Profit refers to the amount received as a difference between the revenue earned out of sales of outputs and the opportunity cost incurred on inputs. It is a reward for the risk taking ability of the entrepreneur when the revenue earned exceeds the costs incurred in the production of goods by the firm. Profits reflect the financial position of the firm as when the firm is incurring profits there is reduction in liabilities of the firm and assets of the firm increases that leads to the increase in the equity of the owner (Mongiovi, 2011). It reflects the future investments of the firm and in case of no profits the firm may lead to extinction. Profits of the firm form the basis for tax computation on which dividends are paid by the firm.
The focus of classical economists is on the factors that help the economy in expansion and contraction. On the other hand, neo-classical economists focus on the ways in which individuals function within an economy.
The theories of value are different for both the classical and neo-classical economists. For classical economists the cost of production of a good is equivalent to the value of the good. On the contrary, in the neo-classical school of economics the value of goods produced by the firm is dependent on the demand and supply of that good in the market (Betz, 2014). Thus the classical economists consider value of the goods as inherent property and the neo-classical economists’ value is termed as the perceived property. For classical economists value is considered as costs and neo-classical economists consider value as utility. Economic value according to the classical school of economics originates form the process of production. Thus the value of the goods produced by the firm is determined on the basis of the quantity of labor used in producing those goods (Smith, 2011).