In any kind of undertaking the enterprisers are likely to vary greatly in their talent for conducting business. Their profits are equal to the difference between their selling price and their cost price. For some enterprisers this difference is much and for others it is little or nothing. If we speak of the enterpriser whose costs just equal his selling price, as the marginal enterpriser, we shall be in a position to explain the profits of those enterprisers who have a surplus above costs of production by comparing their methods of conducting their enterprise with that of the marginal enterpriser.

Possibly this marginal enterpriser has not combined the factors of land and labor and capital in the best proportion in view of the cost of the several factors. An enterpriser who makes a better combination of the factors than does our marginal enterpriser will reap an added reward over what the marginal enterpriser receives, because of his better management, provided that he manages his business in other respects as well as does the marginal enterpriser. Because this added reward is due to better management it is called wages of management. It is profit, but not competitive profit.

An enterpriser who conducted his business exactly as did the marginal enterpriser with the difference that he was a better bargainer and was able to secure labor and land and capital or any of these on better terms than other enterprisers could, would reap a surplus from the fact that he had outbargained the owners of the other factors. What under ordinary circumstances would go to others as rent and wages and interest he now appropriates to himself as profits by reason of his superior bargaining power. At a time when wages or interest or rent is increasing, an enterpriser may be able to secure the factors at the former low rate longer than do his competitors. Again, when these shares are decreasing, he may be able to secure a reduction of costs before his competitors do. In either case he thus obtains a wider margin between prices and costs than does the marginal producer, and so secures a profit.

Where the prices of the finished product or of the raw materials are constantly changing, the shrewd enterpriser who can forecast the changes can make the purchases in such a way as to obtain an advantage over other enterprisers. Thus, if he foresees an increase in the cost of some material which is important for his business, he can purchase a large supply while the prices are low and secure an advantage over employers and enterprisers who had less foresight. If he foresees a rising price of his product, he can prepare for it by a larger production of goods and thus reap profit; or if he foresees a reduction of prices, he may curtail expenses by discharging employees and curtailing the volume of production.

The enterpriser also receives a reward because he assumes the risk of paying the shares of the other factors. The laborer, the capitalist, and the landlord have contracts with him under which they receive their reward whether the business is profitable or not, whereas the enterpriser's reward comes only when the business is successfully conducted and in the event of lack of success he is compelled to bear a loss. As a recompense for this liability to pay a loss, employers must, on the whole, receive a profit in excess of wages of management. Otherwise they would not be willing to undertake the risk attendant upon the management of business.