The Importance of Profit Motive in Market Economies

The Importance of Profit Motive in Market Economies

Profit motive is a characteristic of free market economies, where the

sole intention of producers is to make profit. This results in both

positive and negative results.

A free market economy is one where

- Property and resources are privately owned

- There is freedom to produce and purchase goods and services

- There is no central planning of the economy

- Price mechanism and profits determine price of economic goods

- Profit is the driving force, or motive of all firms

Thus it is evident that there are many privately owned firms that

provide the economic goods in market economies.

The importance of profit motive in a market economy is that all firms

are established on its basis. The fundamental economic questions of

what to produce, how to produce and for whom to produce are answered

by profit motive and price mechanism:

What to produce: in market economies, that which is most profitable is

produced

How to produce: that technology, whether capital, or labour intensive,

which is most profitable is used

For whom to produce: the goods are produced and sold to people,

through whom maximum profit can be derived

Price Mechanism, which is the “invisible hand in guiding an economy”

is also governed by profit motive. Goods will be sold at that price at

which:

1. more goods will be purchased and consumed

2. more profits will be made

Thus goods will be sold at the most profitable price

Profit motive also has its own advantages:

1. it creates incentives for newer products to be made

2. it provides incentives for employees to work efficiently

3. it ensures efficient utilization of resources

4. competition is created, thus only good quality goods survive

5. there is development of technology to allow quicker and cheaper

production of goods

There are also, however, some disadvantages of overemphasis on profit