Lesson 7 - Profit

Lecture Week Seven:

Consider the following quote by Milton Friedman regarding business firms, social responsibility and profit:

"There is one and only one social responsibility of business - to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud."

Your analysis of Friedman’s assertion must include the notions of allocative and technical efficiencies from the chapter four’s lecture. You must also give some thought to what is meant by social responsibility. What are the implications of a firm NOT maximizing its profits?

More about Profit:

Economists recognize a distinction between two levels or types of profit - normal profit and pure profit (economic rent):

Normal Profit – That return necessary to attract and maintain entrepreneurial participation in some economic activity

Pure Profit (economic rent) – Return greater than normal profit

Why is a firm profitable? Profit is a natural outcome of success in meeting the wants of someone. A firm is potentially profitable if, and only if, it produces a product or service valued by consumers. One would not expect profits for the production of broccoli-flavored ice cream.

Learning Objectives

The student must achieve a fundamental understanding of the following:

Chapter 11:

• Frank Knight
• Net revenue
• Cost
• Capital
• Interest
• Time preference
• Risk premia
• Bonds
• Real and nominal interest rates
• Profit
• Profit and uncertainty
• Entrepreneur
• Residual Claimant
• Transition from socialism
• Restrictions on competition
• Competition and property rights
• Discounting
• Present value
• Annuity
• Future value

Lesson 7 Assignment

Practice Test

Take and grade the Lesson Seven Practice Test. Review any questions that you missed on the test and determine the source of your difficulty.

August 28, 2002