Profits & Losses: The Hidden Signal | Cash Course | PragerU Kids

hey cash course fans before we start the show remember that you can get hundreds of free educational videos for all ages at pregnant kids.com subscribe today and never miss an episode everybody loves a reward what's the reward for hitting the gym movie star muscles the reward for studying a new language B Madel and the reward for a successful business more customers and more customers leads to more sales which equals profits profit what am I some greedy fat cat actually a profit is a reward for Success it's simply what a business earns in a given time called Revenue minus their expenses called costs it's what they can save for an emergency spend on a vacation or reinvest into their business losses on the other hand occur when a business's costs are higher than their revenue oh no it's the goal of every business big or small whether it's a plumbing business a deli or a media company to make a profit and avoid losses but how do profits and losses function in an economy since resources like time money and energy are scarce and can be used in different ways profits and losses function to help allocate those resources to their most productive uses Sweet let's take a look at each of them more closely first profits like prices profits function as both an incentive and a signal in a free market where people can choose what to buy the potential for profit incentivizes businesses to respond to what goods and services their customers actually want at competitive prices while keeping cost low for example people need plumbers but a plumber isn't going to be motivated to work very hard if at the end of the day his revenue is $100 and his costs are $100 bye If instead his revenue is $150 the profit of $50 is the reward for utilizing his skills and time to satisfy the customer who wants the service more than they want to keep their $150 it's also the reward for being efficient with his resources and managing his costs well this plays out in every sector of an economy where the potential for profit leads to more and better goods and services in some economies where profits aren't allowed there's much less incentive for anyone including plumbers to try that hard or keep their costs down if there's so much profit maybe I should be a plumber too me too well profits also function as a signal in an economy in this case it's a signal that plumbing is a productive Endeavor this may lead others to offer plumbing services which leads to increased Supply and competition in a free market this increase typically brings down prices thus reducing revenue and any potential profit increase competition but that sounds so hard it is but not as hard as losses which also play an important function in an economy wait important but who wants to lose nobody does but in a market economy there's no guarantee you'll make a profit which means that losses are a powerful incentive for producers to carefully consider how to use scarce resources to maximize revenue and reduce costs say the Plumber's revenue is $75 and his costs are $100 which means he's facing losses he'd better figure out a way to increase his revenue and reduce his cost or else he'll go out of business if his losses continue maybe he offers additional services or Works extra hours to increase Revenue he could also reduce his cost by repairing his own equipment and finding cheaper suppliers additionally losses are a signal to the broader economy that something isn't working meaning too much energy and resources are being devoted to an unproductive or undesired activity this could lead plumbers to shift to other more profitable Endeavors offering other services that are lacking in Supply in some economies government intervene to prevent certain businesses from losses that's good right we need to protect businesses well if businesses aren't allowed to lose it creates a disincentive for businesses to address the causes of their losses including their high cost or dissatisfied customers and if higher cost won't affect the ability to profit the plumber could instead buy more pipes and other equipment and hire more workers than they need this could lead to shortages or higher cost for services with high demand say mechanics or electricians as a result you end up with not enough of things people want and too much of things people don't want like too many plumbers what too many [Music] plumbers sustained interventions like this throughout in an economy could lead to Serious consequences for a nation's standard of living and quality of life in command market economies like Soviet Russia of the past and Cuba and North Korea today there are often chronic shortages of basic food medicine and clothing because resources are being funneled into more favored but less productive activities profits are great and losses are tough but they both play an important role in a healthy economy whether small or large allowing them to function naturally enables a nation's citizens to utilize scarce resources like energy and food to produce the goods and services people actually need and want so the next time you hear profits ah the smell of opportunity ah the smell of sweet rewards I smell something [Music] else watch more at prer kids.com and parents don't forget to subscribe