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2. Profit and Loss in Free Enterprise3
Section 2
Profit and Loss in Free Enterprise
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3. Profits and Losses
Profit is the amount of money left over after all the costs of production have been paid.
Profit exists whenever total revenue is greater than total cost.
Profit = Total revenue > Total cost
A loss occurs when the total cost exceeds total revenue.
Loss = Total cost > Total revenue
Total revenue = Price of a good x Number of units sold
Total cost = Average cost of a good x Number of units sold
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4. Profit and Loss as Signals
In a free enterprise economy, some businesses are earning profits and some are taking losses. Profits and losses are
signals to the firms actually earning the profits or taking the losses, and
signals to firms standing on the sidelines
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5. Profit and Loss as Signals (cont.)
A firm on the sidelines will see what product is profitable and possibly enter that market.
A firm may discontinue a product that is producing losses, and reallocate its resources to a profitable product.
Resources flow toward profit and away from losses.
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