Characteristics of Profit

Profit as a factor reward has the following unique characteristics:

Not a Predetermined Contractual Payment

Other factor rewards like rent, wages, and interest are contractual rewards. They are fixed by contract and can be known in advance. The owners of other factors enter into contract with the employer of the factors of production regarding the remuneration to be paid. But that is not true in case of profit. Whatever is left after all factor rewards are paid is called profit. It is a non-contractual income.

A Residual Surplus

Profit is a residual surplus. The entrepreneur hires factors of production and pays them their remunerations according to the predetermined contract. After making all payments, whatever is left becomes the reward of the entrepreneur. It is a residual surplus.

Not a Fixed Remuneration

As a factor reward, profit is not fixed remuneration. It is highly fluctuating and uncertain in character. For example during the time of business prosperity, profit is very high. During deflation profits tend to decline more rapidly in comparison to the rewards of other factors of production. Hence the amount of profit changes with the changes in state of business.

Profit May Be Negative

Profit is the difference between total revenue earned and total expenditure incurred by the firm. If total revenue exceeds total costs, profit is positive. On the contrary, if total costs are more than the total revenue, profit becomes negative. This is in sharp contrast to other factor rewards (rent, wages and interest) which are always positive. Thus profit can be zero or negative. This is a unique characteristic of profit as a factor reward.

Profit Cannot Be Calculated in Advance

Apparently profit cannot be calculated in advance because it is uncertain, variable and unpredictable by nature. Profits can be known in advance. Viewing the balance sheet of any joint stock company, we can know the apparent rate of profit on capital invested for the past years. But we cannot know the rate of profit before the completion of the present year, what to talk of the future years.