Profit= total revenue – total costs.
Wage- a contractural agreement between worker and firm specifying what he should do and how he will be compensated. Worker knows in advance what he’ll earn if he does his job. The firm knows what they’ll pay if he does his job. WAGES ELIMINATE UNCERTANTY.
Rent- determined on a contractural agreement. You know how much you have to pay to get a good. They know how much they’re going to get.
Interest- a price. Prices came from supply and demand. Process in the market for loanable funds.
Demanders and suppliers in every type of government. Interest is to earn more money to get stuff you want but can’t afford yet. Were willing to pay a price to earn something today that was unearned. Price you have to pay someone to have purchasing power today.
Profits are not wages rents or interests. Useful, but not a profit.
Rachel earns $30,000 a year as a secretary, owns a building that rents for $6,000 a year, and owns a savings account at a bank with $23,000 a pays 10% interest.
Suppose she opens a pizza shop and works full time for herself, uses her own building and cashes savings account and borrows $20,000 for start up.
In the first year she plans to earn $80,000 in revenues for shop.
Total costs are 23,000+ 20,000 +(20,000 *.1)= $45,000
$85,000-$45,000= $40,000 a year in accounting sense= $40,000 in profits.
Economic way to solve- you also have to subtract implicit costs, lost, wages, money she’d get from building (opportunity cost)
$30,000+$6,000 + (23,000*.1)=$38,300
REAL ECONOMIC PRICE= TOTAL REVENUES- TOTAL IMPLICIT COSTS- TOTAL EXPLICIT COSTS
$85,000-45,000-38,300= $1,700 profit. Economic profit if entrepreneur to be pizza owner is $1,700. Richer than next best choice.
PROFITS ARE THE MOST IMPORTANT THING FOR ECONOMIC GROWTH
Profits exist only in a world with uncertainty.
If you made $50,000 instead of $85,000, the accountant profit is $10,000but the economic profit is negative. Giving up a lot of chances to make profit somewhere else. Necessary condition for profit has to do with UNCERTANTY. Not a good deal after people learn about it. If every one could guarantee profit, a lot of people would enter the industry. This would lower profits for everyone.
In the pizza market, shops would have to lower prices to get business. This lowers expected revenues from being in profit. To get more business you would have to either lower the costs or make really good pizza. This would force inefficient producers out of the market. Producers and consumers are better off, Rizzo’s wife might not be though. As new people enter the pizza market, it will also affect the cheese market where the price of cheese will rise from higher demand. This will increase worker’s wages.
The reason why profits still exist is that not everyone knows how to get in on the pie of profit. Entrepreneurs know how to cut themselves in on profit.
By restricting students from med school. It keeps wages high for doctors. Licenses restrict competition. We try to prevent competition. Losses also result from uncertainty. Needed in economics. It is a profit and loss system. The whole point is to make people pay for sucking by incurring losses.
When we eliminate profit and loss income. When profits occur, it is a sign that what we’re doing is valuable. Resources are drawn to those industries. A problem with eliminating people from losses is that losses destroy resources by the amount of loss. It takes resources from valuable resources and use them for destruction. Losses is a feedback loop. People take more risk in things if they are subsidized.
For profit companies people with decision making powers are at the head of the company. Non profits don’t lose or gain from bad or good decisions.
13% of fortune 500 companies from 1960 exist today. Government does things wrong by putting money into things that don’t work and taking money away from things that do work.
A congressman gets paid whether he makes the world better or not.
Large corporations are more vulnerable to small government than ever before. Companies have shorter half life than government. 50% of companies today didn’t exist in 1980.
Capitalism is based on individual decision making. Anticapitalist are uncomfortable with it because decisions and profits not made equally.
No system has ever empowered people and promoted economic activity as much as capitalism. “power to the people” approach.
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