Talk:Profit

From Wikipedia, the free encyclopedia
Business and economics Portal
This article is within the scope of the Business and Economics WikiProject.
Start rated as start-Class on the assessment scale
Top rated as top-importance on the assessment scale
This article is within the scope of the Economics WikiProject, an effort to create, expand, organize, and improve economics-related articles..
Start rated as start-Class on the assessment scale
High rated as High-importance on the importance scale

Contents

[edit] Producer surplus != Profit

Or at least that's what the professor in today's econ. class told us. Producer surplus = The area above the supply curve and below the set price. This is different from "Profit". --Buzoo 04:38, 2 March 2006 (UTC)

And what is the supply curve? For a single firm it is the marginal cost, the cost of producing a unit of output at a particular output level. The summation of all such curves for all firms in a market comprises the market supply curve. The area you speak of, between the supply curve and the market price, is the sum of the difference between marginal cost and price for each unit of output. Assuming continuity, it is the . Strictly talking, the producer surplus is not just profit, because fixed costs are not included in the marginal cost. Instead, the area represents the sum of profit and fixed costs. (More specifically, in the short run we say it is fixed costs and profit. In the long run one does not assume the existence of economic profit, so we say the surplus is economic rent.) Coleca 19:24, 10 March 2006 (UTC)
Buzoo is correct. Producer's surplus includes not only the profit of the firm, but the rents of the factor owners. The two are the same only in the special case in which the input supply curves are flat (and therefore factor owners are paid barely enough to bring their factors into use). I have edited the text to remove the false statement. Agemegos 06:42, 26 September 2006 (UTC)
This depends on how you parse Buzoo's comment. Please read what I wrote above. You will see I agree with your statement, and have no problem removing the producer surplus comment. Rather, I argue with Buzoo's assertion that producer surplus does not equal profit BECAUSE it is the "area above the supply curve and below the set price."Coleca 04:49, 27 September 2006 (UTC)

[edit] Calculations of Cost

I take issue with this:

Economic profit is calculated by π = (p x q) - (mc x q) - f where;

  • π = Profit
  • p = price per unit
  • q = quantity of units sold
  • mc = marginal cost
  • f = fixed costs

The reason is that marginal cost varies with respect to the quantity produced - marginal cost is the cost of the last good made, not all of them.

Instead, it would be correct to say that profit = revenue (price * quantity) - (average total cost * quantity), however this is seemingly obvious and loses the distinction between fixed costs and variable costs. I'll update it to include variable costs. Scott Ritchie 18:27, 1 Jun 2005 (UTC)

Many economics texts use mc rather than avc in this equation, not sure why, but i agree with you that avc is more accurate than mc. thanks Bluemoose 21:21, 1 Jun 2005 (UTC)

marginal cost is the change in total cost that is the sum of all costs. that is why marginal cost covers the fixed cost also in short run. gautambp@nrb.org.np —Preceding unsigned comment added by 202.70.76.3 (talk) 00:48, 25 December 2007 (UTC)

[edit] NPOV issues

This concerns my "messy edit" yesterday, which were reverted by Bluemoose. I take issues with "messy". I think I clarified, and fixed a major NPOV issue.

There really is a widely divergant pair of acceptable definitions, which can generally be described as capitalist and Marxist. The definition in the first paragraph is biased towards the capitalist version. The Marxist version comes later, and is muddled.

My version notes the controversy straight away, supplies a more accurate Marxist definition (the words "exploitation" and "class" are necessary), supplied links to other Wikipedia entries, and made other edits for clarity.

I desire my edit restored, and desire discussion and consensus on this matter.

--Bhuston 19:46, 18 January 2006 (UTC)

Ok, discussion is good, I described your edit as messy for 2 reasons, firstly because you introduced some broken formating and secondly because the introduction wasn't good, jumping straight in to the controversy is a bad way to describe something. I have re-worked it now, it is based on your edit, but it is hopefully more encyclopedic. I was tempted to describe the Marxist way as less common, as it patently is, but I wondered what you thought of that? Martin 20:22, 18 January 2006 (UTC)
Your change is acceptible. I would oppose "less common", because it is irrelevant. e.g., WRT scientific theories, the commonality of a belief is not correlated to its correctness (not to say this is science). Also, saying "more people believe A" may be likely to cause an arbitrary person to believe A, even though A may be incomplete, incorrect, or harmful, or simply not as good a description of the reality as some other belief. Thanks! Unless you or Bluemoose comment further, I consider this matter resolved. Peace, --Bhuston 22:49, 18 January 2006 (UTC)
Good to hear, p.s. I am Bluemoose, I just feel silly signing with such a dumb username. ;) Martin 23:09, 18 January 2006 (UTC)
Sorry, I made one last edit, forgot to add a summary. Just changed Exploitation#Marxian_theory to the correct Exploitation#Marxist_theory to match the heading. --Bhuston 03:06, 19 January 2006 (UTC)
I see there have been no comments in this section for a while, so I hope someone is reading :-) I take issue with the Marxian reference, as profit exists even in marxist economies. Let me explain:
  • Humans live in the here and now, and have finite time available. Whenever you are doing activity "A" (i.e. go to the mall), you have given up doing activity "B" (i.e. clean the gutters). You ultimately choose activity "A" over activity "B" because, in your eyes, activity "A" has more value than activity "B".
  • Because you have irrevocably given up one activity to do the other (at that moment), the cost of doing "A" is "B".
  • Your profit is "A" minus "B". Profit is a result of the nature of time, and cannot be abolished by political means. Therefore going into this whole capitalism vs. marxism thing is irrelevant.
Profit is simply the diference between the cost of doing something vs. the benefit of it. The article should concentrate on that alone. Dullfig 19:46, 20 November 2006 (UTC)

[edit] Profit vs. earning vs. revenue

I read this BBC article about Google.

It says: "Revenues are in line, but it was a big earnings miss". English is not my mother tongue, and even if it would have been, i'm not sure that i would understand that.

What is the difference between revenues and earnings? And profit, for that matter?--Amir E. Aharoni 06:13, 1 February 2006 (UTC)

I suspect the BBC article means accounting profit when it refers to earnings. Economists define profit a little differently from the way most people are accustomed, but I suspect you can read this profit article to get a sense for it. Revenue is the flow of money into the firm, say from advertising sales. I imagine they are counting several revenue sources. The earnings are the difference between the revenue and accounting costs of the firm. If I totally botched this, I expect someone will rectify my response. Coleca 00:56, 16 February 2006 (UTC)

[edit] Total rewrite needed!

I just read this article, which perhaps should be merged with Net income. Anyway, the introduction is quite astonishing, as "profit" definitely doesn't have two definitions. Profit is the net gain of a business, when all its costs have been deducted from its income/turnover, i.e. it's the difference between the price charged for a product or a service and the cost of creating it. Capitalism regards profit as something positive (it's the whole point of Capitalism), while Marxism regards it as exploitation, i.e. something bad. However, both sides define it the same (i.e. agree to what it is), but view it differently and consequently may use different words/explanations as to how it is achieved - just as people who are in favour of the death penalty probably will explain what an execution is differently from people who are against it, although both sides will definitely agree that execution means taking someone's life.
So, I think this article should start with the basic definition, i.e. that profit is the difference between price and cost. The Marxist view should definitely be included in the article, as the negative impact of profit it is one of the pillars of Socialism, but it should of course be presented as a criticism of profit, not as a different definition. Also, the article would greatly benefit from using straight English, instead of meaningless bullshit like "All enterprises constitute investments by their owners of capital. The return to owners' capital under competitive competition is the accounting profit and compensates the owner for not being able to make alternative use of their capital." Thomas Blomberg 11:58, 13 March 2006 (UTC)

Firstly, feel free to improve the article, secondly profit is defined differently by accountants and economists, I think this is the cause of the confusion. Martin 12:05, 13 March 2006 (UTC)
You are sort of right that profit is the net of revenue when costs are deducted. However, what these costs are and how they are handled can differ greatly. Most economists tend to refer to two sorts of profit so they can keep track of the economic profit, whose maximization notionally determines firm's decisions, and the accounting profit, which is what the firm reports but does not include the costs of missed opportunities. This allows economists to say such things as "firms in perfect competition earn zero economic profit in equilibrium" even when same firms may report an accounting profit to shareholders.
It is not generally true that profit is the difference between price and cost, though. Both terms must be more carefully defined. Hence the different definitions of profit. Marxists (and accountants) are likely to perceive the benefits and costs of a firm's operation differently than mainstream economists. Thus, it is possible, and likely, they will arrive not just at a different perspective of the phenomenon, but a different definition.Coleca 19:31, 13 March 2006 (UTC)
Yes, I know that there are a number of different types of profit (gross, net, economic, etc.) but they all are part of the basic definition, i.e. that profit is the difference between price/income and costs - just as the basic definition of a bicycle is a contraption consisting of two wheels, propelled forward by its rider without engine assistance. However, were you to ask bicycle manufacturers and - heaven forbid - bicycle theorists, you're likely to get 15-20 different definitions, which - when you boil them down - still end up saying basically the same thing to the average layman. The difference between the different kinds of profit is which costs that are included, but otherwise they're saying the same thing. None of these definitions claim that profit is something totally different. My main problem with the current article is that the layman who wonders "What does profit mean? Is that the same thing as all the money a company receives?" will be even more confused after having read the article. Every article in Wikipedia should, at least in the introduction, be written in such a way that someone with no prior knowledge of the subject gets a simple, straight explanation. Further down, the article may get into more details, for those interested in finding out more, but even there the language should be kept as simple as possible, for the benefit of the non-expert. Thomas Blomberg 01:51, 14 March 2006 (UTC)
Ok, I see your point. There should be some Platonic ideal of profit, some fundamental concept to which all the various defintions allude. I agree that the article as it stands is confusing (probably as a result of trying to convey a political message by choosing appropriate definitions.) I think the most general way of describing profit is net gain. However, there is a wide range of views about what constitutes gain or loss. Ideally, the introduction would explain that different views exist and that these differences are important to interpretation.Coleca 03:43, 14 March 2006 (UTC)

[edit] Major Addition: The Fallacy of Normal Profit

I have added several paras to clarify a basic problem in Marshallian (neoclassical economics). The key is that exchange involves two diferent people who incur two different costs of production of the same thing. The buyer is someone who would incur a much higher cost if he had to produce it himself (in many cases, he would fail to produce it, or the cost of would be prohibitively high). The buyer is however the producer of something which he is good at producing. He is able to offer a price higher than the marginal cost incurred by the seller, and yet lower than the marginal cost the buyer would incur if he had to produce it. The profit is possible for this divergence between the cost of production of the buyer and the seller. An allocation model cannot have two different people with two different cost functions for the same good, and hence cannot show profit based on differences in costs.

The extremely crude Marshallian type models are no good in dealing with complex problems. More sophisticated models are needed to deal with problems like different cost functions for the same good. Such models are available in Consistent Economics

Gani 17:14, 28 April 2006 (UTC)

Please cite some sources and improve the quality of the language to that of an encyclopedia, or it will probably end up getting removed. Martin 17:18, 28 April 2006 (UTC)

[edit] Average profit?

I hard somewhere that average profit is between 12% and 35%. Is this a really the way it is? If so maybe it should be mentioned in the article

I don't have the figures, but that's way, way too high. More like 3-5% depending on country and industry. MrVoluntarist 16:23, 9 August 2006 (UTC)
That can't be right. If your profit is 3-5% then your money would be better invested in bank savings account where the interest rate is 9-10% and by definition a business should make better money than savings accounts.
3-5% is the average. A business does not need to make more than that. (And where can you get a 10% savings account right now????) Businesses are riskier than savings accounts, and it is the prospect of these higher profits that draws more people in. It's not unreasonable that it would average to the savings account rate.


You are confusing 3–5% per annum of capital with 3–5% of turnover. You are also confusing interest on capital with profit. Suppose that I can lend at 10%, but that I put $300,000 into setting up a business, which earns annual revenues of $500,000 on a 25% mark-up, and that my wages are $60,000 per year. Out of the $500,000 my firm takes, $400,000 goes on inventory, $60,000 on my wages, $30,000 on interest costs, leaving profits of $10,000. That is a profit of 2% on turnover, which is completely unrelated to the fact that the firm returns 10% (to the capital-owner) on capital. The firm gives me an income of $100,000 per year, of which $60,000 is my wages as a worker, $30,000 is my interest as investor, and $10,000 is my profit as entrepreneur.203.217.41.130 02:11, 1 March 2007 (UTC)

You need to clarify what you mean by average profit. Do you mean accounting or economic profit? Do you mean average over time, industry, the whole economy...? Finally, what does the percent mean? Is that percent of earnings? Coleca 05:54, 12 August 2006 (UTC)

You're right I was being sloppy. I'm an engineer-in-training not an economist so bear with me for a moment. :)
Let's say I make a product and it costs me C dollars (or your favorite currency) to produce each one. When I sell this product I sell it for more than C in order to make a profit. This extra sum of money represents a certain percent of C. Let's call this percent P. A 12% profit would mean P=0.12
So if S is the final price of the product then S=C+(P*C)
What I mean by average is what is the usual value of P --Energman 18:51, 12 August 2006 (UTC)
Er, well, most businesses don't look anything like that at all. They don't just buy products and resell them. They have to invest in capital goods (warehouses, machines, trucks, etc.), which are not sold, nor completely paid off in any given period, but can lose value. And even if you followed the full cycle until the machines were no longer in their possession, they'd have new machines affecting the balance sheet. So, they typically look at the rate of change in book value (estimated market price of all assets, including inventory) before distributing dividends to judge profit. And that number is typically 3-5%, though in good periods, they can of course get more. MrVoluntarist 18:11, 27 September 2006 (UTC)

[edit] Reporting Profit

Shouldnt there be something written here about how companies have to report their profits?? discuss??--The penfool 12:24, 29 September 2006 (UTC)

[edit] Profit Margin?

I think any article about 'profit' should include basic information concerning 'profit margin' - most people do not know the difference. Profit margin HAS a seperate short Wikipedia article BUT I think some mention of it should be made here. Bone Pony````

[edit] Lede Rework

The old text implied that there is a difference between Accounting profit and Economic profit (presumably in a microeconomic sense). This would have been both false and somewhat vacuous as stated so I performed the necessary generalization to make it factitious. Lycurgus (talk) 21:27, 21 January 2008 (UTC)

Also, FTR, I don't want to be taken to have tacitly accepted that the rest of the article is any less vacuous. Also the Marxian definition of profit as surplus value is conspicuous by it's absence except as a see also link. I reviewed my 1955 Pyle¹ and there is no other definition of profit than total income minus total expenses (Ch. 4 The Profit and Loss Statement) though total expense includes cost of goods sold (Ch 7. A Merchandising Business and Ch. 28 A manufacturing business) and a breakout of Operating and Net Profit in the Manufacturing case. I also have no idea what "pure" economic profit might be as opposed to any other kind. In my simple mind it is a single undifferentiated thing only varying in the degree of realization (as in operating vs. net) or absolute magnitude (i.e. the rate or degree of exploitation).
¹ Pyle, William W. Fundamental Accounting Principles. 1955 Richard D. Irwin, Inc. LCCCN 55-5652.
Lycurgus (talk) 02:29, 22 January 2008 (UTC)

[edit] Mergefrom Profitability

I've suggested the merger because profitability seems to be a minor variant of the concept of profit (just put on a percentage basis). Unfortunately, it is also a very minor topic in the fringe theory or "Voodoo Finance" topic of so-called technical analysis. Having profitability go to a "trading system" indicator seems grossly misleading. Smallbones (talk) 17:20, 6 May 2008 (UTC)

moved re:discussion on that talk page. Smallbones (talk) 16:56, 19 May 2008 (UTC)