Importance of Profit

• Revenue and Demand

  Revenues - • The amount (value) of a product that customers actually buy from a business

  Demand - • The amount of a product that customers are prepared to buy • Can be measured in terms of volume (quantity bought) and/or value
• Various factors that affect the level of demand

  • Prices & Incomes (you look at this in more detail when considering elasticity of demand)

  • Tastes & fashions

  • Competitor actions

  • Social & demographic change

  • Seasonal changes

  • Changing technology

  • Government decisions
• TR calculation

  Total revenue = volume sold x average selling price
• two main ways of increasing revenues

  Increase quantity (amount) sold - Perhaps by cutting the price or offering volume-related incentives

  Achieve a higher selling price - Best to add value rather than simply increase price
• Why are costs important?

  • Are the thing that drains away the profits made by a business

  • Are the difference between making a good and a poor profit margin

  • Are the main cause of cash flow problems in business

  • Change as the output or activity of a business changes
• VARIABLE COSTS

  • Costs which change as output varies

  • Lower risk for a start-up: no sales = no variable costs
• FIXED COSTS

  • Costs which do not change when output varies

  • Fixed costs increase the breakeven output