Source of information: http://www.econlib.org/library/Enc/Profits.html
In a capitalistic society, profits — and losses — hold center stage. Those who own firms (the capitalists) choose managers who organize production efforts so as to maximize their income (profits). Their search for profits is guided by the famous “invisible hand” of capitalism. When profits are above the normal level, they attract additional investment, either by new firms or by existing firms. New investment enters until profits are competed down to the same level the investment could earn elsewhere. In this way, high profits attract firms to invest in areas where consumers are signaling that they want the investment to occur. Capitalists earn a return on their efforts by providing three productive inputs. First, they are willing to delay their own personal gratification. Instead of consuming all of their resources today, they save some of today’s income and invest those savings in activities (plant and equipment) that will yield goods and services in the future. When sold, these future goods and services will yield profits that can then be used to finance consumption or additional investment. Put bluntly, the capitalist provides capital by not consuming. Without capital much less production could occur. As a result, some profits are effectively the “wages” paid to those who are willing to delay their own personal gratification. Second, some profits are a return to those who take risks. Some investments make a profit and return what was invested plus a profit; others do not. When an airline goes broke, for example, the investors in the airline lose some of their wealth and become poorer. Just as underground miners, who are willing to perform a dangerous job, get paid more than those who work in safer occupations, so investors who are willing to invest in risky ventures earn more than those who invest in less risky ones. On average, those who take risks will earn a higher rate of return on their investments than those who invest more conservatively. Third, some profits are a return to organizational ability, enterprise, and entrepreneurial energy. The entrepreneur, by inventing a new product or process, or by organizing the better delivery of an old product, generates profits. People are willing to pay the entrepreneur because he or she has invented a “better mousetrap.” Economists use the word “interest” to mean the payment for delayed gratification, and use the word “profits” to mean only the earnings that result from risk taking and from enterpreneurship. Attempts have been made to organize productive societies without the profit motive. Communism is the best recent example. But in the modern world these attempts have failed spectacularly. While most profits flow to the three previously mentioned necessary inputs into the productive process, there are two other sources of profits. One is monopoly. A firm that has managed to establish a monopoly in producing some product or service can set a price higher than would be set in a competitive market, and thus earn higher than normal competitive returns. Historically, one can find examples of monopolies that have been able to extract large amounts of income from the average consumer. One modern example is taxicab companies, which in virtually every major U.S. city outside of Washington, D.C., have persuaded the local government to limit the number of cabs that may legally be operated. Professional football, for example, is a monopoly. But Americans have many ways to get pleasure without watching football. The National Football League, therefore, has some, but not much, power to raise prices above the competitive level. “Market imperfections” provide a second source of profits. Suppose firm A sells a product for ten dollars while firm B sells the same product for eight dollars. Suppose also that many customers do not know that the product can be bought for eight dollars from firm B and, therefore, they pay ten dollars to firm A. Firm A gets an extra two dollars in profit. In a “perfect” market, where every consumer is completely informed about prices, this would not happen. But in real economies it often does. Profits from such “imperfections” certainly exist, but here again they are not a large fraction of total profits.