The amount of the excess of total sales revenue over the total costs of production of the good(s) or service(s) produced by a business firm.
The term “profit” is used somewhat more narrowly by economists than the way it is used by the Internal Revenue Service or even by most businessmen and accountants. The economists' concept of profit emphasizes that “costs of production” for purposes of the definition include the full opportunity costs of all the factors of production utilized — an amount for each reflecting what it could yield if employed in the most lucrative available alternative use. This would include not only the amount of money actually paid out for wages, materials, rent, machinery and what have you but also what the money tied up in the business could otherwise be earning in other uses at similar levels of risk. Whereas accountants and the IRS do not subtract out the opportunity costs of capital (unless interest is actually being paid by the firm to an outside lender), economists would insist that “profit” in the true sense refers only to what is left after deduction of the going rate of return on capital for the owners equity in the business as well. In other words, for the economist, the owners' profit does not technically include the amount of “interest” that they should be paying themselves for the use of their own capital — pure economists' profit includes only what the owners are making above and beyond the going rate of interest they could be making by loaning out their financial resources rather than using them to run a business. So a firm that is managing to cover all its bills and its maintenance / replacement costs out of sales with, say, 5% of the value of the investment left over at the end of each year would not technically be making a profit in the eyes of an economist if the owners could be making 5% on their invested capital by just putting it in a CD at the bank or savings and loan. The IRS and most accountants would still say that same firm is “profitable” in their usage of the term.
In the case of unincorporated firms where the owner (or owners) works full time in the business, the divergence between economists' definition of profit and the IRS/accounting definition of profit is still larger because any “salary” that an owner- manager takes out of the till for his living expenses is still counted by the IRS as part of the profits (and hence, in the eyes of the IRS, “unearned income”); the economist, on the other hand would deduct what the owner-manager's services could command as an employee elsewhere from profits as part of the labor costs of production.
Profits (in the economists' sense, but not in the accounting sense) are a direct measure of the net increase in total value generated by employing scarce resources in one particular use rather than in their most valuable alternative use in some other undertaking. Economic profitability indicates (in the absence of externalities) that consumers value the product more than any others that could have been produced with the resources expended. Conversely, losses indicate that resources have been used unwisely — the firm has miscalculated, and the resources committed could better have been used to produce other products more desired by consumers. Hence follows the famous conclusion of Adam Smith that in selfishly seeking to maximize his profits the businessman unwittingly is also maximizing the benefits to society as a whole from the efficient utilization of the resources under his control.