Definition in Detail
Entrepreneurial Profit refers to the earnings of an entrepreneur that are above normal wages paid to managers or the cost of doing business. In simpler terms, it is the extra profit that can be attributed to the skills, risk-taking, and extra effort put forth by an entrepreneur in managing the business.
In accounting terms, entrepreneurial profit includes all profits that exceed the total cost of production. In economic terms, it goes beyond normal profit, which would be what a typical manager earns, reflecting the unique value provided by the entrepreneur.
Examples
-
Example 1: A Retail Store
- A retail store owned by an entrepreneur sells each product for $200.
- Expenses per product sold: $80 for rental space, $50 on labor, and $30 on capital interest.
- The accounting profit per product is $40.
- Considering market wages for a manager could be $30, the entrepreneurial profit due to the owner’s unique expertise and efforts is $10 per product.
-
Example 2: A Technology Startup
- A tech startup offers a software subscription for $500 annually.
- Yearly costs per subscription include $150 on software development, $100 on marketing, and $100 for operational expenses.
- The total accounting profit per subscription stands at $150.
- If hiring a product manager costs $90, the entrepreneurial profit reflecting the entrepreneur’s added value is $60.
Frequently Asked Questions (FAQs)
-
What distinguishes entrepreneurial profit from accounting profit?
- Accounting profit totals all earnings after subtracting expenses. Entrepreneurial profit, however, is the extra profit above typical managerial earnings attributable to the entrepreneur’s unique skills and effort.
-
Why is entrepreneurial profit important?
- Entrepreneurial profit quantifies the value of the entrepreneur’s special skills, innovation, and risk management in making a business successful, going beyond what a standard employee or manager could contribute.
-
How is entrepreneurial profit calculated in economics?
- Economically, it is measured as the difference between total profit and normal profit, normal profit being what a competent manager would earn under regular conditions.
Related Terms with Definitions
-
Income-Producing Property: Real estate property that generates regular income, such as rental property.
-
Normal Profit: The minimum profit necessary for a company to remain competitive in the market, largely representing the opportunity costs of capital and the risks of entrepreneurship.
-
Accounting Profit: The total revenue of a business minus the explicit costs of production; this includes labor, materials, rents, and taxes.
-
Economic Profit: The surplus after accounting for both explicit and implicit costs, which include the opportunity costs of all resources used by the business.
Online Resources
- Investopedia - Entrepreneurial Profit
- Wikipedia - Entrepreneurial Profit Definitions
- Khan Academy - Business Profit Classes
References
- “Principles of Corporate Finance” by Richard A. Brealey and Stewart C. Myers.
- “Essentials of Entrepreneurship and Small Business Management” by Norman M. Scarborough.
- “The Theory of the Growth of the Firm” by Edith Penrose.
Suggested Books for Further Studies
- “The Innovator’s Dilemma” by Clayton M. Christensen
- “Lean Startup” by Eric Ries
- “Zero to One” by Peter Thiel
Real Estate Basics: Entrepreneurial Profit Fundamentals Quiz
### What is the primary function of entrepreneurial profit in a business?
- [x] To reward the entrepreneur's special skills and risk-taking.
- [ ] To determine the overall expenses.
- [ ] To equate manager's salary.
- [ ] To invest in employee training.
> **Explanation:** The primary function of entrepreneurial profit is to reward the entrepreneur’s special skills, innovation, and effective risk management, above the wages of a typical manager.
### What differentiates entrepreneurial profit in economics from accounting profit?
- [ ] Economics doesn't measure profit.
- [x] Economics includes normal profit in its calculus, highlighting extra contributions.
- [ ] Accounting profit always differs positively.
- [ ] Only accountants describe profits.
> **Explanation:** Economically, entrepreneurial profit includes and highlights the value beyond normal profit earned due to the special efforts of the entrepreneur, whereas accounting profit is a broader calculation covering total earnings minus expenses.
### What costs are deducted in accounting profit calculations?
- [x] The total costs of production including wages, rent, and interest.
- [ ] Only labor costs.
- [ ] Only material costs.
- [ ] Market analysis and advertising costs alone.
> **Explanation:** In calculating accounting profit, the total costs deducted include all expenses such as wages, rent, interest, and other production-related costs.
### What typically contributes to higher entrepreneurial profit?
- [ ] Office space rental costs.
- [ ] Employee personal reports.
- [ ] Advertising layout.
- [x] Entrepreneur's innovation and risk-taking abilities.
> **Explanation:** Entrepreneurial profit is substantially elevated by factors such as the entrepreneur’s innovation, skill level, and effective risk management in business operations.
### How is normal profit defined in economics?
- [x] The acceptable profit level for a company to stay in market competition.
- [ ] The sum of all profits made in any business quarter.
- [ ] Profits excluding spread costs.
- [ ] The average profit of different businesses.
> **Explanation:** Normal profit, in economic terms, is the minimum profit a business must earn to justify remaining in industry competition, covering opportunity costs and management risks.
### Which resource typically does NOT affect entrepreneurial profit characters?
- [ ] Innovative income strategies.
- [ ] Skilled managerial decisions.
- [x] Predetermined employee personal budgets.
- [ ] Strategic risk-taking.
> **Explanation:** Predetermined personal budgets of employees reflect individual expense plans and do not directly relate to the entrepreneurial profit factors like skills, risks, and successful strategy implementation.
### Does combining accounting and economic profit offer a thorough understanding of business success?
- [x] Yes, insight into both aspects reflects sustained business acumen.
- [ ] No, results in complex double evaluation.
- [ ] Irrelevant to financial analysis.
- [ ] Uncomplex and overlooked in business studies.
> **Explanation:** Understanding both accounting and economic profit provides a holistic perspective on business viability and entrepreneurial contributions towards success.
### Why might entrepreneurial profit values explicitly reveal business potential?
- [ ] They highlight exact expense amounts.
- [ ] They replicate market manager wages.
- [x] They manifest entrepreneurial equal/above-standard value additions.
- [ ] They decipher only opportunity advices.
> **Explanation:** Values realized from entrepreneurial profits reveal where entrepreneur’s efforts have equalized or added substantial value over standard expectations, indicating business growth potential.
### Why do accountants focus on more than just entrepreneurial profit?
- [ ] Detailing forecast applications.
- [x] Comprehensive evaluation includes all cost elements.
- [ ] Simplistic managerial process.
- [ ] Ignored in critical analysis.
> **Explanation:** Accountants evaluate comprehensive financial elements beyond entrepreneurial profit, ensuring a wider grasp of each cost element’s impact in business sustainability.
### Can entrepreneurial profit guide investment decisions?
- [x] Absolutely, it signals the enterprise's unique strengths and innovative track.
- [ ] Unnecessary, as indirect influencing factor.
- [ ] Predominantly focuses on different aspects.
- [ ] Leads specifically to sale decisions.
> **Explanation:** Entrepreneurial profit, shedding light on strategic strengths and innovative paths, is an insightful tool for guiding investment decisions in potentially high-value ventures.
