Factors and variables that affect profit maximization
It can also spread out the workload and decrease peak labor demands.
Profit limiting factors
Sometimes the best methods are word of mouth. Achieving a sufficiently high level of profit is crucial in sustaining long run business growth. Sales Sales are an important factor in determining profitability. This point can also be illustrated using the diagram for the marginal revenue—marginal cost perspective. For example, this is the strategy of Walmart and to an extent Amazon. The optimal output, shown in the graph as Qm, is the level of output at which marginal cost equals marginal revenue. Products which have falling demand like Spam tinned meat will lead to low profit for the company. It will work if customers remain loyal and still perceive product to be good value or cheaper relative to those of the closest rival product Evaluation: Competitors are likely to respond e. If sales numbers are high, a company is better prepared to handle adverse market conditions and economic downtrends. In the short run, a change in fixed costs has no effect on the profit maximizing output or price. In an environment that is competitive but not perfectly so, more complicated profit maximization solutions involve the use of game theory. What Is Profit Margin? Similarly, complementary goods will be important for the profits of a company. Net profit margin is a better representation of financial health than revenues alone.
The airline would maximize profit by filling all the seats. If the market is very competitive, then profit will be lower.
Substitutes, if there are many substitutes or substitutes are expensive then demand for the product will be higher.
That is, what is the profit maximizing usage of the variable input? When deciding a given quantity to produce, a firm will often try to maximize its own producer surplus, at the expense of decreasing the overall social surplus.
Factors affecting business risk
If the firm is a monopolist , the marginal revenue curve would have a negative slope as shown in the next graph, because it would be based on the downward-sloping market demand curve. IT, call handling, finance Find more statistics at Statista General evaluation points Profitability is ultimately determined by the market price that a business can charge compared to the supply-cost per unit Some costs are under the control of businesses e. Also, firms may suffer from taking wrong expansion plans. Profits for the company are determined by analyzing what is left over after expenses are subtracted from total revenue. Objectives of firms. Increase your net profit margin by doing a good job of managing your merchandise costs, and you can increase your sales prices at the same time. Government Regulation[ edit ] In an attempt to prevent businesses from abusing their power to maximize their own profits, governments often intervene to stop them in their tracks. For example, this is the strategy of Walmart and to an extent Amazon. Cutting the product range helps to remove the expense of a cross-subsidy Outsource non-essential functions A way of reducing fixed costs Focus the business on what it is good at Areas to outsource: e. An increase in costs will decrease profits; this could include labour costs, raw material costs and cost of rent. In an environment that is competitive but not perfectly so, more complicated profit maximization solutions involve the use of game theory. Economies of scale. The number of production units, production per unit, direct costs, value per unit, mix of enterprises, and overhead costs all interact to determine profitability. Similarly, complementary goods will be important for the profits of a company. Total economic profit is represented by the area of the rectangle PABC.
The degree of competition a firm faces. Understanding the key factors determining profitability assists managers in developing an effective profitability strategy for their company.
Factors that affect profitability of a business pdf
Quantitative Factors The most obvious, easily identifiable and broad numbers that affect your profit margin are your net profits, your sales earnings, and your merchandise costs. The additional units are called the marginal units. If you are a retailer, for instance, your branding and marketing strategy affect your profit margin indirectly through revenues. When profitability wanes, it is natural to try to increase productivity. If the firm imports raw materials, a depreciation will increase costs of production. A new CEO has helped to turn the business around and restore it to profitability. Subscribe to email updates from tutor2u Economics Join s of fellow Economics teachers and students all getting the tutor2u Economics team's latest resources and support delivered fresh in their inbox every morning. Peugeot's return to operating profit has been attributed to the companies' success at slashing costs, overseeing job reductions, shrinking inventory, lowering capital spending and raising prices. Also important is the idea of contestability. Losses, unfortunately, work the same way; more of a loser just loses more. Net profit margin is the ratio of net income relative to revenues, calculated by simply dividing profits by sales.
Relative costs. For example, this is the strategy of Walmart and to an extent Amazon.
based on 99 review