PROFITS, REVENUES

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    PROFITS AND

    REVENUES

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    PROFITS

    Profit is the reward received by an entrepreneur.

    Profit is nothing but the surplus amount left withthe entrepreneur after paying all the factors ofproduction.

    Profit can also be defined as the differencebetween the total value of output (TR receivedby the businessman) and the total value ofinputs (TC incurred by the businessman) of a

    business. Profit = Value of Outputs Value of Inputs (rent,wages and interest).

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    Nature of Profit

    Three Features of Profit are:

    Residual Income: After all payments, left isthe profits.

    More fluctuations in Profits: Ups anddowns in the level of profits do exist. Butrent, wages and interest are certain.

    Profits can be negative: Profits can fall tozero or may be negative, but rent, wagesand interest can not.

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    Concepts of Profit:

    Profit consists of two major components:

    Gross Profit and Net profit.

    Gross Profit: The residual income left with theentrepreneur after making all the payments to otherfactors of production is noted as gross profit.

    Gross profit thus includes those costs which go

    unrecorded in the books of accounts, but which areimportant to determine the profit made by the business.

    Gross Profit = Total Revenues Total explicit costs.

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    Net Profit: The net profit can be arrived bysubtracting the implicit costs (entrepreneurs'reward for risk and uncertainty) from grossprofits.

    This is referred to as pure profit.

    Net profit is the surplus leftover after deductingexplicit 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.

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    Normal Profit: Normal profit is the minimum

    return that an entrepreneur receives for

    performing entrepreneurial functions such as

    bearing risk and uncertainty, managing otherfactors 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.

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    Monopoly Profit: Monopoly profits is the profit comingnot because of the performance of entrepreneurialactivity, but because of the degree of monopoly power inthe product market.

    Monopoly profits exist because of imperfect competitionin the market.

    Windfall Profit: These profits arise due to changes inthe general price level in the market.

    For example: If producers/traders purchase inputs andraw materials at lower prices and sell their outputs whendue to unforeseen external factors prices go up verysteeply, then the profits resulting there of are calledWindfall profits.

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    REVENUE

    Revenue means income.

    It is also called as SalesReceipts.

    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 asAverage 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).

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    Marginal Revenue: Marginal revenue isthe addition make to the total revenue byselling one more unit of item. OR it can

    also be said as extra income from sellingextra output.

    MR is calculated as:

    MR = TR n TR n-1 or

    MR = TR/Q.

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    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 MRcurve is a horizontal

    line)

    Output Price

    (Rs)

    TR

    (Rs)

    AR

    (Rs)

    MR

    (Rs)

    1 10 10 10 -

    2 10 20 10 10

    3 10 30 10 10

    4 10 40 10 10

    5 10 50 10 10

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    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 byreducing 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 10 10 10 -

    2 9 18 9 8

    3 8 24 8 6

    4 7 28 7 4

    5 6 30 6 2

    6 5 30 5 0

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    Behavioral Principles:

    One, a firm should not produce at all if TR doesnot equal or exceed its TC.

    Two, It is profitable for a firm to expand outputwhenever MR is greater than MC , and to keepon expanding output un till MR equals MC.

    MC curve should cut MR curve from below.

    Profits will be maximum at point where additionalrevenue (MR) from a unit equals to its additionalcost (MC).

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    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).

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    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 prevailfor the same commodity at the same

    time.

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    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 andtechnology, etc).

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    Determination of Prices in a

    Market: A General View:

    In an open competitive market it is the interaction between demandand supply, that tends to determine price and quantity Equilibriumstate.

    When changes in demand and supply takes place, there is anotherset of equilibrium point in the market:

    1. Increase in demand, causes an increase in equilibrium in price andquantity.

    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.

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    END of INTRODUCTION toMARKETS