January 20, 2018 

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INDEX: A measure of the relative average of a group of items compared to a given base value. Index measures are commonly used in economics to combine and compare diverse measures. One common type of index measure is for prices, such as the Consumer Price Index and the Dow Jones Industrial Average of corporate stock prices. Another noted type of index measure is to track macroeconomic activity, especially the index leading economic indicators. Indexes are usually weighted averages rather than simple arithmetic means that are measured relative to a base value or period. The Consumer Price Index, for example, measures the prices of consumer good, weighted by the quantities purchased. The value of a given period is then stated relative to a base year value, which generates a pure, "unitless" number in the range of 100 (give or take).

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Economic profit, the difference between the total revenue received by a firm and the total opportunity cost of production, that is attributable to innovation, the initial application of new products, technologies, or ideas. Innovation profit is one of two sources of economic profit. The other is monopoly profit that arises due to market control. The generation of innovation profit is an important incentive that by rewarding individual innovative behavior enables society-wide benefits from the resulting innovations.
Innovation profit is the economic profit generated by a firm or production activity that arises due to the introduction and application of an innovation. The innovation might be a new product or a new production technique or a new technology or any of a myriad of changes in existing institutional changes that benefit society. The profit generated is usually measured in monetary terms, but can also accrue in other non monetary ways.

This type of economic profit provides a critical incentive for innovative behavior. The prospect of innovation profit encourages producers, especially entrepreneurs, to assume the risk of undertaking innovation. In many cases, probably most cases, attempted innovations fail, they do not achieve widespread use. However, innovators and entrepreneurs are willing to risk failure for the small chance of a relatively large innovation profit payout. Innovation profit is the "carrot" that entices innovative behavior.

The innovations that result then generate benefits throughout society. The public is better off having a new and an improve product, technology, or way of doing things. And are willing to reward the innovator with "extra" revenue, revenue that exceeds opportunity cost. Henry Ford received profit from his innovative method of mass producing automobiles. And the public benefitted from using the automobiles.

Innovation profit is one type of economic profit. The other is monopoly profit, economic profit that results from market control. At times the distinction between innovation profit and monopoly profit is not clear cut. In fact, innovation is often a source of monopoly profit. An innovation might very well create market control for a firm. However, not all innovation profit arises due to market control and certainly all monopoly profit is not the result of innovation.


Innovation profit results from innovation. Innovation is the process of developing and making available a new good, service, production technique, idea, concept, scientific theory, law, business, cultural norm, social organization, or government agency. An innovation represents a change in the status quo, a modification of existing institutions that form the structure of society and the economy. It's new, it's different and it's the primary means of improving society, enhancing living standards, and promoting economic growth and development.secondary interest in the resulting profit that might arise.

Profit Types

Innovation profit is but one type of profit. It is a form of economic profit and it is occasionally intermingled with monopoly profit. To clarify the concept of innovation profit, consider three other profit concepts.
  • Normal Profit: The first notion of profit is the opportunity cost of using entrepreneurial abilities in the production of a good, or the profit that could have been received by entrepreneurship in another business venture. Like the opportunity costs of other resources, normal profit is a cost that is deducted from revenue when determining economic profit.

  • Economic Profit: The notion of profit preferred in economics is the difference between the total revenue received by a firm and the total opportunity cost of production, including normal profit. Economic profit is what remains after ALL opportunity cost associated with production, the opportunity cost incurred by ALL factors of production, is deducted from the revenue generated by the production. Economic profit is the "conceptually correct" notion of profit used in economics.

  • Monopoly Profit: This is economic profit generated as a result of a firm's market control. It is termed monopoly profit as a reflection of the most prominent market structure with market control--monopoly. However, any market structure with market control, including oligopoly and monopolistic competition, can generate monopoly profit. The existence of monopoly profit is an indication that a firm is NOT efficiently allocating resources. While market control in no way guarantees that a firm receives monopoly profit, there is no way to obtain monopoly profit WITHOUT market control.

Market Control or Innovation?

Determining if the economic profit received by a firm is the result of market control or innovation is not an easy task. One reason is the identification of economic profit itself. Most firms report what is termed accounting profit rather than economic profit. Accounting profit is the difference between revenue and explicit accounting cost. The cost side of the calculation seldom includes a normal profit and often includes a portion of economic profit as a cost.

A second, a more important reason for the present discussion, is that market control often results from innovation. An innovative firm, the firm that is first on the market with a new product or technology, often achieves a degree of market control by virtue of the uniqueness of the innovation. Strictly speaking the resulting economic profit is monopoly profit. However, it is also innovation profit.

Consider, for example, a pharmaceutical company that begins selling a new drug. The resulting profit is largely due to the fact that it is the only company offering the drug. There is no competition. Hence, a case can be made for monopoly profit. However, the company has achieved its monopoly status due to innovative efforts directed toward research and development of this drug. Hence, a case can be made for innovation profit. Innovations, more often than not, generate market control for the innovative firm.

This distinction can be complicate further if the company is able to obtain legal monopoly status through government mandate, such things as with a patent, especially when this prevents competition. In this case, a relatively minor innovation, one which can be easily replicated, might generate extensive economic profit. The profit, however, is more likely the result of market control than innovation.


Recommended Citation:

INNOVATION PROFIT, AmosWEB Encyclonomic WEB*pedia,, AmosWEB LLC, 2000-2018. [Accessed: January 20, 2018].

Check Out These Related Terms...

     | innovation | entrepreneurial behavior | managerial behavior | product life cycle | novel information | redundant information | institution | process innovation | product innovation | behavioral alternatives |

Or For A Little Background...

     | profit | rational behavior | economic profit | monopoly profit | normal profit | market control | opportunity cost | total revenue | total cost | entrepreneurship | monopoly | accounting profit | risk |

And For Further Study...

     | economics of information | economics of uncertainty | risk preferences | alternative business cycles | creative destruction | good types | public goods | innovation and entrepreneurship | market structures |

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