Profit

Profit is the reward to an entrepreneur for the functions he renders in productive activity. Out of the income earned by the farm, land owner is paid rent, labourer is paid wage and capitalist is paid interest. Whatever is left over goes to the entrepreneur as profit. Hence, profit is also called a residual income.

Net profit and Gross profit:

Gross profit is the total amount of money that the entrepreneur gets. Gross profit consists of the following components:

(1) rent for land that belongs to the entrepreneur,

(2) interest for capital owned by the entrepreneur,

(3) wage for managerial functions performed by the entrepreneur,

(4) monopoly or semi-monopoly gains (if the entrepreneur happens to be a monopolist he may get some profit),

(5) wind-fall gains (these are due to favourable circumstances or pure luck),

(6) money earned through the introduction of new innovations and

(7) money earned by bearing risks and uncertainties.

The net profit or the pure profit is the reward for the following three functions performed by the entrepreneur:

(1) reward for organization and coordination of various factors of production.

(2) reward for bearing risk and uncertainties and

 (3) reward for introducing new innovations in the business.