This article will guide you about how profits differ from factors income.
Profits differ in some important respect from other factor remunerations.
Profit as a return to the fourth factor, i.e., the entrepreneur, differs from other kinds of income such as rent, wages and interest in following respects:
1. Non-Contractual vs. Contractual Income:
Other kinds of income are contractual, i.e., rent, wages and interest are fixed by contracts. But profit is not a contractual income.
2. Residual vs. Non-Residual Income:
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Profit is a residual income. It is the residue left from the sale of goods after the deduction of all wages, interest and rent.
3. Nature of Profits and of Other Incomes:
Profit can be zero when there is neither a gain nor a loss; sometimes it can be even negative when there is a loss in business. But other incomes are always positive.
4. Role of Risk:
Risk plays a very important part in the determination of profits; but it does not play such an important role in the determination of other incomes.
5. Fluctuating Nature of Profits:
Profit fluctuates very widely, sometimes very high and sometimes very low. It changes immediately with the change in prices. But rent, wages and interest do not fluctuate so widely, and respond very slowly to price-changes.
6. Wide Variation in Profits:
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The amount of profit varies widely from enterprise to enterprise within the same industry. But other incomes do not vary so much.
7. Uncertain Character of Profits:
Profit is highly uncertain, but other incomes are more or less certain. In fact, the most important point about profit is its unpredictable nature.
8. A Surplus Income:
Rent, wages and interest are parts of the cost of production. But, except normal profits, excess profits are not included in the cost; these represent a surplus above the cost.
In fact, profit can be looked upon as a reward earned by entrepreneurs who not only bear risk but also bring together other factors of production and combine them (i.e., coordinate their activities) in the correct proportion to produce a commodity. In owner-managed firms, part of the profit payment may be regarded as a payment for the owner’s managerial skills. So profit is a mixed income in this case.