Profit Motive

Publication Date :

02 Jun, 2022

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Table Of Contents

Profit Motive Definition

Profit motive refers to an entity's intention that drives the entity to indulge in profit-making activities to achieve financial gain and profit. This powerful force motivates the entity to attain and accumulate wealth until the need or desire is satisfied.

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.

Profit Motive Definition

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 capitalism. Acting in self-interest to make personal gain is a vital element in a capitalist economy. 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 economy.

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 economics, 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 activity for a profit motive ultimately helps other stakeholders. For example, taxes collected from profitable businesses contribute to government revenue, and profitable businesses create jobs.
It is the foundation of economic and entrepreneurial activities. Therefore, earning more and more contributes to the economy.
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.

Frequently Asked Questions (FAQs)

What is the profit motive definition of economics?

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.

Why is profit motive important?

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.

What is an example of the profit motive in economics?

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.