WHAT IS THE IMPORTANCE OF PROFIT MOTIVE IN MARKET ECONOMIES

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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.

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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 ...

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