Profit Motive Definition

In economics, the profit motive drives business owners to enter into business deals and take the risk. There is no right reason to run a business without achieving economic benefit, no matter its scale or size. Primarily this factor makes them different from non-profit organizations.

Key Takeaways

  • Profit motive meaning portrays an entity’s intention to indulge in profit-making activities to achieve financial gain and profit.It interprets how an entity is prepared to take risks, innovate, coordinate and work hard that they won’t perform otherwise if there wasn’t a personal or economic gain.It is an essential element in capitalism and drives people to decide and perform based on self-interest. It explains the existence of businesses and their contributions to the economy.

Profit Motive Explained

The profit motive is an important feature of capitalismCapitalismCapitalism is an economic system consisting of businesses, resources, capital goods, and labour. Private entities own it, and the income is derived by the level of production of these factors. Because of the private hands, these entities can be operated efficiently and maximize their production activity also.read more. Acting in self-interest to make personal gain is a vital element in a capitalist economyCapitalist EconomyA capitalist economy or a free market economy is characterized by private ownership, private production, and profit orientation wherein the role of government is limited to regulating and monitoring. Finally, an alternate economic system is the socialist/command economy that operates on a welfare motive. All production, investments, and price determination decisions rest with the government.read more. Self-interest and consistently aiming for profit result in the expansion of economic wealth. Hence, it aligns with Adam Smith’s invisible hand theory and contributes to the unseen force that moves the free market economyFree Market EconomyA free market refers to an economic system free from government interventions and controlled by privately owned businesses.read more.

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Every entity in the world can have profit-seeking characteristics. For example, the government can manage policies, and companies adjust strategies for profit maximization. Sometimes, consumers reflect profit-making behavior while purchasing even though profit maximization is inadequate for consumer behavior explanation.

Its positive influence can be observed from the impact created by entities like for-profit schools and health care institutions. The profit-seeking feature and competition enhance the performance, affordability, and quality exhibited by the schools and health care institutions, benefiting society. However, at the same time, for-profit organizations radiate negative influence also. For example, private schools or hospitals may fail to fulfill their obligations towards the poor people and affecting trust-based relationships in society.

Examples

Jacob is an employee in a good company. He did his job perfectly for years and enjoyed benefits like salary hikes, promotions, and other job perks that came along with his title. But soon realized that it wasn’t enough and should start his own business to earn more. Jacob always wanted to be a chef. So after giving it much thought, he resigned from his job and started his small restaurant; soon, through good taste, efficient customer service, and word of mouth publicity, his restaurant acquired a good reputation. Gradually he started earning well and more than what he was making as an employee.

In this profit motive example, the sole intent behind starting the restaurant was a profit, and he was driven by it; there were possibilities that he would have incurred heavy loss or have had a bad experience operating his own business for the first time, but he was willing to take the risk to earn more which he would’ve not accepted if it wasn’t for a monetary gain in the first place.

To understand the concept, let’s look into an example from daily life. A person named Robin daily hitchhikes to his office in his neighbor’s car since the neighbor also travels in the same direction. Every day Robin deliberately comes out in the morning at the same time his neighbor does, and the neighbor will offer a ride. If his neighbor leaves late, it will make Robin late, but again he is willing to take that risk and continue doing it because it helps him save transportation costs and add to his earnings.

Why is it Important?

  • The profit motive is deeply connected to business economicsBusiness EconomicsBusiness Economics defines the economic issues faced by an entity. It determine how much is the impact of a certain change in an economic factor on the profitability or revenues of a given business and uses this analysis in steering the firm’s decision-making.read more, and thus, an intent to generate profit is a positive side of doing business. Entities cannot sustain in business without making a profit.Indulging in business activityBusiness ActivityBusiness activities refer to the activities performed by businesses to make a profit and ensure business continuity. read more for a profit motive ultimately helps other stakeholders. For example, taxes collected from profitable businesses contribute to government revenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions.read more, and profitable businesses create jobs.It is the foundation of economic and entrepreneurial activities. Therefore, earning more and more contributes to the economyEconomyAn economy comprises individuals, commercial entities, and the government involved in the production, distribution, exchange, and consumption of products and services in a society.read more.Industrialization, technological advancement, and elimination of trade barriers are indirectly connected to it.Individuals with a profit-reaping mindset become creative; they invent and innovate. It encourages employees, individuals, and organizations to indulge in innovative ways of doing a task.Understanding the concept is important and helps academics analyze and interpret various business activities.Profit is directly proportional to risk; the more risk involved, the more the profit potential. This idea has encouraged many businesses to think out of the box.

This has been a Guide to what is profit motive & its definition in Economics. We explain profit motive meaning, examples, and its importance. You can learn more from the following articles –

It refers to a reason to make a profit possessed by an individual or firm engaged in a transaction or business. It explains that the primary objective of any business is to earn profit. Therefore, all the manufacturing goods, products, and services rendered are provided to make a profit.

It is important because when a business or transaction earns profit, it helps elevate the lifestyle of the people associated with it and contributes to the betterment of society and the people living in it.

The owner of a grocery store opened it intending to make a profit by selling groceries. The output of all the activities and processes performed should directly or indirectly contribute to the revenue from the store. If the store fails to make a profit even after a sufficient period, it will affect the going concern concept of the store.

  • Capitalist EconomyCapitalist EconomyA capitalist economy or a free market economy is characterized by private ownership, private production, and profit orientation wherein the role of government is limited to regulating and monitoring. Finally, an alternate economic system is the socialist/command economy that operates on a welfare motive. All production, investments, and price determination decisions rest with the government.read moreWage-Price SpiralWage-Price SpiralThe wage-price spiral theory in macroeconomics describes the vicious circle of rising wages and increasing prices.read morePublic-Private PartnershipPublic-Private PartnershipPubic-private partnership refers to a collaborative model whereby the government agency collaborates with a private sector organization to accomplish a large-scale infrastructure project through private funding. Such projects include the construction of dams, bridges, airports, roads, etc.read more