Meaning of Profit in Economics

Profit means different things to different people. The word ‘profit’ has different meanings to business, accountants, tax collectors workers and economists. In a general sense, profit is regarded as income of the equity shareholders. Similarly wages getting accumulated of a labor, rent accruing to the owners of any land or building and interest getting due to the investors capital of a business, are a kind of profit for labors, land owners and investors. To an accountant, profit means the excess of revenue over all paid out costs including both manufacturing and overhead expenses. It is much similar to net profit. In economics, profit is called pure profit, which may be defined as a residual left after all contractual costs have been met, including the transfer costs of management insurable risks, depreciation and payment to shareholders, sufficient to maintain investment at its current level. Therefore pure profit can be calculated with the help of following formula.   

Pure Profit = Total Revenue – (explicit costs + implicit costs)

Economic or pure profit also makes provision for insurable risks, depreciation and necessary minimum payments to shareholders to prevent them from withdrawing their capital. Pure profit is considered to be a short-term phenomenon. It does not exist in the long run, especially under perfectly conditions. Because of this, they may either be positive or negative for a single firm in a single year.

The concept of economic profit differs from that of accounting profit. Economic profit takes into account also the implicit or imputed costs. The implicit cost is also called opportunity cost. If an entrepreneur uses his labor in his own business, he fore-goes his income or salary, which he might have earned by working as a manager in another firm. Similarly, by using assets like and building and his own business, he fore-goes the market rent, which might have earned otherwise. All these foregone incomes such as interest, salary and rent, are called opportunity costs or transfer costs. Accounting profit does not consider the opportunity cost.

Bookmark the permalink.