Profit

Meaning It is the difference between total revenue (value of output) and total cost (value of inputs). Profit is a residual income,so its size varies. Profit may be zero or even negative. Under condition of imperfect competition, profit always tends to be more than the marginal cost of the firm.

Kinds of profit Earnings of management- Some consider earnings of management also as profit. Monopoly profits- An entrepreneur earns monopoly profits because he has certain degree of monopoly power in the product market. Windfall profits- These profits arise due to changes in the general price level in the market. Profit as a functional reward- Wages are a reward for functions performed by labour; interest is income from allowing others to use one’s money.

Different Notions,Sources and theories of profits 1. Profits as an “Accounting Surplus” Profits as a cost Profit as Rent of Ability Profit as a Dynamic Surplus Profit as reward for Risk-bearing or Risk-avoiding Profit as the reward for uncertainity-bearing Profit as reward for Innovation Profit as Monopoly Return

Profit Management and Control Government Interference Threat of entry of new firm Image building or tarnishing of the image of the firm The firm would like to have a balance liquidity and profitability The firm will have to preserve good employer-employee relationship The business enterprise has also to maintain proper balance sheet ratios

Role of profit It helps in optimal allocation of resources It is a measure of operational efficiency of the firm and reflects management performance-operational as well as financial. It reflects security and solvency by providing internal finance(retained earnings) for financing expansion,innovation and replacement programmes. It covers up the cost of obsolescence, replacement, risk,as well as uncertainity and provides finance for discharging social responsibilities.

Contd. The level and rate of profit serves as the basis for financial decision analysis in project evaluation and appraisal. It indicates the areas of planning,control and management. Profit index facilitates inter-firm, inter-industry and product line comparisons.