Agriculture Reference
In-Depth Information
blue-chip or high-quality stocks cannot be directly compared with speculative ventures such
as investing in futures and options funds, since the two types of investments involve
two completely different classes of risk. Having raised these limitations of the implicit
cost idea, it is also clear that this concept is a powerful one for managers making resource
allocation decisions.
In a free market system, economic profi ts should not exist. The theory goes that other
fi rms will be attracted into markets earning economic profi t. Once this happens, production
will increase, prices will drop, and economic profi ts will fall to zero. But in the real world
economic profi ts do exist. And the possibility of earning economic profi t is the motivating
force behind most business decisions.
There are four explanations for economic profi t in our market economy. First, profi t is the
reward for taking a risk in a business. When a private property owner invests personal
resources in a business project, there are no guarantees of a return to this investment.
The greater the risk involved, the greater the potential profi t for successful ventures, if the
venture is to attract any investors. Second, profi ts result from the control of scarce resources.
In the U.S. economic system, most property is owned and controlled by private citizens. If a
citizen owns a resource that others want, the others will bid the price up, which generates
a profi t for its owner. The greater the demand for a resource, the higher its price will be,
and the greater the profi t reward to its owners. Third, profi ts exist because some people have
access to information that is not widespread. Resource owners who have special knowledge,
such as secret processes or formulas, can use this information exclusively and can thereby
maintain signifi cant advantages over their competition. The concept of patents and copy-
rights evolved as part of a formal attempt to encourage creativity by ensuring that the creator
profi ts from his or her ideas. Fourth, profi ts exist simply because some businesses are
managed more effectively than others. The managers of such businesses are often creative
planners and thinkers whose day-to-day organizations are extremely effi cient. The reward
for doing the job well often results in economic profi t.
The profi t motive is the “spark plug” of a free market economic system. The prospect of
earning and keeping economic profi t serves as the incentive for creativity and effi ciency
among people. It stimulates risky ventures and drives people to develop ways of cutting
costs and improving techniques, always in an effort to satisfy consumers' desires.
The economics of markets
Supply and demand, and the resulting market equilibrium price and quantity, are among the
most fundamental economic concepts. Supply is defi ned as the quantities that sellers are
willing and able to place on the market at different prices during a particular time period.
The law of supply refl ects a direct relationship between price and quantity, which means
sellers are willing to provide more products for sale in the market as prices increase.
The buyer or consumer side of the market is represented by the demand curve. Demand
is the quantity that consumers are willing and able to buy in the market at various prices
during a particular time period. As with supply, we are concerned with a price-quantity
relationship. The law of demand fi nds an inverse relationship between price and quantity, or
buyers are willing to purchase less as price increases.
The supply and demand relationship can be described in three ways. To illustrate, assume
that a food manufacturer sells an organic gluten-free breakfast cereal to grocers, with prices
ranging from $20 to $40 per case. From market research, they have data on how many cases
will be sold per month at the different prices. Supply and demand can be portrayed as a table
 
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