The Role of Profit in a Market Economy

Created by: rubenkabir1
Created on: 20-01-20 18:21

Finance for capital investment and research

Retained profits are a key source of finance for businesses undertaking capital investment and funds for acquisitions

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Market entry

Rising supernormal profits send signals to other producers within a market. Could lead to entry of news firms and products, increasing choice for consumers, but depends ons scale of barriers to entry

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Demand for and flow of resources

Resources flow where the risk-adjusted rate of profit is highest. For example, in farming when a particular crop is increasing in price, expected profits rise, so farmers will put more resources towards growing that particular crop (profit motive)

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Signals about health of the economy

Rising profits might reflect improvements in supply-side performance. This is also the result of higher AD.

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An important source of tax revenues for government

Although partly dependent on scale of legal tax avoidance by firms, corporation tax is the biggest source of tax revenue in the UK.

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Application: Samsung

Quarterly profit rose from 2.5bn Korean Won in Q1 of 2011 to 10.2bn in Q3 of 2013. Investment expenditure rose $7bn in 2009 to $14 in 2014. Shows the positive correlation between rising profits and investment.

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Other cards in this set

Card 2

Front

Rising supernormal profits send signals to other producers within a market. Could lead to entry of news firms and products, increasing choice for consumers, but depends ons scale of barriers to entry

Back

Market entry

Card 3

Front

Back

Card 4

Front

Rising profits might reflect improvements in supply-side performance. This is also the result of higher AD.

Back

Card 5

Front

Although partly dependent on scale of legal tax avoidance by firms, corporation tax is the biggest source of tax revenue in the UK.

Back

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The Role of Profit in a Market Economy