PROFITS AND REVENUES

PROFITS
Profit is the reward received by an entrepreneur. Profit is nothing but the surplus amount left with the entrepreneur after paying all the factors of production. Profit can also be defined as the difference between the total value of output (TR received by the businessman) and the total value of inputs (TC incurred by the businessman) of a business. Profit = Value of Outputs Value of Inputs (rent, wages and interest).

Nature of Profit
Three Features of Profit are: Residual Income: After all payments, left is the profits. More fluctuations in Profits: Ups and downs in the level of profits do exist. But rent, wages and interest are certain. Profits can be negative: Profits can fall to zero or may be negative, but rent, wages and interest can not.

Concepts of Profit:
Profit consists of two major components: Gross Profit and Net profit. Gross Profit: The residual income left with the entrepreneur after making all the payments to other factors of production is noted as gross profit. Gross profit thus includes those costs which go unrecorded in the books of accounts, but which are important to determine the profit made by the business. Gross Profit = Total Revenues Total explicit costs.

 Net Profit: The net profit can be arrived by subtracting the implicit costs (entrepreneurs' reward for risk and uncertainty) from gross profits. This is referred to as pure profit. Net profit is the surplus leftover after deducting explicit and implicit costs from the sales receipts of a business. Net profit = Gross Profit-Implicit Costs. Net profit is a portion of the gross profit.

 Normal Profit: Normal profit is the minimum return that an entrepreneur receives for performing entrepreneurial functions such as bearing risk and uncertainty, managing other factors of production, etc. Super normal profit: (abnormal profit) The income remaining with the entrepreneur after subtracting all costs (both Explicit and Implicit ) from the revenues received from the business. It is an excess over the normal profit.

 Monopoly Profit: Monopoly profits is the profit coming not because of the performance of entrepreneurial activity, but because of the degree of monopoly power in the product market. Monopoly profits exist because of imperfect competition in the market. Windfall Profit: These profits arise due to changes in the general price level in the market. For example: If producers/traders purchase inputs and raw materials at lower prices and sell their outputs when due to unforeseen external factors prices go up very steeply, then the profits resulting there of are called Windfall profits.

REVENUE
Revenue means income. It is also called as Sales Receipts. Firms revenue is of three categories: Total Revenue (TR): TR is the total sales receipts of the output produced over a given period of time. TR depends on price of product and quantity of product. Symbolically, it is written as TR = P x Q. Average Revenue (AR): Revenue earned per unit of output sold is called or termed as Average revenue. It is simply divided by number of units of output sold. Symbolically, it is written as AR = TR/Q. AR will be equal to the price (AR=P).

 Marginal Revenue: Marginal revenue is the addition make to the total revenue by selling one more unit of item. OR it can also be said as extra income from selling extra output. MR is calculated as: MR = TR n TR n-1 or MR = TR/Q.

Behavior of Average Revenue and Marginal Revenue.

When prices do not change with change in output (prices remaining fixed): Price=AR=MR. Diagram: (AR curve and MR curve is a horizontal line)
Output Price (Rs) TR (Rs) AR (Rs) MR (Rs)

1 2

10 10

10 20

10 10

10

3
4 5

10
10 10

30
40 50

10
10 10

10
10 10

Behavior of Average Revenue and Marginal Revenue.

When prices do change with change in output (prices are not fixed, more output can be sold only by reducing price): Price = AR. Diagram: (AR and MR curves slopes downwards) MR curve is below the AR curve.
Output

Price (Rs)

TR (Rs)

AR (Rs)

MR (Rs)

1 2

10 9

10 18

10 9

3
4 5

8
7 6

24
28 30

8
7 6

6
4 2

30

 Behavioral Principles: One, a firm should not produce at all if TR does not equal or exceed its TC. Two, It is profitable for a firm to expand output whenever MR is greater than MC , and to keep on expanding output un till MR equals MC. MC curve should cut MR curve from below. Profits will be maximum at point where additional revenue (MR) from a unit equals to its additional cost (MC).

Introduction to MARKETS
In ordinary language, market means a public place in which goods and services are brought and sold. But, in economics, market is the whole world whereby buyers are brought in contact with the sellers. (whole of any region, freely or through middlemen, post, internet easily and quickly, etc).

Basic feature/essentials of the Markets

1. A Commodity to deal with. 2. There should be existence of both buyers and sellers. 3. A place, may be region or whole world. 4. Buyers and Sellers enter into transaction in such a way that only one price prevail for the same commodity at the same time.

Factors affecting size of the Market

Several factors determine the size of the market are: 1. Demand. 2. Durability. 3. Transportability. 4. Standard of the good. 5. Transport facilities. 6. Selling Cost. 7. Government Policy. 8. Other factors (credit and banking, science and technology, etc).

Determination of Prices in a Market:

A General View: In an open competitive market it is the interaction between demand and supply, that tends to determine price and quantity Equilibrium state. When changes in demand and supply takes place, there is another set of equilibrium point in the market:

1. Increase in demand, causes an increase in equilibrium in price and quantity. 2. Decrease in demand, result in a decrease in price and quantity. 3. Increase in supply result in decrease in equilibrium price and increase in quantity supplied. 4. Decrease in supply causing an increase in the equilibrium price and a fall in quantity demanded.

END of INTRODUCTION to MARKETS