Measurement Of Business Profit Rates

In long-run equilibrium, profits in perfectly competitive industries are usually just sufficient to provide a normal risk-adjusted rate of return. In monopoly markets, barriers to entry or exit can allow above-normal profits, even over the long run. Nevertheless, high profits are sometimes observed in vigorously competitive markets, while some monopolies stumble from one year to the next without realizing superior rates of return. To appreciate the sources of profit differences, it is first necessary to understand conventional measures of business profits.

return on stockholders' equity (ROE)

Business profits expressed as a percentage of owner-supplied capital

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