Income and profit: what is the difference between the two economic concepts

For any entrepreneur, the income and profit categories are the most significant. Each seller in a competitive market seeks to maximize their cash flow and receive a steady income, but what are the differences between these two concepts and how to learn how to calculate them? The answer to these questions you can learn in this article. Also you can learn more about the definition of profit and income.

What is income?

Since most of the founders of the theory of economics were English or Americans, many terms and their designations are customarily written in English. Revenue is denoted by the word revenue, and the formula uses TR - total revenue, or "total revenue." Income and revenue in the economic sense are synonyms.

The profits and profits of the organization are formed in different ways. To calculate the income of a firm, you need to multiply the price per unit of output by the quantity of output. In the economy, this simple formula has the following entry:

• TR = P * Q.

Where TR - total revenue (revenue), P (from the word price) - the unit price, and Q (quantaty) - the number of products sold.

For example, if a store produces only one type of smartphone at a price of 999 rubles per piece, then selling 100 smartphones, it will receive an income of $ 99,900 rubles. No matter how significant this number does not seem to be to the manufacturer, it's too early to rejoice, because income and profit are different economic concepts.

Costs of the firm

Profit is the definition that is final for the firm. Profit is calculated as the final measure of the profitability of production, whether it be goods or services. The profit can be much lower than the number of income. In order to calculate it, it is also necessary to introduce the concept of production costs.

Costs in economic theory are denoted by the English word costs, and for formulas a short notation TC (total costs) is used. There are several types of production costs:

• Fix Costs (FC) - fixed (fixed) costs. Such costs can serve as a constant rent for the premises. Constant costs do not depend on the volume of the company's output.
• Variable Costs (VC) are variable costs. This type of cost varies depending on the volume of output. For example, the purchase of fabrics for the creation of dresses - variable costs for the firm-studio.
• Total costs, which consist of constant and variable costs - TC = FC + VC .

The value of production costs allows you to understand how profitable the business is. It is clear that if costs become more income - then the business needs to be closed.

Income and profit: what's the difference?

Two economic concepts that need additional clarification are income and profit. The formula for calculating income was presented earlier. Let's try to figure out what the profit is.

Economic profit is a value that shows how much money a firm (producer) receives after deducting expenses. Its short notation is π (pi). The formula for profit is as follows:

• N = TR-TC .

That is, it is the difference between total income and total costs.

There is a more complex definition in the economy - net profit. The income of a firm can be measured by it, in which case it is calculated as the sum of financial, gross and operating profits minus taxes. That is, again, TR with the deduction of tax.

Revenue and profit - what's the difference? You can understand the answer to this question if you keep two formulas in mind and clearly realize that the final result of a producer's economic activity on the market is a net profit, and income in turn is a concept containing the value of all produced (sold on the market ) Of the goods.

What is the net profit for?

Two concepts were considered above: income and profit. What is the difference between these two terms, we were able to determine using the above formulas. But understanding what the net profit is for is also important for every entrepreneur.

So, the net profit allows to understand, whether it is possible to cover expenses of the current period and to use the received money for development of the enterprise. Net profit allows the manufacturer to always see a few steps ahead and make plans for the future development of the firm. So, there are several possible ways to obtain net profit, but the choice is always behind the entrepreneur:

• The formation of funds - investment, accumulation, social security and so on;
• Receipt of dividends;
• "Spare" capital;
• Expansion of the authorized capital (in this case, the net profit should be large).

How to increase net profit

Revenue and profit - what's the difference? This issue is seen for beginning entrepreneurs is not entirely relevant. Beginners in small business are more interested in how to increase net profit, being on the starting positions. At the same time, the issue of increasing net profit also worries big businessmen, since this process allows us to expand our authorized capital. Improvement of production technologies can be a costly method, however, the net profit will be increased due to intensive methods of production development.