Class XI, Principles of Economics, "Constituents of Gross Profit"

Constituents of Gross Profit

The main constituents of the gross profit are as follows:

1. Reward for the Factors Supplied by the Entrepreneur Himself

The entrepreneur may have borrowed capital from other sources for investing in the business, he may be the owner of the business premises and perhaps he may also be working as a manager in the business concern. Besides selling him self as a entrepreneur he would have earned interest on his capital, rent of his land or salary for his responsibilities as a manager. But when he becomes an entrepreneur, he would lost all these incomes. Thus profit is a reward for him for loosing such options of income.

2. Entrepreneur’s wages of Management

The wages of management are the return of the work done by the entrepreneur as a manager an could have been done on a salary basis by him for another firm. This is also an important part of gross profit.

3. Gains as Superior Bargainer

Certain gains accrue to the entrepreneur when he bargains with the labours, capitalists, landlord, suppliers of raw material and consumers. These gains are the resultant of his superior skills in bargaining. They form a part of the gross profit.

4. Monopoly Gains

These gains are due to imperfect competition, which enables the entrepreneur to charge higher prices or to pay reward to the factors of production hired by him. The monopoly gains increase his income and becomes a constituent of gross profit.

5. Reward of the Entrepreneur as a Risk Taker

According to the definition of an entrepreneur the function of risk taking must be perform by the entrepreneur him self. Apart from certain risks, which are insurable, the risks that cannot be insured and are necessary to bear, gives entrepreneur the reward of profit