Question

Profit serves as both an incentive and a signal. Explain Why?

Answer 1

Profit as an incentive is the reward of the risk taking, if the firm is investing in a field it runs through the risk of loosing that investment or making a profit from it.

Profit as a signal suggests that the firm in the market who are facing a profit are in the industry where the market is not saturated, i.e. there is more scope for the market to expand, or accommodate more firms in the market, that will encourage more and more firms in the market to invest in that particular industry. That will continue to the point where there is no more profit and all firms are just breaking even.