profit and objectives

profit

total revenue - total costs of production

function of profit

1. incentive to invest and a means for investment

2. reward to risk taking entrepreneurial behaviour

3. allows the price mechanism to work as an effective and efficient way to allocate scarce resources

4. promotes all four efficiencies

incentive to invest, a means for investment

retained profit is a major source of investment for firms which can further improve profitability for the business

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

price mechanism to work as an effective 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 of producers who can either reduce or raise their price to ration excess demand or supply

all four efficiencies

1. profit motivated businesses will keep costs low and revenues high, implying no waste

2. ensuring the needs and wants of consumers are met (allocative)

3. ensuring all economies of scale are fully maximised (productive)

4. ensuring there is regular investment to stay ahead of rival firms (dynamic)