The Role of Profits and Markets

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The Role of Profits and Markets by Mind Map: The Role of Profits and Markets

1. Profits

1.1. definition: difference between costs of production and revenue earned from sales

1.1.1. normal profit: minimum amount a business needs to keep operating

1.1.2. abnormal profit: profit above normal profit

1.1.3. subnormal profit: below normal profit

1.2. profit = tr- tc

1.3. functions of profit

1.3.1. existence of profit: demand buoyant, prices may be rising, worth entering market

1.3.2. profit attracts new businesses

1.3.3. profit encourages efficiency

1.3.4. profit encourages enterprise, innovation, & risk taking

1.4. profit margin = (profit/revenue) * 100

1.4.1. margins can be affected by: cost of capital equipment, changes in interest payments, labour costs, type of market, bottom end of market

2. Markets

2.1. consumers represent demand

2.2. producers represent supply

2.3. interaction of consumers and producers creates the market

2.4. changes in supply and demand conditions the market

2.5. market system

2.5.1. price acts as signal

2.5.2. rising and falling prices

2.5.3. factors influencing supply and demand: income (demand), cost of production (supply), advertising (demand), external shocks (supply), fashions and tastes (demand), technology (supply)

2.5.3.1. changes in supply and demand

2.5.3.1.1. creates surpluses & shortages

2.5.3.1.2. influence price

2.5.3.1.3. firms seek opportunities

2.5.3.1.4. business flexibility in order to survive

3. Losses

3.1. when costs exceed a revenue over a period

3.2. necessity of covering variable costs

3.3. losses can be sustained

4. Adding Value

4.1. difference between input costs and value placed on the product/service by market

4.2. value added may be tangible or intangible

4.3. value chain