Profit Management

The Role of Profit in an Economy High profit Enables 1. Investment in Research & Development. This leads to better technology and dynamic efficiency. This profit is particularly important for some industries such as oil exploration and car manufacture. Without this investment the economy will stagnate and lose international competitiveness, leading to job losses in some sectors. 2. Reward for Shareholders Shareholders are given dividends. Higher profit leads to higher dividends and encourages people to buy shares. Shareholders are an important source of finance for firms. Profit is important to be able to remunerate shareholders. 3. High Profit should attract new firms into the industry For example, the high price of oil and hence profits for oil companies should encourage firms to develop new oil fields. This assumes the market is contestable and new firms can actually enter. 4. Risk Bearing Economies Profit can be saved and provide insurance for an unexpected downturn, such as recession or rapid appreciation in the exchange rate. 5. Tax Revenues Governments charge corporation tax on company profits and this provides several billion pound of tax revenue per year. In UK the corporation tax rate is 20% 6. Acts as Incentive Higher profit acts as an incentive for entrepreneurs to set up a business. Without the reward of profit, there would be less investment and less people willing to take risks. For example, it is argued higher corporation tax, which reduces a firms post tax income may deter inward investment.

Evaluation of Importance of Profit. Though profit plays an important role in an economy. It is worth bearing in

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mind. 

Pursuit of profit may damage environment

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Higher profit can lead to greater inequality in society.

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Pursuit of short-term profit can encourage risk-taking and reckless behaviour. For example, commercial banks took more risks in the 1990s and early 2000s; this contributed to the credit crunch