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WHAT IS THE IMPORTANCE OF PROFIT MOTIVE IN MARKET ECONOMIES? WHAT ARE ITS NEGATIVE EFFECTS? 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. ...read more.


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 motive. 1. Misallocation of resources: due to profit motive, firms concentrate on producing that what is most profitable, and not what is most needed. ...read more.


Ruthless exploitation of resources: in order to make more profitable goods, resources are used quickly, without much planning for the future, resulting in degradation of ecology, pollution, and future scarcity of resources 5. Wastage: since newer machines and technologies are brought out, old ones are discarded. Also, when new goods are introduced in the market, the old ones are thrown away. Therefore there is wastage of resources 6. Economic imbalances: although not a direct influence of profit motive, cyclic booms and recessions are caused due to over dependence on price mechanism, causing periodic unemployment. Thus it is clear that profit motive has its pros and cons. In order to avoid the cons, economies impose government restrictions so that profit is made, but welfare of the people is also maintained. This is also one of the reasons why mixed economies were established. Now there is no pure market economy. ...read more.

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