What can be the role of profit in a Business?
Answers
Profit is the surplus revenue after a firm has paid all its costs. ... In a capitalist economy, profit plays an important role in creating incentives for business and entrepreneurs. For an incumbent firm, the reward of higher profit will encourage them to try and cut costs and develop new product
Profit is the surplus revenue after a firm has paid all its costs. Profit can be seen as the monetary reward to shareholders and owners of a business. In a capitalist economy, profit plays an important role in creating incentives for business and entrepreneurs. For an incumbent firm, the reward of higher profit will encourage them to try and cut costs and develop new products. If an industry is profitable, it will encourage new firms to enter. If a firm becomes unprofitable, it will either have to adapt and change or close down. This profit motive can help increase efficiency, provide greater choice for consumers and allocate resources according to consumer preferences.
However, profit can have a downside. To increase profits, firms may take action which cause market failure. For example, an asset stripper could buy a failing firm – selling off its assets and then make workers redundant. Alternatively, a firm may increase profits by finding ways around environmental regulation and cause more pollution. Also, a firm may seek short-run profit maximisation and under-invest in the long-term.
Behavioural economists argue that economics can often over-emphasise the role of profit. For example, individuals are motivated by many factors other than profit, such as pride in work, desire to work in bigger company, be successful and attachment to ideas – even if unprofitable.