Profit Flashcards
Functions of profits
-Business, worker and shareholder incentives
-Resource allocation
-Efficiency indicator
-Reward for risk taking/innovation
-Source of business finance
-Economic health indicator
Business incentive
Supernormal profit acts an an incentive for people to move into the market
Worker incentive
Some firms link pay with profit so workers work harder for higher profits and therefore higher pay
Shareholder incentive
High profits are likely to pay out a higher dividend and the share price will rise.
Resource allocation
Profits help to give more resources whose output is in demand and less where there is less profit
Efficiency indicator
An indicator that firms are efficient; it is finding ways to minimise costs
Reward for risk taking / innovation
Without high profits, there is no incentives for firms to try develop new products
Source of business finance
Profit means that businesses have funds for expansion, research and development, etc. No need for borrowing/ loans.
Economic health indicator
High profits across an economy suggests that it is healthy and innovating with improved efficiency.
