The Nature and Justification of Profit Making In Business.

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The Nature and Justification of Profit In Business– The term “Profit” is usually understood to mean the difference between the total sale-proceeds obtained by a businessman and his total expenses of production. It is the surplus that remains in the hands of the businessman after paying rent, wages, interest on borrowed capital etc.

The Nature and Justification of Profit

The Nature and Justification of Profit

In other words, we can say that Profit is the surplus of income over expenses of production according to a businessman. It is the amount left with him after he has made payments for all factor services used by him in the process of production.

But he may not have been careful in calculating all such expenses of production in the economic sense. Therefore, economists regard businessman’s Profit as “Gross Profit”.

Nature Of Profit:

With regard to nature of profit, it tends to be overestimated by an average person as businesses are often assumed to be making more profit than they actually make.

It  is easily assumed that any difference between the price of a good or service and its actual value is profit. Each time an average person feels short-changed in  the marketplace, he or she assumes that profit is soaring, when as a matter of fact this might be due to poor management or inefficient production or marketing.

Profit as we have seen is the reward for enterprise which goes to the entrepreneur- owner (individual or collective) of the firm. The reward for an entrepreneur cannot be determined in advance.

The reward for entrepreneur depends on his calculations regarding future business expectations. If these calculations prove correct, he may earn profit but if they prove wrong he has to bear losses also. The essential nature of Profits are as follows:

1. Profits Include Some Reward for Risk-Taking:

One of the important functions of an entrepreneur is to assume the risks of production. And for this risk-taking he gets some income.

2. Profits Include some Income which Businessmen Manage to Secure:

This is an important question as to how a businessman should secure Profits? In order to secure profits the businessmen either tries on account of their monopolistic control over supply or because of the existence of imperfect competition.

In real life, every businessman is often able to secure some monopolistic or semi-monopolistic control over the markets. Therefore, he is normally in a position to charge a slightly higher price than would be possible under perfect competition. He therefore, earns some extra income.

3. The Existence of Market Imperfections may Swell Profits in another Way:

Competition in the market for labour or for any other factor of production may be, and is often, imperfect, as a result of which an employer is in a position to exploit the situation and pay those factors an amount of remuneration which may be less than the values of their respective marginal net products. The difference will be his profits.

4. Profits often Contain Large Amounts of Fortuitous Gains:

These gains arise from mere good luck in certain enterprises. A sudden shift in demand may drive up prices, and so may bring large gains to the entrepreneurs.

Justification of Profit:

Issues pertaining to the nature and justification of profit are interrelated. A common conception of profit is that it is what is left of the gross receipt after all expenses have been paid in a business.

It is the surplus or gain from legitimate business activities. As such, it must be earned in a fair and reasonable way if it must be justified. Thus, any surplus gained through lottery winnings or fraud cannot be correctly construed as profit.

 However, when it comes to profit, construed as difference remaining after all costs have been deducted, questions are asked regarding what it is payment for, how it is actually earned, and why it is truly deserved.

In response to the above queries, it appears reasonable to define profit as what is left-over after all tangible, specifiable and quantifiable costs have been paid.  

Hence, it is considered to be the reward for some intangible factors that are crucial to business. These would include risk, entrepreneurial creativity, initiative and the deferment of the use of one’s resources.

In addition to the above, profit may possibly be justified on the ground that the desire for profit is a manifestation of a universal desire of all humans (investors, workers, suppliers, consumers) to acquire more than one already has.  

This argument assumes that if the drive for profit is a universal and innate human attribute, it is beyond ethical scrutiny and moral criticism.

However, this line of thought ignores the fact that morality in ordinary life and also in business requires that innate drives are either suppressed or transcended for people to act in morally acceptable ways.

Consequently, the attempt to justify profit on the basis of the fact that the desire for it is innate and universal to all humans fails to provide any  cogent justification for profit.

Some businesses might want to justify their profit by saying that the fact that they are recording profit is proof that profit is justified and also indicative of the integrity, utility and moral goodness of their business. 

Another approach that may be adopted in the quest to provide justification for  profit is to make a distinction between the goal of the economic system, which is primarily to enhance the economy as well as the overall wellbeing of all stakeholders in an economy, and the goal of business which is generally construed as maximising profit for the owners of business.

The goal of maximising profit is considered to be justified if it is consistent with and enhances the attainment of the economic and overall well being of all in society.

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