FACTORS AFFECTING PROFIT

PROFIT• A financial benefit that is realized when the

amount of revenue gained from a business activity exceeds the expenses, costs and taxes needed to sustain the activity. Any profit that is gained goes to the business's owners, who may or may not decide to spend it on the business.

PROFIT (ACCOUNTING)• The difference between the purchase price and

the costs of bringing to market.

FACTORS AFFECTING PROFIT

• Degree of competitionThe degree of competition a firm faces is important. If a firm has monopoly power then it has little competition, therefore demand will be more inelastic. This enables the firm to increase profits by increasing the price. However government regulation may prevent monopolies abusing their power.

• Market CompetitionIf the market is very competitive then profit will be low. This is because consumers would only buy from the cheapest firms.• Market ContestabilityMarket contestability is how easy it is for new firms to enter the market. If entry is easy then other firms will always face threat of competition, even if it is just “hit and run competition” This will reduce profits.

• Strength of DemandDemand will be high if the product is fashionable.e.g. mobile phone companies.• State of the EconomyIf there is economic growth then there will be increased demand for most products especially luxury products.

• Successful AdvertisingA successful advertising campaign can increase demand and make the product more inelastic, however the increased revenue will need to cover the costs of the advertising. Sometimes the best methods are word of mouth.

• SubstitutesIf there are many substitutes or substitutes are expensive then demand for the product will be higher. Similarly complementary goods will be important for the profits of a company.

• Degree of CostsAn increase in costs will decrease profits, this could include labour costs, raw material costs and cost of rent. For example,1) A devaluation of the exchange rate would increase cost of imports therefore companies who imported raw materials would face an increase in costs.2) If the firm is able to increase productivity by improving technology then profits should increase. • Firm with high Fixed CostsA firm with high fixed costs will need to produce a lot to benefit from economies of scale and produce on the minimum efficient scale, otherwise average costs will be too high.E.g.: Steel Industry.

• Firm’s EfficiencyIf a firm is not dynamically efficient then over time costs will increase. And it will reduces the profit.

• Price DiscriminationIf the firm can price discriminate it will be more efficient. This involves charging different prices for the same good, so the firm can charge higher prices to those with inelastic demand.E.g.: Airline Firms.

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