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Definition of Profit Motive:
The profit motive is the incentive for businesses to strive to maximize profits.
The profit motive pushes people to accomplish extraordinary things. Virtually every large company was started by an entrepreneur seeking to earn a profit. Walk down the aisles of a supermarket. Every item in the store was likely provided because a farmer or company wanted to earn a profit. Furthermore, these suppliers strive to provide their goods or services in the most efficient manner. Society benefits because there is less waste and a lower production cost. When a company’s cost is lower than the competition it can either match the competitor’s price or reduce its price and increase sales. In either case – profits increase.
Innovation and entrepreneurship are encouraged by the profit motive. Developing a new product or innovation can be very risky. What if the entrepreneur misreads the demand for the good or service, and few are willing to purchase it at the price it is offered? What if production costs are underestimated? What if a competitor produces a similar and better product before the entrepreneur? These are just a few of the many risks an entrepreneur or company accepts when choosing to invest time and money in a project. What is their motive? Profits of course. Would these ventures be made without the possibility of earning a profit (assuming no coercion)? Probably not.
The profit motive is not limited to businesses. Individuals strive to improve their well-being. They must receive something in return for the time and skills they offer and choose to work for the company that offers the best package, including monetary compensation, employee benefits, and the work environment. Many companies have profit-sharing plans, where employees share in the company’s profits. The objective is to provide an incentive for every employee to work together and harder because every employee has a vested interest in the company’s success.
Capitalism refers to the private ownership of capital or businesses. The profit motive exists because individuals and corporations have a private interest in a company. Private investors own most American enterprises. Individuals are free to risk their money and efforts by starting a business. They are also free to seek better employment opportunities. Capitalism works best in a market economy where businesses strive to interpret the market forces, so they can furnish desired goods and services efficiently in order to earn large profits.
Does the profit motive offer a sufficient incentive for companies to supply all the goods and services the public needs and wants? No. Some goods and services are not well suited to be provided by companies seeking a profit. Most of these services are offered by the government. For example, who would pay for the military if the government did not provide it? Recognizing few individuals would pay, it is very unlikely a business would profit from furnishing a military. There are many companies that profit from the production of weapons, but their largest customers are probably governments. Economists also agree that police, fire, and judicial protection are best supplied by the government and not profit-seeking companies. However, it is important to note these services are funded with taxes. Profit-seeking companies pay the taxes directly as with a corporate tax, or indirectly through individuals working for these companies who pay a personal income tax. After all, in the long run every employee’s job depends on the company’s profitability.
Dig Deeper With These Free Lessons:
Fundamental Economic Assumptions
Entrepreneurs – Their Vital Role In The Economy
Supply and Demand – Where Producers and Consumers Reach Agreement
Changes in Supply – When Producer Costs Change