Copyright 2006 – Biz/ed The Role of Profits and Markets

Copyright 2006 – Biz/ed Profit The difference between the costs of production and revenue earned from sales Profit = TR – TC where: –TR = Total Revenue (Price x Sales) –Also referred to as Turnover –TC = FC – VC where: –FC = Fixed Costs (overheads) –VC = Variable Costs (direct costs or cost of sales)

Copyright 2006 – Biz/ed Profit Drives business objectives: Normal profit – the minimum amount needed to keep a business in a particular line of production Abnormal profit – profit above normal profit – market power? Subnormal profit – below normal profit – how long can the firm survive?

Copyright 2006 – Biz/ed Profit Functions of Profit Existence of profit suggests: –Demand buoyant, prices may be rising, worth entering market Profit attracts new businesses Profit encourages efficiency Profit encourages enterprise, innovation and risk taking

Copyright 2006 – Biz/ed Profit margin = profit / revenue x 100 Margins can be affected by: Cost of capital equipment Changes in interest payments Labour costs Type of market Top end of the market Luxury goods High margins/low volume Bottom end of the market Everyday use ‘Cheap as chips’ Low margin/high volume

Copyright 2006 – Biz/ed Losses When costs exceed revenue over a period –Caused by temporary downturn in economy –Caused by external shocks –Caused by changing tastes/fashions/technology Necessity of covering variable costs Losses can be sustained: –Restructuring –Re-financing – shares/loans –Using reserves –Cut costs –Boost sales

Copyright 2006 – Biz/ed Adding Value Difference between the input costs (raw materials, etc.) and the value placed on the product/service by the market Value added may be tangible – additional features or intangible – brand image, style, etc. Value Chain – value adding activities in a product or service

Copyright 2006 – Biz/ed The Market System The Market: Consumers represent demand Producers represent supply Interaction of the two creates the market Changes in supply and demand conditions cause changes in the market

Copyright 2006 – Biz/ed The Market System Price acts as a signal Rising prices – goods in shortage, demand greater than supply – firms attracted to that line of production by existence of profit Falling prices – existence of surplus, supply exceeds demand – incentive to move to more profitable line of production

Copyright 2006 – Biz/ed The Market System Factors influencing supply and demand: Incomes – demand Costs of production – supply Advertising – demand External shocks – supply Fashions and tastes - demand Technology – supply Can you think of others??

Copyright 2006 – Biz/ed The Market System Changes in supply and demand Create surpluses and shortages Influence price Firms respond to seek profitable opportunities Business flexibility important to long term survival in changing markets