Profit decides whether a firm keeps producing

1. A firm producing at a loss is using up resources worth more than the output they make, so it cannot go on indefinitely.
2. Profit is therefore the test a producer applies to every decision, from what to make to how much of it.
3. It is also the incentive that draws producers into a market in the first place, which is the signal described in 2.4.1.
4. Profit is what enterprise earns for organising the other factors and carrying the risk, as set out in 1.1.2.

Costs and revenue together set the supply decision

1. A producer supplies a unit when the price covers the cost of making it, so the supply curve in 2.3.3 is really a cost curve.
2. A rise in costs makes some units no longer worth making, which is why higher costs shift supply left, as in 2.3.5.
3. A rise in the price does the opposite, bringing units into production that were not worth making before.
4. So costs and revenue do not just measure how a firm is doing; between them they decide how much it puts on the market.

A loss is a signal, not always a closure

1. In the short run a firm may keep producing at a loss if the revenue at least covers the variable cost, because the fixed cost has to be paid either way.
2. Closing means losing the customers and the trained staff, which is expensive to rebuild if trade recovers.
3. A loss that looks permanent is different, because there is no point covering variable costs forever while never covering the rest.

Profit funds the investment that lowers future costs

1. Retained profit is the cheapest source of finance a firm has, so a profitable firm can invest without borrowing.
2. That investment raises productivity and lowers average cost, which makes the firm more profitable again, as covered in 2.6.2.
3. A firm with no profit is stuck, because it cannot fund the very improvements that would restore its margin.

Judging the importance of profit for producers

1. It depends on the time period, because a loss in one bad quarter means something quite different from a loss over three years.
2. It depends on what the firm is for, since a charity or a public sector producer aims to cover its costs rather than maximise profit, as in 2.6.1.
3. It depends on which figure you look at, because total profit rewards the owners while average cost against price is what guides the next decision.
4. It depends on the market, because a firm in the competitive market of 2.5.2 has almost no room to protect its margin by raising the price.
5. Overall: cost, revenue and profit matter to a producer because between them they decide whether it produces at all and how much it supplies, but profit is a test rather than a target for every producer, and the figure that guides day-to-day decisions is average cost set against the price.