profit Flashcards
what are explicit costs
explicit costs are the costs which have to be paid e.g. raw materials , wages
what are implicit costs
they are age opportunity costs of production
- the cost of the next best alternative
why do implicit costs need to be considered ?
as entrepreneurs will rationally reallocate resources when greater profits can be made elsewhere
profit calculation?
profit = total rev - total costs
where do normal profits occur
where total revenue - total costs
where does abnormal (super normal ) profits occur?
when Total revenue > total costs
a loss occurs when total revenue < total costs
what is the role of profit
profit is an incentive for innovation and entrepreneurship
allocation of resources
competition
economic growth
wealth creation
what is meant by profit is an incentive for innovation and entrepreneurship?
-profit serves as a reward for successful entrepreneurship and innovation
-Entrepreneurs take on risks to start businesses or develop new products/services with the expectation of making a profit
-It encourages individuals to innovate, leading to economic growth and improved standards of living
what is meany by allocation of resources
-In a market economy, profit serves as a signal for resource allocation
-When businesses earn profits, it indicates that they are meeting consumer demands efficiently
-This encourages the reallocation of resources (capital, labour, and land) towards the production of goods and services that consumers value most, thereby enhancing economic efficiency
what is meant by competition ?
-Profit serves as a measure of business success and efficiency
-In a competitive market, firms strive to maximise profit by improving productivity, lowering costs or enhancing the quality of goods and services
-This competition benefits consumers by providing them with better products at lower prices
what is meant by economic growth?
-Profitable businesses reinvest their earnings into expanding operations, research and development, and hiring more workers
This investment stimulates economic growth, creates jobs, and generates technological advancements
what is meant by wealth creation?
-Profit generation leads to wealth creation for businesses, shareholders, and employees
-It enables businesses to accumulate capital, which can be reinvested or distributed to shareholders as dividends
-Employees also often benefit from profit-sharing schemes or performance-based bonuses
-It is essential to recognise that excessive focus on profit maximisation without considering social and environmental factors can lead to negative externalities, such as environmental degradation, income inequality, or exploitation of labour
-While profit is a crucial driver of economic activity, it should be pursued within the framework of ethical and sustainable business practices
