Friday, January 18, 2008

Profits and Losses

Why is the free market better at delivering goods and services than the state? The answer is profits and losses! Profits are rewards that a company receives for offering something that people want at the right price, while losses are the opposite. How can government tell if they're offering goods and services that people want at the right price? Well, they can't, and that's the problem; oftentimes in fact, the worse a government program does, the more money is thrown at it. Here's an article that explain more about why profits and losses are critical indicators:

When a firm's revenue is greater than its costs, that firm earns a profit. When a firm's costs are greater than its revenue, that firm suffers a loss. Fair enough. But what do profits and losses mean? Are they the product of blind chance? What useful information can possibly be contained in profits and losses?

Contrary to public opinion, profits do not embody "exploitation" of laborers or customers. Profits embody information in the form of a lucrative reward for the entrepreneur or capitalist who is able to combine labor, capital goods, and other inputs in such a way as to produce an output that consumers value more highly than they value the inputs in another configuration. In plain English, the Coca-Cola Company earns profits because people are willing to pay a dollar for a two-liter bottle of Coke that may only cost ninety cents to produce. Profits are the rewards enjoyed by Coca-Cola for producing a product that people want to buy at a price they are willing to pay.

Read the rest of the article

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