The role of profit in a market economy
Profit does three jobs in a market economy. It signals where resources are needed, rewards risk-taking, and funds future investment and innovation.
Real World
When ride-hailing apps like Uber entered cities and earned supernormal profits, rival firms (Bolt, Ola) entered the market, competition intensified, prices fell, and profits were competed away — demonstrating profit's signalling and incentive roles simultaneously.
Exam Focus
For 'evaluate' questions, counter the positive role of profit by discussing how monopoly profit can persist without entry, limiting the signalling function.
Price Elasticity of Demand
PED = % change in quantity demanded ÷ % change in price
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