Friday, September 26, 2014

Profits, Economic Growth and the Poor

(NOTE:  this is an updated version of a previous 2011 post)

Many people are uncomfortable with the concept of profit. For them there is an underlying belief or feeling that profits made by entrepreneurs and their businesses are made at the expense of the rest of society.

However, in economics, profit is defined as the excess of the total revenues of a business over its total costs. Profit is the surplus left over from the revenues after paying for the raw materials needed for production, paying the workers, paying the lenders and investors and, of course paying all of the various r due to all government entities having jurisdiction over the enterprise.

For the business there are two ways of increasing profit.

The first is to increase sales and revenue while holding costs constant. This can be done by expanding and finding new customers, improving the quality and desirability of the product to attract new customers, better marketing of the product, etc.

When businesses expand more labor is needed which creates more jobs which results in income opportunities for more people. 

The second is to keep revenue constant while reducing costs. This involves finding less expensive ways of doing things without reducing the quality of the product.

Costs can be reduced in many ways. A business can invest in more efficient equipment which enables its workers to produce more in the same amount of time with the same or less effort. This saves on labor costs because it allows a business to expand its output without hiring more, or as many more workers, as would be needed in the absence of the labor saving machinery.

Costs can be reduced by eliminating waste. In the era before digital photography when photographers had to use film when taking pictures the giant film producer and developer, Eastman Kodak, was a big consumer of silver which, in the form of silver nitrate, was used in the making of photographic film. The amount of silver used to make each roll of film was small but, when multiplied by the number of rolls of film produced each year it added up to a very large amount.

After taking pictures with the film, photographers would send the film back to Kodak to be developed and developing film made up another large portion of Kodak's business. In the developing process the silver nitrate used in making the film was literally washed down the drain as it was no longer needed once the picture had been taken. Again, the amount of silver nitrate was minute. However, when multiplied by the hundreds of thousands of rolls of film developed by Kodak each year a lot of silver was going down the drain. Because of this Kodak invested in equipment to recapture this used silver nitrate and recycled it for use on new film thereby reducing the cost of purchasing silver for film making considerably.

Another example of cost saving by recycling was described in a 2008 entry on this blog entitled Saving Money and the Environment by Recycling old Roadbeds. In this case, companies that tear up and remove the old, broken asphalt from roads that are being enlarged or replaced no longer send the truckloads of asphalt they remove to landfills, instead, they use a recycling process that extracts up to 80% of the bitumen, the basic ingredient in asphalt, from the chunks of old road and use that in the building of the new road thereby reducing the cost of building the new road.

The point of this is is that while the hard life of the poor is mitigated somewhat by government programs and private charities, the real force that alleviates poverty is the pursuit of profit by driving down the cost of production which, in turn drives down the price of goods brought by consumers both rich and poor.

It is this lowering the cost of living that has been and still is, the main force improving the lot of the poor.

Links to Related Articles:

Prices, Profits and Low Income Consumers

Going Green Is Not Cheap

Solar Energy and Economic Efficiency

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