profit

profit, in economics, return on capital, also called earnings, minus the costs of maintaining land, labor, and capital. It is also known as net income. Economic theorists generally make a distinction between two types of profit: normal profit, in which the entrepreneur receives the minimal necessary amount to encourage him to open or stay in a particular business; and excess profit, that which exceeds normal profit. With the development of the corporation, profits are apportioned between dividends to the holders of stock, and investment and depreciation funds in the control of hired managers. Interest paid on loans is usually considered as separate from profit, and is therefore deducted from the net profit. Profit is often considered to be the major incentive for production in a capitalist economy, although with the decline of the entrepreneur and the rise of a salaried managerial class, it has tended to become less personal and more institutional in character. See also profit sharing.

System by which employees are paid a share of the profits of the business enterprise in which they are employed, in keeping with a plan outlined in advance. These payments, which may vary according to salary or wage, are in addition to regular earnings. Profit-sharing plans were probably first developed in France in the early 19th century as worker incentives. Today such plans are used by businesses in Western Europe, the U.S., and parts of Latin America. Profit shares may be distributed on a current or deferred basis or through some combination of the two. Under current distribution, profits are paid out to employees immediately in the form of cash or company stock. In deferred-payment plans, profit shares may be paid into a trust fund from which employees can draw annuities in later years.

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In business usage, the excess of total revenue over total cost during a specific period of time. In economics, profit is the excess over the returns to capital, land, and labour. Since these resources are measured by their opportunity costs, economic profit can be negative. There are various sources of profit: an innovator who introduces a new production technique can earn entrepreneurial profits; changes in consumer tastes may bring some firms windfall profits; or a firm may restrict output to prevent prices from falling to the level of costs (monopoly profit).

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See Profit