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Profit motive

What is profit?

A financial gain, esp. the difference between the amount earned and the amount spent in buying, operating, or producing something.

Every accountant knows the following formula
Revenues - Expenses = Profit

However this definition is not enough. To see what is really going on we need another formula.
Revenues - Expenses - Opportunity cost = Real profit

Profit is necessary


If a person owns and runs their own business and it makes a profit of $10,000. You might think that is good.
But what if they put in 40 hrs a week and invested $50,000 dollars in the business? You might also think that is good.

Now what if, the interest rate was 10% and that same person could earn $9,000 in a job if they didn't run that business? 
Well this means the business is a really bad idea. By running the business they are not getting:
$ 5,000 in interest
$ 9,000 income from job
a total of $14,000 

They are actually $4000 worse off despite making a profit.
Their real profit is actually a loss!! And they are taking on risk, they might not make that $10,000

Some people cannot understand why businesses need to make a profit, why is someone charging them more for goods than it cost the person selling the goods. But if they didn't they would actually be worse off than not running a business and the goods wouldn't be supplied at all. Better to pay someone a bit extra than not have a choice to buy it at all.

Think about this would you be happy earning the same as you earn now in your job if you had to put some money into the business you work for, say $100,000 or equivalent. They might even be a chance you wont get your money back. Wouldn't you want to have a better rate of return for taking on that risk, and the more the risk the more you would need to be promised to make you happy?


Marketing

The profit motive we are constantly told leads businessmen to:
  • Lie
  • Cheat
  • Steal

But this is just conjecture misunderstanding and rumours 
Businessmen
  • Create goods and services
  • Create jobs
  • Create wealth
  • Allocate resources (market)
  • Drive technology
  • Pay taxes and give to charity
The few that are bad, eventually get caught and not reflective of the majority.


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