Saturday, August 11, 2012

Class XI, Principles of Economics, "Profit, Pure or Net Profit, Gross Profit"


In the ordinary language the term profit stands for the excess of income/money earned over costs. But in economics profit is defined as a reward for the entrepreneur for performing the function the function of final decision-making and risk bearing.
Profit differs from return on other factors in three important respects.
1. Profit is a residual income and not contractual or certain as in the case of other factors,
2. There are much greater fluctuations in profit than in the reward of other factors and,
3. Profit may be negative i.e. it may be a loss.

Pure or Net Profit

Pure or net profit is the amount that accrues to the entrepreneur for assuming their risk inseparable from business under the system of production in anticipation of demand. The essential function of the entrepreneur is considered to be something, which only he can perform. This something cannot be the task of managers, or the people, which are hired. Thus the entrepreneur receives profit as a reward for assuming the final responsibility, a responsibility that cannot be shifted on the shoulders of any one else.

Gross Profit

Gross profit stands for the total earnings of the entrepreneur, not necessarily of the entrepreneurial functions only. Some thing else can also be included in this profit. Apart from the net profit, the following are the main constituents of the gross profit.
1. Interest on entrepreneur’s own capital.
2. Rent of land owned by the entrepreneur.
3. Entrepreneur’s wages of management.
4. Gain as superior bargaining.
    Monopoly gains.

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