Question

What is profit? There is accounting profit discussed in the textbook:

profit = total revenues – explicit costs

Let me relate profit to the factors of production. The three factors of production according to the textbook are land, labor, and capital. Let me add a fourth factor found in many economics textbooks: a return to the entrepreneur! (Entrepreneurs provide two services to society: organize resources and assume risk.)

So how does a firm or entrepreneur maximize its profits? The answer is simple: provide society what it wants. (Note: this may be different from what society needs.)

Given this perspective, profit is something inherently good, something to be maximized, not feared.

Let’s refine our understanding of this concept. Normal profit is that return necessary to attract and maintain entrepreneurial participation in some economic activity.

What must a firm do to maximize its profit? Who must the firm please? How?

Answer 1

Maximizing profit:

This is to be done by making the best use of factors of production. Land, labor, capital, and entrepreneurial factors must be used in the best way so that the waste and cost could be minimized, and profit could be maximized.

Example: suppose labors are trained how to cut leathers in order to make leather garments. Although the training cost is their but it actually benefits the firm, since it reduces the cost of waste leathers and increases the profit margin – the maximization is done.

Please:

The firm must please Customers (society).

How?

This could be done by fulfilling the wants and needs of customers. In the process of doing so the firm must investigate (may be through market survey) their necessities and should fulfil accordingly. In this way revenues could be earned well at the minimum cost, making the profit margin high.