Profit and Loss in Free Enterprise

Transcription

1 Profits and Losses CHAPTER 3: SECTION 2 Profit and Loss in Free Enterprise Profit equals total revenue (price of a good times the units of the good sold) minus total cost (average cost of a good times the number of units of the good sold). Profit is the amount of money left over after all the costs of production have been paid. Profit exists whenever total revenue is greater than total cost. A loss occurs when the total cost exceeds total revenue.

2 Profits and Losses TOTAL REVENUE = price of a good x number of units sold TOTAL COST = average cost of a good x number of units sold PROFIT = total revenue > total cost LOSS = total cost > total revenue

3 For example, suppose you sell 10 headphones at $100 each, for a total revenue of $1,000. If it costs you an average of $70 each to produce those headphones, your total cost to produce 10 headphones is $700. Do you have a profit or a loss on your sale of 10 headphones? Answer: Profit of $300

4 Profit and Loss as Signals In a free enterprise economy, some businesses are earning profits and some are taking losses. Profits and losses are 1. signals to the firms actually earning the profits or taking the losses, and 2. signals to firms standing on the sidelines A firm on the sidelines will see what product is profitable and possibly enter that market. A firm may discontinue a product that is producing losses, and reallocate its resources to a profitable product. Resources flow toward profit and away from losses.

5 CHAPTER 3: SECTION 3 The Ethics of the Free Enterprise System Ethics and Free Enterprise Ethics consists of the principles of CONDUCT, such as right and wrong, morality and immorality, and good and bad. An ethical economic system should have four characteristics. Supporters of free enterprise say that the free enterprise economic system has these characteristics. Allow individuals to CHOOSE their own occupations or professions. Produce the goods and services preferred by both the majority and the MINORITY. REWARDS (or PUNISHES) producers according to how well (or poorly) they respond to the preferences of the buying public. Provide people with numerous FREEDOMS, including the freedom to work where they want to work, the freedom to start their own businesses if they want, the freedom to acquire property, the freedom to buy and sell the goods they want to buy and sell, and even the freedom to FAIL.

6 Economic Principles in Key Documents The Bill of Rights shows a high regard for PRIVATE property. The Bill of Rights notes that private property [shall not] be taken for public use, without just COMPENSATION. The Declaration of Independence encourages free TRADE -an essential ingredient of free enterprise. The Declaration of Independence lists COMPLAINTS against the king of Great Britain, George III. One complaint is that the king prevented the 13 colonies from TRADING with all parts of the world. The Constitution preserves COMPETITION an important feature of free enterprise by denying states the right to tax each other s goods. Article 1, Section 8, of the U.S. Constitution states that no tax or duty shall be laid on articles EXPORTED from any State. To preserve competition, it was important to allow the free trade of goods ACROSS state lines.

7 Economic Rights and Responsibilities in a Free Enterprise Economy People in a free enterprise economy usually share three sets of rights and responsibilities: OPEN DISCLOSURE The right to sell an item comes with the responsibility to disclose any relevant facts about the item in question. OBEYING THE LAW One has the right to use private property as one wishes, within the limits of the law. BEING TRUTHFUL The responsibility attached to the right to compete is that one must compete in a truthful, legitimate manner.

8 CHAPTER 3: SECTION 4 Entrepreneurs Imagine Being an Entrepreneur An entrepreneur is a person who has a special talent for searching out and taking advantage of new business opportunities. Entrepreneurs play an important role in society by taking risks to develop new products or new ways of doing things that benefit the public. Most people are not entrepreneurs; entrepreneurs are a tiny minority of the population.

9 Entrepreneurs, Profit, and Risk People will not risk their time and money to develop new products unless they can potentially earn a profit. Not all entrepreneurs are successful. However, a few end up as millionaires and even billionaires, and it is the prospect of such success that motivates entrepreneurs.

10 CHAPTER 3: SECTION 5 The Role of Government in a Free Enterprise Economy Government as Enforcer of Contracts A contract is an agreement between two or more people to do something. Government punishes people who break their contracts. In other words, the government enforces contracts. Without government to enforce contracts, the risk of going into business would be too great for many people. Could the free enterprise system function without a government to enforce contracts? Probably not as well, because the risks of going into business would be too great.

11 Government as Provider of Non-excludable Public Goods Goods are categorized as two major types: private goods and public goods. A private good is a good in which one person s consumption takes away from another person s consumption. Examples include food and gas. A public good is a good in which one person s consumption does not take away from another person s consumption. An example would be a movie in a movie theater.

12 A public good can be excludable or non-excludable. An excludable public good is a public good that individuals can be excluded (physically prohibited) from consuming. An example would be a college lecture, which is available only to enrolled students of the college. A non-excludable public good is a public good that individuals cannot be excluded from consuming. Free riders are people who receive the benefits of a good without paying for it.

13 Who will want to produce a nonexcludable public good? Economists say that in a free enterprise system, no one will want to. After all, people will not pay for something they get anyway. However, even in a free enterprise economy, people want non-excludable public goods, such as national defense or flood protection (dams). Who will produce these goods? The government will provide non-excludable public goods and pay for them with taxes. One way for people to communicate what nonexcludable public goods they want is through the voting process.

14 Externalities There are two kinds of externalities: negative and positive externalities. A negative externality is an adverse side effect of an act that is felt by others. A positive externality is a beneficial side effect of an action that is felt by others.

15 Some people argue that education generates positive externalities. What you learn at school will not only help you earn a living, but also help you become a better citizen and a more informed voter. Following that argument, if the public benefits from your education and the education of others, then the public should pay for that education. Some people argue that government should pay for all activities that generate positive externalities for society.

16 When it comes to negative externalities, some might say that the role of government is to reduce the negative externalities. Government can reduce the negative externalities through the following: the court system, regulation, and taxation. If you have a complaint against a negative externality, the courts are available to hear your case and find a resolution. The government creates regulations, such as speed limits and pollution standards, to deal with negative externalities.