1. The Role of Profits and Markets

2. 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)

3. 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?

4. 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

5. 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

6. 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
It is important that students should understand that the absence of profit does not mean that a company will automatically ‘go bust’ or go out of business. Many companies will make losses at some point in their development – especially in the early stages of a new business or a new product launch. The important issue to get across is how companies in these positions deal with the challenge – there are 5 ideas given on the slide and it is worth spending some time discussing these.

7. 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

8. 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

9. 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

10. 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??

11. 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