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| 1. |
What is role of profit in business |
| Answer» Role 1. Profits as ‘Surplus’:The goal of every business manager is to gen\xaderate a surplus above cost. In fact, business exists for surplus generation. Profits are only a measure of the surplus of business income over expenses.Role 2. Profits as Regulator of Efficiency and Effec\xadtiveness:Profits act as a regulator of efficiency in business operations. Those who accomplish objectives with the least cost are able to make the maximum profits). In competitive conditions only profit-making com\xadpanies are supposed to use their human and mate\xadrial resources better than others.Role 3. Profits and Resource Allocation:In a competitive system the allocation of resources is determined by what consumers want to buy and how much they are willing to pay. If people demand more colour TV sets, its price will increase and its production will become profitable. So there will be transfer of resources from other industries to the colour TV industry.\xa0Role 4. Profits as Rent of Capital:Profits may be taken as pay for use of capi\xadtal. One of the purposes of profits is to compen\xadsate the numerous owners—proprietors, partners or shareholders—for the use of the capital they have in\xadvested in a business. Profits also must compensate them for risk-taking. If the business fails the capital may be lost.Role 5. Profits as Source of Capital:A major portion of undistributed profits is rein\xadvested in business for expansion and diversification. And one of the major sources of a company’s capital is its profit.Role 6. Profit and Innovation:According to J. Schumpeter “profits become the key element in innovation in a dynamic, changing economy, profit-seekers are driven to bring forth new processes and products profits are the lure that keeps the economy seeking new and more ef\xadficient ways of meeting real and potential human wants.” | |