• From the standpoint of the economy as a whole, and from the standpoint of the central concern of economics profits and losses play equally important roles in maintaining and advancing the standards of living of the population as a whole.

• Part of the efficiency of a price-coordinated economy comes from the fact that goods can simply “follow the money,” without the producers really knowing just why people are buying one thing here and something else there and yet another thing during a different season.

• When one business enterprise in a market economy finds ways to lower its costs, competing enterprises have no choice but to scramble to try to do the same.

Profits:

• Profits may be the most misconceived subject in economics.

• Socialists have long regarded profits as simply “overcharge”.

• Profits as Incentives:

  • The hope for profits and the threat of losses is what forces a business owner in a capitalist economy to produce at the lowest cost and sell what the customers are most willing to pay for.

  • Under free market capitalism, the incentives work in the opposite direction.

  • Even the most profitable business can lose its market if it doesn’t keep innovating, in order to avoid being overtaken by its competitors.

  • While capitalism has a visible cost profit that does not exist under socialism, socialism has an invisible cost inefficiency that gets weeded out by losses and bankruptcy under capitalism.

• Profit Rates:

  • When most people are asked how high they think the average rate of profit is, they usually suggest some number much higher than the actual rate of profit.

  • Competition among those seeking money from investors makes profit rates tend to equalize, even when that requires different mark-ups to compensate for different turnover rates among different products.

  • Profits on sales and profits on investment are not merely different concepts. They can move in opposite directions.

Costs of Productions:

• Among the crucial factors in prices and profits are the costs of producing whatever goods or services are being sold.

• Unfortunately, costs are misconceived almost as much as profits.

• Economies of Scale:

  • There is no such thing as “the” cost of producing a given product or service.

  • Large fixed costs are among the reasons for lower costs of productions per unit of output as the amount of output increases.

  • Advertising has sometimes been depicted as simply another cost added on to the cost of producing goods and services.

• Diseconomies of Scale:

  • There comes a point, in every business, beyond which the cost of producing a unit of output no longer declines as the amount of production increases.

  • Economies of scale and diseconomies of scale can exist simultaneously in the same business at various levels of output.

  • With increasing size, eventually the diseconomies begin to outweigh the economies, so it does not pay a firm to expand beyond that point.

  • Once again, counterproductive behavior from the standpoint of the economy was not irrational behavior from the standpoint of the person engaging in it.

• Costs and Capacity:

  • Costs vary not only with the volume of output, and to varying degrees from one industry to another, they also vary according to the extent to which existing capacity is being used.

  • In many industries and enterprises, capacity must be built to handle the peak volume which means that there is excess capacity at other times.

  • Unutilized capacity can cause price anomalies in many sectors of the economy.

• Passing on Costs and Savings:

  • It is often said that businesses pass on whatever additional costs are placed on them, whether these costs are placed on them by higher taxes, rising fuel costs, raises for their employees under a new union contract, or a variety of other sources of higher costs.

  • The idea that sellers can charge whatever price they want is seldom expressed explicitly, but the implication that they can often lurks in the background of such questions as what they will pass on to their customers.

  • Over a period of time, competitors usually begin to use technological or organizational advances to cut costs and reduce prices, but fortunes can be made by pioneering innovators in the meantime.

Specialization and Distribution:

• A business firm is limited, not only in its over-all size, but also in the range of functions that it can perform efficiently.

• Middlemen:

  • The range of human knowledge and expertise is limited for any given person or for any manageably-sized collection of administrators.

  • Only a certain number of links in the great chain of production and distribution can be mastered and operated efficiently by the

    same set of people.

  • Any economy must not only allocate scarce resources which have alternative uses, it must determine how long the resulting products remain in whose hands before being passed along to others who can handle the next stage more efficiently.

  • When a product becomes more valuable in the hands of somebody else, that somebody else will bid more for the product than it is worth to its current owner.

  • Third World countries have tended to have more middlemen than more industrialized nations have, a fact much lamented by observers who have not

    considered the economics of the situation.

• Socialist Economies:

  • Socialist economies not only lack the kinds of incentives which force individual enterprises toward efficiency and innovation, they also lack the kinds of financial incentives that lead each given producer in a capitalist economy to limit its work to those stages of production and distribution at which it has lower costs than alternative enterprises.

  • Capitalist enterprises buy components from others who have lower costs in producing those particular components, and sell their own output to whatever middlemen can most efficiently carry out its distribution.

  • Reliability is an inherent accompaniment of the physical product when keeping customers is a matter of economic life and death under capitalism, whether at the manufacturing level or the retail level.