Profits are the payments made for the services of the entrepreneur. Rewards given to the factors for their services viz, wages, interest etc. arc included in the price of the commodity by a firm. Now, the question that creeps in mind is that if profit is a part of the cost of production then it enters into price or not. In order to answer this question
Normal profit refers to the minimum profit expected by the owner of a firm in the long period. In other words, normal profit is the normal rate of profit that must exist in order to attract men of adequate business calibre to any industry. According to Stonier and Haquc, Normal profits are those which are just sufficient to induce an entrepreneur to stay in business.
Gross Profit refers to that part of the income of a businessman which is available to him after all payments to the contractually hired factors and other current obligations like taxes and depreciation charges. In other words, the difference between total revenue of an Entrepreneur and total explicit costs is called the gross profit.
Prof. Taussig, in the late 19th century remarked that “Profit is a mixed and vexed income. lt 1s mixed in the sense that it is made up of a number of sources and vexed because there exists a lot of difference regarding the definition, constituents and determinants of profit. The classical economists regarded profit as the reward of capitalists who supplied capital and owned the busines
The income of other factors of production like rent, wages, interest etc. is decided before putting them in operation. Thus, the income earned from these factors is called contract income. But in the case of profits it is not so. Whatever remains is called profit. Therefore, it is termed as residual income.
The price mechanism has little relevance in a socialist economy as it is regarded as a distinguishing feature of a free market economy. In a socialist economy the various elements of the price mechanism costs, prices and profits- are all planned and calculated by the planning authority in accordance with the targets of the plan.
In every society there are legal and social institutions. Individual economic actions must conform to them. In a free enterprise economy to which the price system primarily relates, the factors of production are privately owned. The raw materials, the machines, factories and farms are owned by individuals who are at liberty to dispose of them in accordance with the prevalent laws of the country.