Profit in the capitalist price system

The term profit is used to denote the income earned by the organizer or the entrepreneur. According to Taussig “Profit is a mixed and vexed vexed income”. It is a ‘mixed’ income because it is earned from many sources. It is a ‘vexed’ income because it is earned from many sources. It is a ‘vexed’ income because of disagreement among economists relating to profit. Walker and many other economists use profit in a narrow sense. While and many other economists use profit in a narrow sense. While Marshall, Robertson and other English economist are in favors of using the term in the wider sense. Role of profit in capitalist price system s the motivation for economic activities. All economic activities revolve round the profit. It is the profit which helps in making balance between demand and supply. When demand become more than supply, price increase. Therefore, profit increases as a result of the increase in price. This causes the entry of new firms into production. With this entry of new firm, production increases and as a result supplies of goods also increases. In this way balance is made between demand and supply or consumption and production. Thus business fluctuations are avoided by profit mechanism in capitalist price system. Social wealth means total capital of society. Profit makes allocation of total capital from the low demand sector to high. If demand of certain goods and services becomes low, entrepreneurs do not like to employee their capital for the production of those goods which are demanded more. So there is diversion of capital from goods which demanded more. So there is diversion of capital from low demand sector to high demand sector. In this way allocation of total capital is made by the profit mechanism. It is the profit which determine nature of production. Therefore, profit in the capitalist price system helps in solving the basic problems of economy.