Differences between the neo-classical and classical school of economics:
On the contrary, the neo-classical school of economics assumes the value as the demand and supply of goods when they are exchanges and used by individuals in the market in contrast to the classical thought of assuming the value of goods according to their costs of production.
The profits come from in the market
Profits are the surpluses in form of value added from which the wages and salaries of the production factors is deducted. In simple words, profits are that amount of money which is left after the deduction of costs of labor is used in the transformation of inputs into finished products. Then the residual income left is termed as profit for the economy, business and the industry (Ritsatos, 2014). Classical economists Adam Smith the productivity of labor is increased through the use of fixed capital such as machinery and building but it cannot produce anything without the recurring capital of the firm in terms of money or inventory. Thus he concluded that the circulating capital of the firm helps in the formation of profit through furnishing raw materials and reducing the wastages of the labor resources. Adam Smith was of the view that capitalist and owners of the land must be rewarded for their risk taking ability in form of profits. Thus he supported upwards redistribution of income in order to ensure that the resources owned by the landowners are employed in the business. Each product has some exchange value at which it is sold in the market but it cannot be the case that this value is equal to the use value of the product i.e. the intrinsic value of the product for the user.
Profits are the revenues earned by the firm after the cost of raw materials and components used in the production process is deducted from the total income of the company. The costs incurred on the power and services used for the production processes of the goods are also deducted for the accurate estimation of profits of the firm. The other costs which are necessarily deducted from the total revenue of the firm for the correct estimation of profits are costs of wear and tear of fixed assets of the firm and the cost of depreciation of building and machines of the firm. The profits are calculated in real after the deduction of the wages and salaries distributed to the employees of the firm who are engaged in the transformation process of raw materials into finished goods of the firm. For the capitalists profits are simply the differences between the costs incurred by him on the production of goods and the selling price of the product. Thus profits appear to be derived by the sale of products but in real circulation or sale of goods leads to the realization of profits.