Question

Assignment :

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.) Note: 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. Economic rent is return greater than normal profit.

The main question : So in order to even earn a profit or to maximize profit a firm must?

Answer 1

Profit is earned by entrepreneur as it assemble all the other factors like land labour and capital and start production a take risk to start a production.it has risk to start production as after employ those factors he has to pay for those factors but after profuction if product doesn't sell in market then it has a huge loss for entrepreneur.so to take that risk and start production there should have a minimal payment without it noone will comes to produce anything and this is called profit.on the other hand all the others factors like land labour and capital get a receipt for participating in the production process similarly enterprenure is a also a factor of production so it also need a minimum receipt.now profit depends on certain factors like which market firm is operating,cost structure of the firm,competition in the market etc.as in theory we assume there are perfect competition in the market but in reality we can't see perfect competition.there are only monopolistic competition and monopoly in most of the market in the world.monopolistic competition is where many firms producing in the industry and they are producing close substitute goods.as those product available in the market are close to each other but have some distinguish features which other competitor doesn't possess.and there is a advertisement cost to advert there highlighting features.so in those industry they can charge different price.and here price is also depends upon quality as individuals can pay extra for a higher quality like apple is a leading mobile manufacturer who earns profit nearly 300% but although knowing it there is a craze for their product as they have maintain quality.so here all the amount is not profit but it is economic rent and to earn those abnormal profit they have to pay higher research and development cost to maintain the quality over other competitor.

On the other hand cost is also important factor for profit.so to increase profit level entrepreneur has to charge higher price or lower its production cost but higher the price is always not possible as there can be consumer loss due to price hike as they shift to other brand.so the only way to increase profit is decrease the production cost.is production cost of any firm is lower than the other existing firm of a industry then if they charge the same price they are not earning the same profit as the firm which production cost is lower will earn greater profut than others.and to decrease production cost entrepreneur has to use available resources optimally or he has to use advanced technologies.

Now if the entrepreneur produce some product which has no close substitute then the firm can earn higher profit than normal.