Friday

 

Profits Are Good, The More The Better, They Create Wealth, Jobs and Economy Growth

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How do profits create wealth and economy growth?
Inputs, including labor and raw materials, into Company A cost $100.
Product created from those inputs sells for $110.
Adding up all businesses, the economy had e.g. $100,000 of wealth before but it now has $110,000.
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Per Figure 1, potential competitors see the Q1 sales quantity and P1 prices and can estimate profits of Company A.
They are incentivized to start up competing companies or start making the same product at their existing company.
Competition among multiple suppliers results in
· increased product supply, moving from Q1 to Q2
. increased employment because of the increase of quantity produced
· reduction of product price, from P1 to P2
Product quality and variety also increase due to competition.
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In a market economy any person or group is free to start a new competing company, but they must:
· have required skill/knowledge
· have or be able to raise investment capital money
· have motivation, mostly created by desire for profit
· be willing to risk losing the investment money
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You can make your own table for $1000, including value of your time.
A specialist, a profit-seeking businessperson, can make the same table for cost of $500.
The businessperson sells the table to you for $750.
You save $250 and the business makes a $250 profit.
Businesses usually invest most current profits back into the company leading to more profits, more wealth, more jobs, and more total worker pay.
The original $250/$500 = 50% profit attracts competitors.
With each company lowering price to get more business this eventually drives price of the table down close to $500 and economic profit down to almost zero, just enough profit (“normal profit”) to incentivize the company to stay in business.
Wanting more profits businesses then innovate to reduce production costs,
improve product quality and create new products.
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Wanting to make profits, the businessperson pays employees their value = the going market rate for their labor.
The more the employee contributes to increasing profits the more the employee will be paid.
If paying employees too little, below their market value, the businessperson will not be able to hire and keep workers.
If paying employees too much, above their market value, the businessperson will make little or no profits.
Because of competition most businesses do not make economic profits, above what they could make just by putting their money in the stock market - unless they innovate, including reduce production costs, improve product quality, and create new products.
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A helpful five minute video, “Profits Are Progressive”
https://www.youtube.com/watch?v=tdHwewUuXBg