What Is Profit Motive?
How does the profit intent affect us in our daily lives?
What must you know?
In this article, I will break down the meaning of Profit Motive so you know all there is to know about it!
Keep reading as we have gathered exactly the information that you need!
Let’s understand the profit motive and its effects!
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What Is Profit Motive
The profit motive is what drives people and companies to take on projects and perform transactions with one another.
In other words, our goal to earn a profit is what motivates us and drives us to do business, to start a new project, or to embark on a money-making journey.
For example, if you decide to put time, energy, and effort to building different sources of income for yourself, you are doing this as you are primarily driven by the idea of making money or profits.
Since we stand to gain, we will perform activities or accept varying levels of risk based on the premise that we will make money (otherwise we would not have pursued the activity in question).
Our motivation to earn profits pushes us to innovate, to create things, to improve on things, to investing things, and take personal or commercial risks.
Profit In Economics
The concept of “profit motive” is an important concept in economics.
In economics, it is viewed that we each strive to do or act in such a way that we earn a profit or make money.
A long time ago, Adam Smith (a famous economist) discussed the topic of the “profit motive” in his book called The Wealth of Nations.
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Based on the premise that we all do things with the intention to make money, economists have created models, theories, and concepts in an attempt to predict how individuals may act in different situations.
We take steps to earn money because we need to pay for what’s necessary for us to live and survive.
However, we also want to earn money to perhaps adopt a different lifestyle, get personal satisfaction in the process of earning money, or merely get rich!
That’s what the economist Adam Smith considered to be the “invisible hand” driving the economy.
People like you and me, driven by our self-interest to make a profit will do what we think is going to help us achieve our goal.
When everyone in the economy acts in a similar way, you have a healthy and growing economic activity creating additional wealth for the population.
Profit Motive Definition
Investopedia defines the profit motive as follows:
The profit motive is the intent to achieve a monetary gain in a project, transaction, or material endeavor.
In other words, the profit motive is when:
- Individuals and companies
- Have the intention
- To do things
- For profit, gain, or money
In essence, based on the profit motive definition, we can say that it’s the idea that profit induces us to act in ways that we believe will help us make money.
Importance of Profit Motive
The notion of profit is quite important to predict how companies, individuals, consumers, and economic stakeholders tend to operate.
Decision-making is a complex process and may involve many variables both objective and subjective.
However, if you want to have a good estimation of how people act or may act in the future, the economic profit motive would be the model that you should use.
Corporations make decisions driven by the need to make money to ultimately make their shareholders and stakeholders happy.
Individuals make decisions driven by the need to earn a profit to pay for their life necessities, adopt a lifestyle of their choice, and build wealth.
From this perspective, you’ll see how individuals and corporations make decisions.
If you had the option to choose between two income opportunities, most will choose the one that pays the most.
If corporations had multiple lines of product, they may eventually focus only on the profitable ones and drop the ones that don’t bring in any revenues or even result in a loss.
As you can see, using the profit motive model, you can make logical deductions about how economic agents act or may act in the future.
Effect of Profit Motives
What are the effects of our desire to make money?
In a free market, we have the freedom to choose what products and services we consume (or produce).
As a result, the profit motive theory in economics suggests that if everyone acts in their self-interest to maximize their profits, overall there is a good and effective distribution of resources and capital within the economy.
The main effects of profit motive is to:
- Reward us for doing something useful or valuable
- Correct undersupply or oversupply of goods and services
- Determine who gets what resource
You get rewarded when you make something useful that willing to pay for.
For example, if you provide a service or create a product that another person needs and is willing to pay for, you stand to gain a profit.
When we are all free to make choices as to what we wish to buy at and what price, the economy will automatically correct shortages and surpluses in such a way that we achieve a balance between supply and demand.
Finally, the profit motives help define how resources are allocated in the market.
If a company is willing to pay more for a specific resource to create something of value, the seller of the resource will offer the resource to that economic agent than another one looking to pay less for the same thing.
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Profit Motive Example
What is an example of profit motive?
To better illustrate the point, let’s first look at what the economist Adam Smith considered to be an example of profit motive and then we’ll look at modern profit motive examples.
According to Adam Smith, the practice of buying and selling goods, barter, or trade was considered an example of people performing certain activities for the purpose of economic gain.
When people in society trade with one another, Smith argued the overall economy would gain as a result of the effective distribution of capital and goods.
In today’s world, what drives us to make money?
Well, we need to make money and earn profits to survive.
As such, our basic survival instinct leads us to act in ways that help us make profits.
Once we’ve covered our survival needs, many of us in society are driven by the dream and fantasy of being rich, living a jet-set lifestyle, living financially free, having the ability to buy and consume at will.
The example of our desire for bigger and better is why people lineup for hours (or days) to buy the latest smartphone, you have the fashion industry banking on our desire to look rich, the need to drive a luxury car, and so on.
The reason we consume these things is that some individuals or corporations considered that they could make a profit by selling us goods and services that we intend to consume to satisfy our needs.
Profit Motive For Taxation
In the United States, the Internal Revenue Service (the IRS) uses the profit intent to determine whether or not certain expenses are deductible for tax purposes.
Companies and individuals have the ability to deduct expenses incurred when operating a business or looking to earn an income.
Deductible business expenses are called ordinary expenses.
However, how can you tell which expense is a deductible expense or not?
That’s where the IRS uses the business or entrepreneur’s intention to make profits as a basis.
If the expense was incurred based on reasonable expectations to earn an income or profits, the expense would probably be an acceptable business expense.
However, if the expense was not a necessary expense or appropriate, the IRS will not accept the deduction.
For example, if you incur expenses related to a hobby of yours, your expenses are non-deductible if you had no intention of making a profit or achieving an economic gain.
The IRS has come up with a profit motive test where they consider nine factors to try to determine if an expense was incurred to earn a profit or not.
The IRS profit motive test factors are as follows:
1. the manner in which the taxpayer carried on the activity
2. the expertise of the taxpayer or his or her advisers
3. the time and effort expended by the taxpayer in carrying on the activity
4. the expectation that the assets used in the activity may appreciate in value
5. the success of the taxpayer in carrying on other similar or dissimilar activities
6. the taxpayer’s history of income or loss with respect to the activity
7. the amount of occasional profits, if any, which are earned
8. the financial status of the taxpayer
9. elements of personal pleasure or recreation
Profit Motive Criticism
Over the years, there has been some criticism about the concept of profit motive.
The idea behind the criticism is that economists should not consider that a person’s decision or a corporation’s decision is merely based on profit-making activities.
When people decide to do something, they may be driven by the need to make money, profits, greed, and self-interest, but it’s not necessarily the case for all decisions and for all people.
Based on the profit motive concept, if a person is offered two jobs, he or she is supposed to pick the job giving the highest return for the least amount of work expected.
However, not every person in society will favor the highest paying job to work less.
In fact, you’ll have people choosing a job not because of how much money they can earn but about the satisfaction and pleasure they derive from performing the job duties.
A major criticism of the motivation for profit is towards the corporation’s drive to make money.
In essence, following the 2008 financial crisis and stock market crash worldwide, critics argue that corporations, motivated by short-term gains, have the incentive to act in ways that can put the entire economy (even at the global scale) at risk.
As such, companies are encouraged not to make decisions purely based on the need to make more and more profits but consider the overall impact of their decisions.
In general, we can say that the profit motive profits can help in predicting how people and companies make decisions, but should not be considered as the sole motivation or focus.
The Profit Motive Takeaways
So, there you have it folks.
What is the profit motive?
What is the purpose of the profit motive?
How does the profit motive affect us in society?
The profit motive economic definition suggests that corporations, firms, individuals, and economic agents act in a way as to maximize their profit.
On this basis, a person would prefer to have a higher paying job or choose the cheaper product or service if both were to be equal.
Similarly, businesses are primarily started with the intention to earn profits.
Achieving the highest possible revenue and spending the least amount of money to get there is what allows companies to remain profitable and competitive in the market.
By seeking higher profits, companies create value for their shareholders, investors, and stakeholders.
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Definition of Profit Motive
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