Profit is usually defined as the residual of sales revenue minus the explicit costs of doing business. It is the amount available to fund equity capital after payment for all other resources used by the firm. This definition of profit is accounting profit, orbusiness profit.

In economic terms, profit is business profit minus the implicit (noncash) costs of capital and other owner-provided inputs used by the firm. This profit concept is calledeconomic profit.

A normal rate of return is necessary to induce individuals to invest funds rather than spend them for current consumption. Normal profit is simply a cost for capital; it is no different from the cost of other resources, such as labor, materials, and energy. A similar price exists for the entrepreneurial effort of a firm's owner-manager and for other resources that owners bring to the firm.

In general,compensatory profit theorydescribes above-normal rates of return that reward firms for extraordinary success in meeting customer needs and maintaining efficient operations.