Question

What is profit? There is accounting profit discussed in the textbook:

profit = total revenues – explicit costs

Let me relate profit to the factors of production. The three factors of production according to the textbook are land, labor, and capital. Let me add a fourth factor found in many economics textbooks: a return to the entrepreneur! (Entrepreneurs provide two services to society: organize resources and assume risk.)

So how does a firm or entrepreneur maximize its profits? The answer is simple: provide society what it wants. (Note: this may be different from what society needs.)

Note: Given this perspective, profit is something inherently good, something to be maximized, not feared.

Let’s refine our understanding of this concept. Normal profit is that return necessary to attract and maintain entrepreneurial participation in some economic activity.

Economic rent is return greater than normal profit.

Comment.

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Answer 1

Solution:

Profit is the cost of enterpreneurship, In simple words the efforts put by the entrepreneur to put all factors of input together to form finished goods, apart from this entrepreneur also took risk to produce that particular good and to sell that good in the market, therefore profit earned by entrepreneur is the reward of that risk as well.

So, It is true to say profit can be maximize by fulfiling the wants of the society, but it is totally differ from needs of the people as wants can be created by the way of advertisements, Hence society wants are to be fulfilled to earned maximum profit by the entrepreneur.

Next is the concept of Economic rent, it is return greater than normal profit because Economic rent also includes, monopoly of the producer in the market, that means the goods produce by the producer is extreamly demanded by the society and for that producer can charge premium price for their product.