Question

What role does profit play in a newly setup business organization? Write in brief.

Answer 1

Profit is the surplus revenue after a firm has paid all its costs. Profit can be seen as the monetary reward to shareholders and owners of a business. In a capitalist economy, profit plays an important role in creating incentives for business and entrepreneurs. If an industry is profitable, it will encourage new firms to enter. If a firm becomes unprofitable, it will either have to adapt and change or close down. This profit motive can help increase efficiency, provide greater choice for consumers and allocate resources according to consumer preferences.

No risk, no gain is an age-old principle, which applies to all types of business. Greater the risk involved in a business, higher is the chance of profit. An entrepreneur undertakes risks under the expectation of higher profit. Profit is thus the reward for risk taking.