CMA Foundation · Fundamentals of Business Economics and Management · Means of Production
Meera Textiles of Surat pays rent, wages and interest in full, and the owner Meera earns the remaining surplus, which may be positive or negative. In economic theory, this residual reward to the entrepreneur is called:
The residual reward is profit. After the firm pays contractual amounts as rent, wages and interest, whatever remains goes to the entrepreneur. Because this surplus is uncertain and can turn into a loss, it is regarded as the reward for organising production and bearing risk.
- AProfitCorrect
- BWages
- CRent
- DInterest
Explanation
Profit is the residual reward left after paying rent to land, wages to labour and interest to capital. It is uncertain and can be negative, unlike the contractual payments to the other factors, which are fixed in advance.
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