8.2 Functions of Profit

Question 1

Functions of Profit

Answer 1

The various functions of profit.

Question 2

Profit provides an incentive to invest and means for investment

Answer 2

Profit provides an incentive to invest and means for investment. Retained profit is a major source of investment for firms, which can further improve profitability for the business but also provide some major macroeconomic benefits as well. Investment can increase both short run and long run growth whilst providing jobs and improving the international competitiveness of the economy. Retained profit is a major source of investment for firms, which can further improve profitability for the business but also provide some major macroeconomic benefits as well.

Question 3

Profit is a reward to risk taking entrepreneurial behaviour

Answer 3

Profit is a reward to risk taking entrepreneurial behaviour. Profit is the incentive for entrepreneurs to take risks with the use of factors of production creating brand new products and developing new technologies to improve production processes. This benefits the economy significantly with increases in long run growth and job creation.

Question 4

Profit allows the price mechanism to work as an effective and efficient way of allocating scarce resources

Answer 4

Profit allows the price mechanism to work as an effective and efficient way of allocating scarce resources. The incentive function of price means that shortages and surpluses in a free market will never last, given the greater profit potential for producers, who can either reduce or raise their price to ration excess demand or excess supply. The efficient allocation of resources in society therefore depends heavily on the existence of a profit motive.

Question 5

Profit can promote all four efficiencies

Answer 5

Profit can promote all four efficiencies. This is because a profit motivated business will always keep costs low and revenues high, implying no waste in production, ensuring the needs and wants of consumers is met ensuring all economies of scale are fully maximised and ensuring there is regular investment to stay ahead of rival firms. Consequently improvements in allocative, productive, dynamic and x efficiency can our simply due to this profit maximisation goal of private firms, maximising social welfare.