Profit (economics)

A business gets money from selling things. This is called revenue. The business also has to pay for things it needs. These are called costs.

Profit is the money left over. It is the revenue minus the costs. Accountants and economists look at profit in different ways.

Some businesses have many rivals. This is called a competitive market. In these markets, prices stay low. New shops can join easily.

Other businesses have few rivals. One big shop might rule a market. This is called a monopoly. These shops can set higher prices.

Governments sometimes make rules for these big shops. They want to keep prices fair for everyone. This helps people buy what they need.

A business earns money by selling goods. This is called revenue. It also has costs.

Accountants look at explicit costs. These are costs you can see on papers. Economists look at all costs. They include implicit costs too. Because of this, economic profit is often smaller than accounting profit.

Some businesses make a normal profit. This means their revenue equals their total costs. This helps them stay in business. In a competitive market, many shops sell the same thing.

If one shop makes a big profit, new shops will join. This adds more goods to the market. More supply makes prices go down. Soon, economic profit disappears.

Other markets have very little competition. A monopoly is when only one firm sells a good. An oligopoly is when a few firms rule the market.

These firms can set high prices. They often have barriers to entry. These are rules or costs that stop new shops from joining. Governments may step in to keep prices fair.

They use laws to help consumers.

Profit is a very important idea in economics. It is the money left over after a business pays its costs. This extra money is also called surplus value.

An economist looks at two types of costs. These are explicit costs and implicit costs. Explicit costs are the direct payments a company makes. Implicit costs are other types of costs that are not always easy to see. Because economists count both, economic profit is usually smaller than accounting profit. Accountants only look at the explicit costs on financial statements.

Sometimes a company makes what is called a normal profit. This happens when total revenue equals total costs.

A normal profit is the minimum amount a company needs to stay in business. It means the company is using its resources in the best way possible. If economic profit is zero, the company is making a normal profit. This allows the business to keep working in a competitive market. It is a very important balance for any industry to reach.

In a perfectly competitive market, things change over time. At first, a company might make a large economic profit. This attracts new companies to join the market. These new firms increase the supply of goods. To win customers, they must offer lower prices.

As more firms join, the price keeps falling. Eventually, the economic profit disappears completely. This state is called a long-run equilibrium. At this point, there is no reason for new firms to enter.

Some markets do not have much competition at all. A monopoly is a market with only one firm. An oligopoly is a market with just a few large firms. These companies can set their own prices or quantities. They often use barriers to entry to stay in power. Examples of these barriers include patents or land rights.

These barriers make it hard for new businesses to start. This allows these firms to keep making economic profits for a long time.

Governments often step in to help consumers in these markets. They want to make sure prices do not get too high. Governments use competition laws to stop unfair behavior. For example, the United States once had a case involving Microsoft Corporation. The government used oversight to prevent unfair business practices. Sometimes, the government regulates a natural monopoly instead. They control the prices so the firm cannot charge too much. This helps keep the market fair for everyone.

In the field of economics, profit is defined as the surplus value left over after a firm accounts for its costs. It is the difference between the total revenue a business receives and the total cost of its inputs. While people often use the word profit generally, economists distinguish it from accounting profit. An accountant calculates profit by subtracting only explicit costs from total revenue. Explicit costs are the direct, visible payments found on financial statements.

An economist uses a much broader definition to analyze a firm. They subtract both explicit costs and implicit costs from total revenue. Implicit costs are not direct payments but represent the value of resources used. Because economists include these extra costs, economic profit is almost always smaller than accounting profit. This detailed view helps researchers understand the true cost of doing business. It provides a more complete picture of how resources are being used in an economy.

There is also a concept known as normal profit. This occurs when a company's total revenue is exactly equal to its total costs. In this specific state, the economic profit is equal to zero. Normal profit is considered the minimum level of income a company needs to stay operational. It signifies that resources are being used in the most efficient and highest way possible. In a competitive industry, reaching normal profit allows a company to continue its work without losing money.

Market structures determine how much economic profit a firm can actually keep. In a perfectly competitive market, economic profits are usually temporary. If a firm makes a high economic profit, it creates an incentive for new competitors to enter. These new firms increase the total supply of the product. To attract customers, they must offer lower prices.

As competition increases, prices fall until they reach the level of average total costs. Eventually, the market reaches a long-run equilibrium where economic profit disappears.

Some markets are uncompetitive, which allows for much higher profits. A monopoly exists when only one firm supplies a good with no close substitutes. An oligopoly is a market dominated by just a few large firms. These companies often possess market power, meaning they can act as price setters rather than price takers. They can set prices or quantities to maintain high economic profits.

This is much more common in markets where there are significant barriers to entry.

Barriers to entry are obstacles that prevent new firms from joining a market. Common examples include patents, land rights, and specific zoning laws. These barriers protect the market share of existing firms. In an oligopoly, firms might even collude to limit production and restrict supply. This keeps prices high and ensures a constant economic profit. Without these barriers, new competitors would quickly enter and drive the economic profit down to zero.

Because uncompetitive markets can lead to higher prices, governments often intervene. They use competition laws to prevent powerful firms from creating artificial barriers. For instance, the United States government took action against Microsoft Corporation for anti-competitive behavior. This oversight helps ensure that new firms can enter the market to compete. In other cases, like a natural monopoly, the government may allow one firm to exist but will regulate it.

Regulators examine costs to ensure the firm does not charge unfair prices. This balance helps protect consumers while allowing the industry to function.