITION,COMPETTIONS ETC
2. REWARD FOR BEARING UNCERTAINTY:UNINSURABLE RISK
3. REWARD FOR ABILITY
4. MONOPOLY GAINS
5. WINDFALL GAINS
6. REWARD FOR INNOVATION

• DIFFERENCE BETWEEN GROSS PROFIT AND NET PROFIT
• GROSS PROFIT

1. WIDER TERM AND INCLUDES NET PROFIT
2. INCLUDES IMPLICIT COSTS
3. NOT POSSIBLE TO KNOW THE REAL PROFIT OR REAL LOSS
4. NET PROFIT IS NOT EARNED UNDER PERFECT COMPETITION RATHER A PART OF GROSS PROFIT IS INCLUDED
5. NET PROFIT IS NOT EARNED UNDER CERTAIN CONDITIONS IN THE LONG RUN ONLY A PART OF THE GROSS PROFIT IS OBTAINED

• NET PROFIT

1. NARROW TERM
2. NET PROFIT IS CALCULATED BY DEDUCTING IMPLICIT COSTS FROM GROSS PROFIT

• PROFIT AND PRICE

1. PAYMENTS MADE FOR THE SERVICES OF THE ENTREPRENEUR IS CALLED PROFIT
2. PROFIT IS FACTOR PRICE
3. REWARD GIVEN IN THE FORM OF WAGES,INTEREST,RENT IS INCLUDED IN THE PRICE OF THE COMMODITY

• IS PROFIT A PART OF PRICE?

1. NORMAL PROFIT: THE MINIMUM AMOUNT NECESSARY TO KEEP THE ENTREPRENEUR IN A GIVEN BUSINESS IS CALLED NORMAL PROFIT. BEING PART OF THE COST NORMAL PROFIT INFLUENCES TH COST
2. SUPER NORMAL PROFIT: IT DOES NOT ENTER INTO PRICE. IT IS NOT INCLUDED IN THE PRICE