Profit is what is left when revenue exceeds costs. It is the reward for taking risk and organizing production. A bakery that sells $1,000 of bread and spends $800 on ingredients, rent, and labor earns $200 in profit. That money can be reinvested, saved, or paid to owners.

Economists distinguish accounting profit from economic profit. Accounting profit subtracts explicit costs. Economic profit also subtracts opportunity cost, the return the owner could have earned elsewhere. A business may show an accounting profit but an economic loss if the owner could earn more in another venture.

Profit drives behavior. High profits attract new entrants. Competition erodes them over time. Low profits push firms to cut costs or exit. The pursuit of profit can produce innovation and efficiency. It can also produce shortcuts and exploitation. Rules and ethics shape which happens.

Key concepts

• Revenue minus costs
• Accounting profit vs. economic profit
• Normal profit
• Profit margin
• Reinvestment and dividends