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The Role of Profits and Markets
Profit <ul><li>The difference between the costs of production and revenue earned from sales </li></ul><ul><li>Profit = TR ...
Profit <ul><li>Drives business objectives: </li></ul><ul><li>Normal profit  – the minimum amount needed to keep a business...
Profit <ul><li>Functions of Profit </li></ul><ul><li>Existence of profit suggests: </li></ul><ul><ul><li>Demand buoyant, p...
Profit margin = profit / revenue x 100 <ul><li>Margins can be affected by: </li></ul><ul><li>Cost of capital equipment </l...
Losses <ul><li>When costs exceed revenue over a period </li></ul><ul><ul><li>Caused by temporary downturn in economy </li>...
Adding Value <ul><li>Difference between the input costs (raw materials, etc.) and the value placed on the product/service ...
The Market System <ul><li>The Market:   </li></ul><ul><li>Consumers represent  demand </li></ul><ul><li>Producers represen...
The Market System <ul><li>Price acts as a signal </li></ul><ul><li>Rising prices  – goods in shortage, demand greater than...
The Market System <ul><li>Factors influencing supply and demand: </li></ul><ul><li>Incomes –  demand </li></ul><ul><li>Cos...
The Market System <ul><li>Changes in supply and demand </li></ul><ul><li>Create surpluses and shortages </li></ul><ul><li>...
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Role Of Profits And Markets

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Role Of Profits And Markets

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  • It is important that students should understand that the absence of profit does not mean that a company will automatically ‘go bust’ or go out of business. Many companies will make losses at some point in their development – especially in the early stages of a new business or a new product launch. The important issue to get across is how companies in these positions deal with the challenge – there are 5 ideas given on the slide and it is worth spending some time discussing these.
  • Transcript of "Role Of Profits And Markets"

    1. 1. The Role of Profits and Markets
    2. 2. Profit <ul><li>The difference between the costs of production and revenue earned from sales </li></ul><ul><li>Profit = TR – TC where: </li></ul><ul><ul><li>TR = Total Revenue (Price x Sales) </li></ul></ul><ul><ul><li>Also referred to as Turnover </li></ul></ul><ul><ul><li>TC = FC – VC where: </li></ul></ul><ul><ul><li>FC = Fixed Costs (overheads) </li></ul></ul><ul><ul><li>VC = Variable Costs (direct costs or cost of sales) </li></ul></ul>
    3. 3. Profit <ul><li>Drives business objectives: </li></ul><ul><li>Normal profit – the minimum amount needed to keep a business in a particular line of production </li></ul><ul><li>Abnormal profit – profit above normal profit – market power? </li></ul><ul><li>Subnormal profit – below normal profit – how long can the firm survive? </li></ul>
    4. 4. Profit <ul><li>Functions of Profit </li></ul><ul><li>Existence of profit suggests: </li></ul><ul><ul><li>Demand buoyant, prices may be rising, worth entering market </li></ul></ul><ul><li>Profit attracts new businesses </li></ul><ul><li>Profit encourages efficiency </li></ul><ul><li>Profit encourages enterprise, innovation and risk taking </li></ul>
    5. 5. Profit margin = profit / revenue x 100 <ul><li>Margins can be affected by: </li></ul><ul><li>Cost of capital equipment </li></ul><ul><li>Changes in interest payments </li></ul><ul><li>Labour costs </li></ul><ul><li>Type of market </li></ul><ul><ul><li>Top end of the market </li></ul></ul><ul><ul><li>Luxury goods </li></ul></ul><ul><ul><li>High margins/low volume </li></ul></ul><ul><li>Bottom end of the market </li></ul><ul><ul><li>Everyday use </li></ul></ul><ul><ul><li>‘ Cheap as chips’ </li></ul></ul><ul><ul><li>Low margin/high volume </li></ul></ul>
    6. 6. Losses <ul><li>When costs exceed revenue over a period </li></ul><ul><ul><li>Caused by temporary downturn in economy </li></ul></ul><ul><ul><li>Caused by external shocks </li></ul></ul><ul><ul><li>Caused by changing tastes/fashions/technology </li></ul></ul><ul><li>Necessity of covering variable costs </li></ul><ul><li>Losses can be sustained: </li></ul><ul><ul><li>Restructuring </li></ul></ul><ul><ul><li>Re-financing – shares/loans </li></ul></ul><ul><ul><li>Using reserves </li></ul></ul><ul><ul><li>Cut costs </li></ul></ul><ul><ul><li>Boost sales </li></ul></ul>
    7. 7. Adding Value <ul><li>Difference between the input costs (raw materials, etc.) and the value placed on the product/service by the market </li></ul><ul><li>Value added may be tangible – additional features or intangible – brand image, style, etc. </li></ul><ul><li>Value Chain – value adding activities in a product or service </li></ul>
    8. 8. The Market System <ul><li>The Market: </li></ul><ul><li>Consumers represent demand </li></ul><ul><li>Producers represent supply </li></ul><ul><li>Interaction of the two creates the market </li></ul><ul><li>Changes in supply and demand conditions cause changes in the market </li></ul>
    9. 9. The Market System <ul><li>Price acts as a signal </li></ul><ul><li>Rising prices – goods in shortage, demand greater than supply – firms attracted to that line of production by existence of profit </li></ul><ul><li>Falling prices – existence of surplus, supply exceeds demand – incentive to move to more profitable line of production </li></ul>
    10. 10. The Market System <ul><li>Factors influencing supply and demand: </li></ul><ul><li>Incomes – demand </li></ul><ul><li>Costs of production – supply </li></ul><ul><li>Advertising – demand </li></ul><ul><li>External shocks – supply </li></ul><ul><li>Fashions and tastes - demand </li></ul><ul><li>Technology – supply </li></ul><ul><li>Can you think of others?? </li></ul>
    11. 11. The Market System <ul><li>Changes in supply and demand </li></ul><ul><li>Create surpluses and shortages </li></ul><ul><li>Influence price </li></ul><ul><li>Firms respond to seek profitable opportunities </li></ul><ul><li>Business flexibility important to long term survival in changing markets </li></ul>
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