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Encyclopedia > Profit

Profit, from Latin meaning "to make progress", is defined in two different ways. Pure economic profit is the increase in wealth that an investor has from making an investment, taking into consideration all costs associated with that investment including the opportunity cost of capital. Accounting profit is the difference between retail sales price and the costs of manufacture. A key difficulty in measuring either definition of profit is in defining costs. Accounting profit may be positive even in competitive equilibrium when pure economic profits are zero. Profit was a short-lived television series on the Fox Broadcasting Company that grew to have a large cult following. ... In economics, opportunity cost, or economic cost, is the cost of something in terms of an opportunity forgone (and the benefits which could be received from that opportunity), or the most valuable forgone alternative (or highest-valued option forgone), i. ... In economics and business, the price is the assigned numerical monetary value of a good, service or asset. ... In economics, business, and accounting, a cost is the value of inputs that have been used up to produce something, and hence are not available for use anymore. ... Competitive market equilibrium is the traditional concept of economic equilibrium, appropriate for the analysis of commodity markets with flexible prices and many traders, and serving as the benchmark of efficiency in economic analysis. ...


Accounting profits should include economic profits, which are also called economic rents. For instance, a monopoly can have very high economics profits, and those profits might include a rent on some natural resource that firm owns, where that resource cannot be easily duplicated by other firms. In economic theory, economic rent is a payment to a factor of production or input in excess of that which is needed to keep it employed in its current use. ... A monopoly (from the Greek language monos, one + polein, to sell) is defined as a persistent market situation where there is only one provider of a product or service, in other words a firm that has no competitors in its industry. ...

Contents

Economic definitions of profit

Note: these definitions are different from those used by accountants


In economics, a firm is said to be making an economic profit when its revenue exceeds the total (opportunity) cost of its inputs. It is said to be making an accounting profit if its revenues exceed the accounting cost the firm "pays" for those inputs. Face-to-face trading interactions on the New York Stock Exchange trading floor. ... Revenue is a U.S. business term for the amount of money that a company earns from its activities in a given period, mostly from sales of products and/or services to customers. ...


In a single-goods case, a positive economic profit happens when the firm's average cost is less than the price of the product or service at the profit-maximizing output. The economic profit is equal to the quantity output multiplied by the difference between the average cost and the price. In economics, profit maximization is the process by which a firm determines the price and output level that returns the greatest profit. ...


(In circumstances of perfect competition, average cost = marginal cost at the profit-maximizing position) Perfect competition is an economic model that describes a hypothetical market form in which no producer or consumer has the market power to influence prices. ...


All enterprises can be stated in financial capital of the owners of the enterprise. The economic profit may include an element in recognition of the risks that an investor takes. It is often uncertain, because of incomplete information, whether an enterprise will succeed or not. In these cases, economists treat returns to risk as part of the profit, as it is also an element of the cost of capital. In brief, financial capital is money used by entreprenuers and businesses to buy what they need to make their products (or provide their services). ... Complete information is a term used in economics and game theory to describe a economic situation or game in which knowledge about other market participants or players is available to all participants and is instantaneously updated as new information arises. ...


Economic profit does not occur in perfect competition in long run equilibrium. Once risk is accounted for, long-lasting economic profit is thus viewed as an inefficiency caused by monopolies or some form of market failure. Perfect competition is an economic model that describes a hypothetical market form in which no producer or consumer has the market power to influence prices. ... The term inefficiency has several meanings depending on the context in which its used: Economic inefficiency refers to a situation where we could be doing a better job, i. ... This article is about economic monopoly. ... This article or section does not adequately cite its references or sources. ...


Positive economic profit is sometimes referred to as supernormal profit or as economic rents. In economic theory, economic rent is a payment to a factor of production or input in excess of that which is needed to keep it employed in its current use. ...


The social profit from a firm's activities is the normal profit plus or minus any externalities that occur in its activity. A polluting oil monopoly may report huge profits, but by doing relatively little for the economy and damaging the environment. It would exhibit high economic profit but low social profit. An externality occurs in economics when a decision (for example, to pollute the atmosphere) causes costs or benefits to individuals or groups other than the person making the decision. ...


Accounting definitions of profit

Note: these definitions are different from those used by economists


In the accounting sense of the term, net profit (before tax) is the sales of the firm less costs like as wages, rent, fuel, raw materials, interest on loans and depreciation. Costs such as depreciation and amortization tend to be ambiguous. Within US business, the preferred term for profit tends to be the more ambiguous income. Sales, or the activity of selling, forms an integral part of commercial activity. ... In economics, business, and accounting, a cost is the value of inputs that have been used up to produce something, and hence are not available for use anymore. ... Declining-balance depreciation of a $50,000 asset with $6,500 salvage value over 20 years. ... Income, generally defined, is the money that is received as a result of the normal business activities of an individual or a business. ...


Gross profit is profit before Selling, General and Administrative costs (SG&A), like depreciation and interest; it is the Sales less direct Cost of Goods (or services) Sold (COGS),


Net profit after tax is after the deduction of either corporate tax (for a company) or income tax (for an individual).


Operating profit is a measure of a company's earning power from ongoing operations, equal to earnings before the deduction of interest payments and income taxes.


To accountants, economic profit, or EP, is a single-period metric to determine the value created by a company in one period - usually a year. It is the net profit after tax less the equity charge, a risk-weighted cost of capital. This is almost identical to the economist's definition of economic profit.


There are commentators who see benefit in making adjustments to economic profit such as eliminating the effect of amortized goodwill or capitalizing expenditure on brand advertising to show its value over multiple accounting periods. The underlying concept was first introduced by Schmalenbach, but the commercial application of the concept of adjusted economic profit was by Stern Stewart & Co. which has trade-marked their adjusted economic profit as EVA or Economic Value Added. Economic Value Added (EVA) is an estimate of true economic profit after making corrective adjustments to GAAP accounting, including deducting the opportunity cost of equity capital. ...


Some economists define further types of profit:

Optimum Profit - This is the "right amount" of profit a business can achieve. In business, this figure takes account of marketing strategy, market position, and other methods of increasing returns above the competitive rate. Supernormal Profit, also referred to as abnormal profit or pure profit, is an economic term of profit exceeding the normal profit. ... Subnormal profit, an economic term of profit, occurs when profit fails to meet the level of normal profit. ... A monopoly (from the Greek language monos, one + polein, to sell) is defined as a persistent market situation where there is only one provider of a product or service, in other words a firm that has no competitors in its industry. ... Wikibooks has more about this subject: Marketing Look up marketing in Wiktionary, the free dictionary. ...


See also

Supply curve shift Consumer surplus or Consumers surplus (or in the plural Consumers surplus) is the economic gain accruing to a consumer (or consumers) when they engage in trade. ... Economic Value Added (EVA) is an estimate of true economic profit after making corrective adjustments to GAAP accounting, including deducting the opportunity cost of equity capital. ... In economics, an externality is a cost or benefit from an economic transaction that parties external to the transaction receive. ... Gross profit or sales profit or gross operating profit is the difference between revenue and the cost of making a product or providing a service, before deducting overheads, payroll, taxation, and interest payments. ... Income, generally defined, is the money that is received as a result of the normal business activities of an individual or a business. ... Net profit is an accounting term which is commonly used in business. ... In economics, the profit rate refers to the relative profitability of an investment project or of a capitalist enterprise or for the capitalist economy as a whole. ... Superprofit (or surplus profit or extra surplus-value; in German: extra-Mehrwert), is a concept in Karl Marxs critique of political economy, subsequently elaborated by Lenin and other Marxist thinkers. ... The production of surplus value, from Karl Marxs Capital in Lithographs, by Hugo Gellert, 1934 Surplus value is a concept created by Karl Marx in his critique of political economy, where its ultimate source is claimed to be unpaid surplus labour performed by the worker for the capitalist, serving... The tendency of the rate of profit to fall, commonly abbreviated to TRPF, is a hypothesis in economics and political economy, generally accepted in the 19th century, but mostly rejected by mainstream economists today. ...

External links

Look up profit in Wiktionary, the free dictionary.
  • Measuring the Long-Run Profitability of the Firm, Salmi - Virtanen (1997)

  Results from FactBites:
 
Profit - Wikipedia, the free encyclopedia (867 words)
Under capitalism, profit is a positive return made on an investment by an individual or by business operations.
The social profit from a firm's activities is the normal profit plus or minus any externalities that occur in its activity.
The underlying concept was first introduced by Schmalenbach, but the commercial application of the concept of adjusted economic profit was by Stern Stewart and Co. which has trade-marked their adjusted economic profit as EVA or Economic Value Added.
Profit (real estate) - Wikipedia, the free encyclopedia (426 words)
A profit, in the law of real estate, is a nonpossessory interest in land similar to the better-known easement, which gives the holder the right to take natural resources such as petroleum, minerals, timber, and wild game from the land of another.
Like an easement, profits can be created expressly by an agreement between the property owner and the owner of the profit, or by prescription, where the owner of the profit has made "open and notorious" use of the land for a continuous and uninterrupted statutory period.
Profits can also be exclusive (guaranteeing the owner of the profit that no other person will be given the right to collect the specified resources on the land).
  More results at FactBites »

 
 

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