Nature of Profits
Profit is the reward of the entrepreneur, rather of the entrepreneurial functions. Profit differs from the return on other factors in three important respects: (a) Profit is a residual income and not contractual or certain income and not contractual or certain income as in the case of other factors. (b) There are much greater fluctuations in profits than in the rewards of the other factors. (c) Profits may be negative, whereas rent, wages and interest must always be positive. In the ordinary speech, people understand by the term ‘profit’ all excess of income over costs and this includes the earnings of self-used factors entrepreneur’s own land, capital and his own labour work called respectively implicit rent, implicit interest and implicit wage. But in economics, profit is regarded as a reward for the entrepreneurial functions of final decision-making and ultimate uncertainty bearing.
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