IGCSE Economics Paper-2: Specimen Questions with Answers 52 - 52 of 100

Passage

The cost of production of a firm decreases as the business expands.

Question 52 (1 of 5 Based on Passage)

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Short Answer▾

Explain why a firm՚s profits might increase.

Explanation

The profitability of a firm us dependent on the revenue and cost of production.

Profits are calculated by:

Where revenue of a firm is dependent on the price and the number of units of output sold. The profitability of a firm depends on several factors which are as follows:

  • Market share: A firm having large share in the market earns more profit as compared to the firm having less share because many of the customers buy the product of the firm that has a larger market share which eventually leads to higher profits.
  • Brand image: Brand image also plays an important role in affecting the profits of the firm. A firm with a good brand image in the market will be able to earn more profit because of its good image in the market.
  • Competition: If in the market the degree of competition is less or there is a monopoly in the market then a firm can exercise its monopoly power to earn more profits as in such cases the demand for the product is inelastic.
  • Cost of production: Profits are inversely related to the cost of production. The lesser the cost of production the more is the profit earned by a firm.
  • Product life cycle: Product life cycle determines the stage in which the firm՚s product is. If the firm is in the growth or maturity stage it will be earning more profits.

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