Which will increase the profits of the business with example?

Answer 1

To answer this, first one must know whether you refer to accounting profit or to economic profit.

Accounting profits are basically the difference between nominal pecuniary prices and nominal pecuniary costs. For example, if a business borrows $100 at 10% interest to produce widgets which it finishes and sells a year later for $120, then the accounting profit is $120 - $100 * 1.1 = $10.

But if there was price inflation over that same year, did the business make a real profit of $10? Sometimes there is an accounting profit purely due to inflation, and the business actually loses purchasing power while making that supposed profit. For example, if the widgets increased in price only because of a general 20% inflation, then the business lost the purchasing power that went to pay-off the cost of borrowing the money! They made an accounting profit, on which the government is going to tax them, but they are worse-off than they started! Price inflation can increase accounting profit.

Modern economics has a different notion of profit. First, they want to adjust for any price inflation or deflation. Second, they call two other things "profit".

The first is "normal profit". The idea here is that someone who goes into one business could have gone into another, so that going into one business means giving-up the profit that would have been made going into the other. Viewed that way, the forgone profit is actually a cost. One really doesn't gain by going into a business unless one does better than one would have if going into another. There are some controversies about what are the sources of normal profit. Some economists see them as really the value of delaying consumption in order to produce; others associate them with the contribution of management. If the former is true, then normal profits would increase if over-all productivity increased, or if people became more anxious to consume. If the managerial theory is correct, then an improvement in management (over-all through the economy) would increase normal profits.

Then there's "super-normal profit", better known as "economic profit", which is any profit above normal profit. When economists speak to each other, if they say just "profit" then they mean economic profit. Basically, economic profit is possible when the economy is out of equilibrium, so that some items sell for more than they cost, after we adjust for price inflation or deflation and after we subtract normal profits. For example, let's say that people suddenly discover that widgets make teeth whiter and sexier. Until everyone adjust for this -- so that the suppliers to the widget maker don't increase their prices and other firms don't rush-in to make competing widgets -- the widget business will get higher prices while paying the old costs If there is no fully offsetting price inflation, then economic profit will imply accounting profit. If there is a price deflation, then there could be economic profit with accounting loss. Pre-modern economics, which attempts to explain price as determined by cost, frequently sees profit as purely a result of expropriation. For example, Marxists see profit as a result of giving employees less than the value of their labor; Georgists see profit as a result of claiming property in land. Under such theories, profit would increase if the means of expropriation increased, or if the productivity of the expropriated resource were to increase.