Question

1. How can profit motive lead to income inequality?

2. How does profit motive affect innovation and economic productivity?

Answer 1

Q.1)

Earning profit is the encouragement of doing business; but, this should not be the only objective of business; social aspects also to be considered. In order to increase profit, a business may cut short the expenses – like lower payments of wages and salary, stopping of new recruitment, etc. If these are done income inequality arises, since income increases of businesses decreases of labor forces.

This indicates rich become richer and poor become poorer.

Q.2)

Productivity is the ratio of output and input.

Since there is profit-motive, business wants to get new ideas and concepts of doing business differently so that earning big profits – therefore, it indulges innovation. At the same time it increases productivity, since the use of labor and capital could be done efficiently so that profit increases.

Example: before innovation the production was 500 units by 2000 labors. Now, it becomes 800 units.

Earlier productivity = 500/2000 = 0.25

Current productivity = 800/2000 = 0.0.40

Productivity increases by (0.40 – 0.25 =) 0.15.