Question

What factors determine the profit of a firm makes? Distinguish different sorts of industries

Answer 1

There are various factors that determine the profit that a firm makes which are as follows:

1. Degree of Competition: If the number of competitors in the market are more, then profit of the company will fall. On the other hand, if the degree of competition is less, then profit of the company will rise.

2. State of the economy- If the economy is currently booming, then the profits will rise and profits will fall if the economy is in recession as demand will fall.

3. Brand Image - If the company spends a large amount on advertising expenditure, then the profits of the firm increases and vice-versa

4. Total Cost- If the company is efficient then its total cost will fall which will increase the profits of the firm. On the other hand, if the company is inefficient, then total cost will fall.

It also depends on the type of industry in which the firm is operating. In case of service industry, the total cost are less and thus firms in service industry are profitable. On the other hand, in case of manufacturing firms, total cost increases as the variable cost and fixed cost is high because it involves the process of production.