Why is Profit Important in a Free Market Economy?
- It rewards risk takers (such as shareholders and entrepreneurs).
- It provides a stimulus to innovation (introduce new products and production techniques)
- It provides a source of funds (for investment and research and development-retained profit)
- It sends signals to potential investors and entrepreneurs (resources are drawn towards the production of goods where profits can be earned). This helps to allocate resources efficiently.
Types of profit
- Normal profit. The level of profit required to cover the costs of production. Normal profit is where revenue is equal to costs (MC = MR and draw line up to where it crosses the AC curve). Occurs at the level of profit required to keep factors of production in their current use.
- Supernormal profit (abnormal profit…
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