Presentation on theme: "Objectives Explain the importance of profit in a private enterprise system. Explain how factors affecting profit can be adjusted to increase profit. Economics."— Presentation transcript:
Objectives Explain the importance of profit in a private enterprise system. Explain how factors affecting profit can be adjusted to increase profit. Economics LAP 2
Objective Explain the importance of profit in a private enterprise system.
Worked hard for a reward?Worked hard for a reward? Gave up something to get it?Gave up something to get it? I really wanted to go out with my friends tonight. Asked, “ Is it worth it ? ” If “yes,” you expected a profit.
What Profit Is If you’re like most people, you want to get something for what you spend. You want a reward. In business, when a reward is measured in financial terms, it’s called profit. Profit is the monetary reward for investing in a business.
C a l c u l a t i n g P r o f i t Business owners use a simple formula: Income – Expense = Profit They total the firm’s yearly income and subtract everything spent during the year.
Income Money received for supplying goods and services Expense Money a business spends Income & Expense
Cost of goods Money supplied for goods and services
Operating expenses Expenses to run the business
Gross profit Money left over after cost of goods Income from sales – Cost of goods = Gross profit Formula for gross profit:
Net profit Money left over after cost of goods and operating expense Gross profit – Operating expense = Net profit Formula for net profit:
It’s what’s left over that drives business owners to do what they do, such as: Build a new facility Expand into a new location Produce an additional product Give to charity Sponsor research
Why Profit Is Important It provides benefits to business owners. Motivation Satisfaction Motivation Satisfaction It provides benefits in general. Meets needs Provides better wages Strengthens the economy Meets needs Provides better wages Strengthens the economy
Businesses can: Hire and promote Pay salaries and wages Offer benefits Hire and promote Pay salaries and wages Offer benefits
As businesses grow, they develop products— which consumers purchase. Competition helps businesses meet the needs of customers before their rivals do.
With tax money from profitable firms, the government can pay for services and programs. Sometimes, businesses choose to contribute to charitable causes.
If no profit is generated in the long run, the business must shut down — because it can’t pay its employees, suppliers, or creditors.
Objective Explain how factors affecting profit can be adjusted to increase profit.
What Affects Profit When the economy is good, people are working and earning enough money to buy things. In a bad economy, people are out of work and can’t afford “extra” purchases. No customers A business owner can’t prevent a bad economy or create a good one. External Factors — Economy
What Affects Profit External Factors — Demand A product may become “all the rage” if the trend is to buy it. Aren’t they awesome? A product may become less popular if something else becomes “the thing,” instead. Demand and profit go hand in hand. When more people buy a product (or more of it), the business owner makes more profit.
What Affects Profit External Factors — Chance Surprise events can affect sales. Equipment breaks down. A weather event destroys something you need. Equipment breaks down. A weather event destroys something you need. A supply goes on sale. Sale! 2 for the price of 1 Some surprises actually help.
What Affects Profit Internal Factors E x p e n s e s When expenses go up, When expenses go down, Expenses profits go down. Expenses profits go up. Profits
What Affects Profit Internal Factors P r i c i n g Raising prices might raise profits. But it might discourage sales, too. Find out first what customers are willing to pay. $1.50 $1.30
No “free” services Good rates on supplies Good rates on advertising Efficient work No extra payroll spending Wise use of resources No “free” services Good rates on supplies Good rates on advertising Efficient work No extra payroll spending Wise use of resources How to Increase Profit
Change what you provide Beat the competition $1.50 $1.30 Expand product line
Entrepreneurs closely monitor how much profit they receive. Which actions should help an entrepreneur receive even more profit? If they charge extra fees—they hope to increase income. If they eliminate free services—they hope to decrease expenses. Talk with a local entrepreneur about how s/he tries to increase profit.
Graphic design for club Profit should be $50. Worked slowly Profit now $70 Profit should be $50. Worked slowly Profit now $70
Acknowledgments Original Developers: Mary C. Hollaway and Lelia Ventling MarkED Version 1.0 MarkED Resource Center Copyright 2006 Acknowledgments Original Developers: Mary C. Hollaway and Lelia Ventling MarkED Version 1.0 MarkED Resource Center Copyright 2006
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