How is profit determined in economic terms?

Profit in economic terms is defined as the difference between total revenue and total cost. This means that profit represents the amount of money that remains after all costs associated with the production of goods or services have been deducted from the revenue generated from sales.

When a business earns total revenue, it accounts for all the money received from selling its goods or services. From this total revenue, the business must subtract all relevant costs, which can include variable costs like materials and labor, as well as fixed costs such as rent and salaries. The resulting figure is the profit, indicating how effectively the business utilizes its resources to generate income.

This concept is fundamental to understanding how businesses operate and make decisions regarding production, pricing, and overall strategy. A positive profit suggests that the business is successful, while a negative profit (often referred to as a loss) indicates that the costs exceed the revenue generated.