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Debt Relief – Insolvency – Bankruptcy Information » Bankruptcy Help » The Price System, Part II: Profits & Losses

The Price System, Part II: Profits & Losses


What is the social function of profits and losses? As Prof. Daniel J. Smith of Troy University describes, they provide an incentive for people to follow the information provided by the price system. By pursing profits and avoiding losses, producers and consumers use scarce resources in effective ways. In anticipation of being rewarded with profit, people and businesses are encouraged to undertake activity that will create valuable outputs. At the same time, the potential for losses encourages them to avoid excessive risks and wasteful activity. Policies that reduce profits, such as taxation, or reduce losses, such as bailouts, disrupt this function of prices and lead to inefficient uses of resources.

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25 Responses to "The Price System, Part II: Profits & Losses"

  1. moderatecanuck says:
    @IntronDepot1 Only if the market wants it. So far, the market has turned down so-called green alternatives. The biggest losers in the market right now is solar panel companies
  2. moderatecanuck says:
    @Zzaztur That is what government do. Reward those who fail by keeping them in business. What makes a business too big is government regulations and subsidies
  3. MrShootinputin says:
    Too bad it can not get of rid of incompetent government.
  4. MrGiggity890 says:
    excellent videos
  5. MrGiggity890 says:
    @Zzaztur of course!
  6. ggguzman says:
    @Zzaztur thats what he explicitly criticises
  7. mtanousable says:
    @lolnickfox BP lost millions of dollars from the oil spill. If the government hadn’t stepped in and shut down offshore drilling afterwards, they would have lost millions more to their cleaner competitors. Instead, the price of oil went up because of the lower production and they made money back. If anyone is to blame for BP continuing to make money, it is the federal government of the United States. Of course, the spill would likely not have happened if the government let them drill onshore.
  8. IntronDepot1 says:
    I really do believe that the countries that develop ‘bright green’ will be in a much stronger position in the future.
  9. IntronDepot1 says:
    I wonder  if this has a direct impact on the environment as well. We all know that the Soviet Union was a great destroyer of the environment and misused valuable resources, if efficiency and value are suffering from the current state of the U.S. economy then in turn the environment is getting stripped. Perhaps this could end up being an advantage the U.S. has over China in the long run. By learning to be more efficient with land and resources.
  10. ElJefer says:
    Maybe if the government stopped micromanaging, we wouldn’t have too big to fail enterprises. Also, what is too big to fail? Would we have a depression if they failed? Perhaps not, and businesses would think twice before relying on governments taking our money and giving it to them to pay for their mistakes.
  11. StateExempt says:
    @lolnickfox – How did the free market reward BP for damaging other people’s property?
  12. lolnickfox says:
    “it cleans out businesses which make poor economic decisions”

    Unless, of course, you are downstream of a business that makes poor economic decisions, like, say, fishermen in the gulf after BP spills it’s shit everywhere. Then, it cleans out businesses that were making adequate economic decisions and were fucked by bigger, greedier companies. Then, with gulf competition hamstrung, other fishing competitors can relax on their decision making because the threat is lessened. free market BS

  13. RealBloppy says:
    Amen. Recessions are necessary purges of inefficiencies. Recessions are natural market corrections to eliminate the under-performing businesses/services from the economy… we need more recessions.
  14. totustuus11 says:
    @Zzaztur Oh, state distortions and incentive perversity. Happy happy joy joy.
  15. Exmech2 says:
    @daobagua (p5)Unfettered free markets grow much faster, but cannot reach its potential due to short term greed, infighting, and the general belligerency that comes with cutthroat capitalism.However a well regulated free market can, has, and will achieve the full potential of growth that its population and tech could achieve. Another thing to remember, modern agriculture is the industry of converting oil into food, without regulations, reliance on oil will continue. This will prove catastrophic.
  16. Exmech2 says:
    @daobagua (p4) … has, surely, created fast economic growth. However, regulating the economy, paired with the influx of technology and efficiency, China would have outpaced the US a long time ago. Picture a population of 1.5 billion with the same tech, and efficiency as in the US with its population of 310 million! Absolutely regulated economies do not grow well. The Soviet Union was a prime example of this. …(p5)
  17. Exmech2 says:
    @Exmech2 technology, or technical availability to properly equip the population, the potential for economic growth still remains. What occurred during WWII wasn’t merely the destuction of the worlds’ material wealth… it also generated an immense amount of potential. Now take a population without tools or technology and inject modern efficient technlogies and rapid growth will occur up to the potential point. China emphasizes this well. Rampant and unfettered crony capitalism …(p4)
  18. Exmech2 says:
    @daobagua The reason Japanese factories were so young you’ve eloquently pointed out… the war destroyed a portion of the worlds’ wealth. But did it really? Premise 1) During any given period of time a given population, technological ability, and technilogical availability there will always be a limit to economic growth, that is, during a period of time economic growth can never be infinite; 2) During any period of time, if a given population does not have the…(p3)
  19. daobagua says:
    @Exmech2 Great. I look forward to your full reply. I am glad we are on the same page about crony capitalism. I think we can now probably constructively talk about policies.

    Cheers.

  20. Exmech2 says:
    @daobagua Pardon, please don’t mistake my arguments that pragmatically regulated business has been extremely successful for a defense of crony capitalism. The robber baron period was the epitome of unfettered crony capitalism. Much like the pyramids of Egypt, there are bodies in the foundations of many historic structures because more care was paid to profit, than workers lives. Regulation sought to limit crony capitalism, though I wonder if some measure nepotism will always remain.
  21. Exmech2 says:
    @Exmech2 (p2) …and the effects of these advances help growth in later periods. There’s a reason Japan rose so high economically. In 1980 there were many refineries and factories in the US that were 100 years old. Japan had no factory, or refinery that was more than 30 years old. Fast modernization increased efficiency dramatically. I have to carry this on tomorrow…
  22. Exmech2 says:
    @daobagua You hit all the facts I was hoping you would notice. There are two temporal forms of greed: short term greed; and long term greed. Deregulation incentivizes short term greed, while regulation incentivizes long term greed. Your mention of the economic growth during the war years evidences this. More money was spent on technologies that made all the industries more efficient. Advances in effinciency are what what create the growth spurts… (p2)
  23. daobagua says:
    @Exmech2 (P5) If I would wager what increased the GDP at an increased rate over time, I would say capital accumulation combined with technological leaps probably have the most positive effect.

    But I do not want to provide much more insight into the GDP talk, because this is besides the point. There is a causal explanation to why free markets and free trade would increase standards of living (See Smith). What is the explanation of how crony capitalism would increase general well being?

  24. daobagua says:
    @Exmech2 (P4) However, this trend is no different then what happened during the liberalization of markets between the 1700′s to the late 1800′s. It seems very presumptuous to therefore assume that the additional growth has to do with the increased regulations (“Life in 1776 wasn’t much different than in 1676. But can you say that 2011 and 1911 bare even the remotest comparison? Of course not.”). Perhaps regulation has nothing to do with it, perhaps it has grown in spite of regulation??? (see P5)
  25. lockdown260 says:
    @Exmech2 1)The ignorant idiot here is you. People past & present would not have moved to the city if the jobs there didn’t pay more than the jobs they already had. Look at the shop pay vs ave. wage in the 3rd world. The shops pay more. If you think prostitution & starvation is > shop work/pay you are a tool, period.

    2)If legislation was/is all it takes to end poverty then all you’d have to do is set the min wage at $50k everywhere & there’d be no more poor ppl. Learn some economics.

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