A product will be produced only if the total revenue is large

enough to pay wages , interest,rent and a normal profit to the

entrepreneur .
If the total revenue exceeds all these economic costs, the rest
goes to the entrepreneur as an added reward. This return is
called economic profit or pure profit
Economic profit is above the normal profit
Economic profit is what attracts other producers to a
particular industry.

Profits are the difference between revenues
and costs. In a trade transaction, profit is the
difference between the price at which you
sell a good and the price at which you bought
it. Running a business, net profit is what is
left out of turn-over after paying suppliers,
workers, financing institution, and the state.

Consider the case of a competitive market where
many firms sell basically the same product at the
same price. If they had the same technology and
faced the same input prices (e.g. wages), they
would enjoy similar profit levels. Let's assume
that one specialized supplier introduce a new
machine that is better than the state-of-art, say
a faster machine. The suppler sells it to one of
the firms on the market. This will result in lower
costs per unit of output, thus higher profits.
These profits are used, retrospectively, to pay
for the investment in the new machine but after
the pay-back period they can be distributed to
firm's owners.

Consider a market with product differentiation, as this. An R&D
investment over the years leads to an improvement of one product
features and the management decides to substitute this new model to
the existing one. Let's imagine for simplicity's sake that costs of product
are the same as the previous version.
Three main effects will increase sales:
1. CONSUMERS who did not buy the good because it did not satisfied
their minimum requirements on this feature can now buy, to the extend
the improvement is sufficient at their eyes;
2. consumers who decides by a "top-quality" rule and
positively value the feature could switch from their current provider, to
the extend the overall quality of the new good becomes superior;
3. consumers who decides by a "value-for-money"
rule could switch from their current provider, to the extend the price /
quality relationships of the new good becomes more convenient.
At the same time, the price of this new version could be set higher than
before, so that sales would be braken, unit profits boosted. Overall
profits would soar.

Maximising profits is said to be the objective of all firms. Indeed, it's not
always easy for the management to find out which are the right decisions
that would maximise them. For instance, short-run profits can be easily
pumped up by avoiding maintenance, discretionary costs, investments,
that however are necessary of on-going competitiveness, as you can
experiment with this free business game.
Moreover, what maximises the "overall profits" is not necessary what
allows to attain the maximum of "profitability", i.e. the percentage of
profits to turn-over, as you can better understand by using this model of
monopoly and comparing two policies: (i) extremely high prices (= high
profitability), (ii) a price set from a mark-up of 15% on costs.
In reality, firms do have profits targets, and sometimes they pay
managers for reaching them, but the goals of firms are broader than
profits alone.
Proceeding with other determinants of profits, rising prices of
competitors, better sales conditions and skills, a higher overallprice
level allow for higher prices of the considered firm's products, thus
increase nominal profits to the extent that costs are inelastic, i.e. they
rise less than proportionally to revenues.

Is a component of (implicit) costs and not a
component of business profit at all. It
represents the opportunity cost , as the time
that the owner spends running the firm could
be spent on running another firm . The
enterprise component of normal profit is
thus the profit that a business owner
considers necessary to make running the
business worth his while it is comparable to
the next best amount the entrepreneur could
earn doing another job.
Economic profit does not occur in perfect
competition in long run equilibrium; if it did, there would
be an incentive for new firms to enter the industry, aided
by a lack of barriers to entry until there was no longer any
economic profit.
As new firms enter the industry, they increase the supply
of the product available in the market, and these new
firms are forced to charge a lower price to entice
consumers to buy the additional supply these new firms
are supplying as the firms all compete for
customers Incumbent firms within the industry face losing
their existing customers to the new firms entering the
industry, and are therefore forced to lower their prices to
match the lower prices set by the new firms.
Only in the short
run can a firm in a
perfectly
competitive
market make an
economic profit.
Economic profit is, however, much more
prevalent in uncompetitive markets such as in a
perfect monopoly or oligopoly situation. In these
scenarios, individual firms have some element of
market power: Though monopolists are
constrained by consumer demand, they are not
price takers, but instead either price-setters or
quantity setters. This allows the firm to set a
price which is higher than that which would be
found in a similar but more competitive industry,
allowing them economic profit in both the long
and short run.
A monopolist can set a
price in excess of costs,
making an economic profit
(shaded). The above
Picture shows a Monopolist
(only 1 Firm in the
Industry/Market) that
obtains a(Monopoly)
Economic Profit. An
Oligopoly usually has
"Economic Profit" also, but
usually faces an
Industry/Market with
more than just 1 Firm
(they must share available
Demand at the Market
Price).
Often, governments will try to intervene in uncompetitive
markets to make them more competitive. Antitrust(US) or
competition (elsewhere) laws were created to prevent
powerful firms from using their economic power to
artificially create the barriers to entry they need to
protect their economic profits. This includes the use of
predatory pricing toward smaller competitors
].
For
example, in the United States, Microsoft Corporation was
initially convicted of breaking Anti-Trust Law and engaging
in anti-competitive behavior in order to form one such
barrier in United States v. Microsoft; after a successful
appeal on technical grounds, Microsoft agreed to a
settlement with the Department of Justice in which they
were faced with stringent oversight procedures and
explicit requirements designed to prevent this predatory
behavior. With lower barriers, new firms can enter the
market again, making the long run equilibrium much more
like that of a competitive industry, with no economic profit
for firms.
In a regulated
industry, the
government examines
firms' marginal cost
structure and allows
them to charge a
price that is no
greater than this
marginal cost. This
does not necessarily
ensure zero Economic
profit for the firm,
but eliminates a "Pure
Monopoly" Profit.
Gross profit equals sales revenue minus cost of goods sold(COGS), thus removing
only the part of expenses that can be traced directly to the production or purchase
of the goods. Gross profit still includes general (overhead) expenses like R&D, S&M,
G&A, also interest expense, taxes and extraordinary items.
Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) equals
sales revenue minus cost of goods sold and all expenses except for interest,
amortization, depreciation and taxes. It measures the cash earnings that can be
used to pay interest and repay the principal. Since the interest is paid before
income tax is calculated, the debtholder can ignore taxes.
Earnings Before Interest and Taxes(EBIT)/ Operating profit equals sales revenue
minus cost of goods sold and all expenses except for interest and taxes. This is the
surplus generated by operations. It is also known as Operating Profit Before Interest
and Taxes (OPBIT) or simply Profit Before Interest and Taxes (PBIT).
Earnings Before Taxes (EBT)/ Net Profit Before Tax equals sales revenue minus
cost of goods sold and all expenses except for taxes. It is also known as pre-tax book
income (PTBI), net operating income before taxes or simply pre-tax Income.
Earnings After Tax/ Net Profit After Tax equal sales revenue after deducting all
expenses, including taxes (unless some distinction about the treatment of
extraordinary expenses is made). In the US, the term Net Income is commonly
used. Income before extraordinary expensesrepresents the same but before
adjusting for extraordinary items.
Earnings After Tax/ Net Profit After Tax minus payable dividends becomes Retained
Earnings.





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