1.6.3 Profit and loss

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    Profit can act as a signal for firms, giving them an incentive to enter or leave the market. If a market has highly profitable products, then it makes firms more likely to enter that market as they see potential to make profits themselves. However, this signals consumers to leave the market as prices are too high for them. This shifts the demand and supply curves

    Entrepreneurs aim to maximise profits, which is their incentive to take risks. They innovate in order to reduce costs and improve the quality of products because they want to avoid loss and gain profit.

    Gross profit = total sales revenue – cost of goods sold

    Gross profit margin = gross profit/sales

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