Question

Why do businessmen earn profit?

Answer 1

The role of profit in business can be judged from the following points.

1. Sources of Income-Investors invest their money in the business with the sole purpose of earning profit, since profit is a source of income, it is therefore provides the owners of business the mean with which they and their family members can live a comfortable life.

2. Continuity of Business-The incentive of earning profit keeps the man engaged in business activities. A business can only grow and gain strength if it earns profit. So earning of profit is necessary for the continuity of business.

3. Expansion of Business-One of the roles of profit in business is that businessman retains and reinvests a part of its profits in business undertaking stands on sound footing. It can expand and diversify business not only from reinvestment of funds but also getting loans from external sources for business.

4. Reward of Risk Bearing-Profit is the reward for bringing new products or processes to the market. It is a reward for a risk successfully undertaken. Profit, therefore, is a reward for the future which is uncertain.

5. Profit and Economic Development-Another role of profit in business is economic development. Profit and economic development are closely related with each other. If the firms are not earning profit then there is no economic progress in the country. If there is no economic development there is no profit to the business.

6. Profit Acts as Measure of Efficiency-Profit acts as an index of performance for business, if the business firms are earning profits. It shows that the country is progressing satisfactorily.