CONCEPT OF PROFIT

A business firm is an organization designed to make profits, and profits are the primary or key measure of its success. Social criteria of business performance usually relate to quality of good, rate of progress and behavior of price. But these are necessary elements of the whole profit system. Within that system, profits are the acid test of the individual firm’s performance.
The word “Profit” has different meanings to businessmen, accountants, tax collectors, workers, and economists, and it is often used in a loose, polemical sense that buries its real significance. In a general sense, ’Profit’ is regarded as income accruing to the equity holder’s, in the same sense as wage accrue to the labor, rent accrues to the owners of rental assets and the interest accrues to the money lenders. To a layman profit means all income that flow to the investors. To the business community business profit reefers to the revenue of the firm minus the explicit or accounting costs of the firm. Economist’s concept of profit is of “Pure profit” also called economic profit’. Economic profit is return over and above the opportunity cost or economic profit equals the revenue of the firm minus its explicit costs and implicit costs. Implicit costs refer to the inputs owned and used by the firm in its own production processes.
Specifically, implicit costs include the salary that the entrepreneur could earn form working for someone else in a similar capacity (say, as the manager of similar firm) and the return that the firm could earn form investing its capital and renting its land and other inputs to other firms. The inputs owned and used by the firm in the production processes are not free to the firm, even though the firm can use them without actual or explicit expenditures. Their implicit costs are what these same inputs could earn in their best alternative use outside the firm. Accordingly, economists include both explicit and Implicit costs in their definition of costs. That is, they include a normal return on owned resources as part of costs, so that economic profit is revenue minus explicit and implicit costs. While the concept of business profit may be useful for accounting and tax purpose, it is the concept of economic profit that must be used in order to reach correct-investment decisions.