Monday, October 14, 2013

Know The Three Profit Components.

Profit has three components. The pure interest component is shared alike by production for profit and by other investments earning interest. What is expected for sacrificing present consumption for future consumption is the pure interest component. It is an expression of the natural time preference. No action would be taken if this pure interest component is not present.

The second component is entrepreneurial profit which comes about because the future is unknown. Ex ante estimates for production and price are guesses with a certain amount of entrepreneurial profit potential. Astute entrepreneurial perception may lead to a lessening of the risks taken despite the uncertainty faced. Alertness then to the market reaction – ex post – is mostly where the entrepreneurial profit component is captured. For instance if excess demand is discovered early in the selling period a raising of the price would lead to increased profits making the entrepreneurial component of the profits larger. Of course also, a lack of entrepreneurial perception could lead to losses.
The third profit component is the purchasing power spread. This element is mostly seen nowadays as a phenomenon of monetary intervention which causes the purchasing power of the currency to decrease due to inflating the money supply. A profit margin has to be built into the ex ante price because it takes time before the product reaches the market. Ex post the purchasing power will have declined when there is inflation making real profits significantly less than nominal profits.

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