Reading: Lesson 5 – Profits: A Sign of Serving Others Well

Description: 

In Module 2, Lesson 3: Creating Value and Serving Others, we explored how entrepreneurs benefit others through their efforts to benefit themselves in the market. This lesson focuses more specifically on how profits tell a producer the extent to which his or her product or service creates value for others.

In this lesson students will read an article ‘He Gains Most Who Serves Best’ by Paul L. Poirot. This article discusses how profits can be used as an indicator of how well an entrepreneur is serving others. Students will then read an article by Walter E. Williams, “People Before Profits,” which addresses the same topic. Lastly, students will participate in an activity called the Coffee Shop Game.

 

Time Required:

45 min

 

Required Materials:

Internet connection, writing instrument 

 

Prerequisites:         

Lesson 2.3 – Creating Value and Serving Others

Module 3 – How Can Entrepreneurs Use Economics to Make Better Decisions?

Module 4 – How Does Trade Create Wealth?

Lesson 5.1 – Role of Prices

Lesson 5.2 – How Market Prices Emerge

Lesson 5.3 – The Function of Profits

Lesson 5.4 – The Importance of Loss

5.5.A - Read the following article using the questions below to guide your discussion [10 min]:

Article: He Gains Most Who Serves Best by Paul L. Poirot (FEE.org)

“A businessman’s profits are a measure of his efficiency in the use of scarce and valuable resources to satisfy the most urgent wants of consumers. Having competed successfully in the market, a property owner seeks to preserve his gains. But the market continues to insist: "He gains most who serves best." In other words, the way to preserve your gains is to keep on serving consumers efficiently; that’s the only protection of property the market can offer.”

Discussion Questions: He Gains Most Who Serves Best

1.  How do you know you are serving others well?

1. The article states “A businessman’s profits are a measure of his efficiency in the use of scarce and valuable resources to satisfy the most urgent wants of consumers”.
2. A person knows they are serving others well when they are earning a profit. The author repeatedly uses the phrase, “He gains most who serves best”. The larger the profit, the better the person is serving others.
3. Profits are a reward for innovation and entrepreneurial skills, and an indicator that resources are being used efficiently to satisfy the wants of consumers.

 

2.  Some people own more property than other people. Do you think this is a good thing?

1. Maybe. This can be a difficult question to answer without more information. All property ownership is not created equally. People can acquire property by means of criminal theft, fraud, or political plunder. People can also acquire property by producing and trading for goods people want and need on the market.
2. Unequal ownership of property based on market activity is a good thing. As the author explains, “Because the market rewards individuals according to services rendered, the result is that some persons earn and own more property than do others. Strictly by serving the masses of mankind, some individuals have been made extremely wealthy. They have been given stewardship over vast amounts of property because of their proven capacity to use such scarce resources efficiently in providing the goods and services most sought and most valued by others.”

5.5.B - Read the following article using the questions below to guide your discussion [15 min]:

Article: People Before Profits by Walter E. Williams (FEE.org)

Discussion Questions: People Before Profits

1.  What does Professor Williams mean when he says that “profits are a cost of business?”

1. Williams is saying that profits are a necessary requirement for businesses to exist.
2. If entrepreneurs are not paid (in the form of profits), then there will be little incentive to start a business in the first place.

 

2.  What caused Coca-Cola to abandon their new formula and return to the original Coca-Cola? What does this imply about the nature of profits?

1. The possibility of huge losses (negative profits) resulting from upset consumers switching to other beverages.
2. One function of profits is to help producers discover what consumers want. When profits are high, this indicates that there is likely something about the product that consumers like; when they are low, it is likely there is something they dislike.

 

3.  Professor Williams uses the example of plywood being rerouted from original destinations to Florida following a bad hurricane. What role do profits play in helping others/allocation of valuable resources to those who need it most?

1. When a good or service is in high demand, the existing supply will begin to sell out quickly. Producers/suppliers will notice this and will raise prices in order to a) make more money and b) conserve the supply (thus enabling more people to get the resource than would if the price had remained the same).
2. Other producers will notice the opportunity to make more money and will start selling their good or service in the area, thus bringing more resources (and lowering the price) to the people who greatly need them.

 

4.  How are profits able to “hold accountable” producers who make a bad product or who squander resources?

1. Consumers will not buy a product or service that they have heard is of poor quality, and are unlikely to buy from a company they have had bad experiences with in the past.
2. This sends a clear signal to the producer that they need to improve their product.
3. If they do not, they risk going out of business…this will redirect resources toward more productive uses.

 

5.5.C – Complete the following activity and share your ideas with the class [20 min]:

Activity: Coffee Shop Game

This game is a simulation of running a coffee stand. Students will make choices about inventory and price in an attempt to make the highest profits. It will quickly become apparent to students that they must consider what their customers want in order to be successful—in other words, they will not be able to make much profit if they serve their customers poorly.

The game can be accessed here: http://www.coolmath-games.com/0-coffee-shop

Directions:

The game has detailed, step-by-step instructions that appear as the game progresses, but the following is a quick overview:

1. Each round begins with the students buying inventory (coffee, sugar, milk, and cups), altering the recipe for their coffee, and setting the price of the coffee.
2. The next stage of the round involves customers passing by the stand. Icons appear above customers that indicate why or why not they choose to buy coffee—students should pay attention to these and make adjustments as necessary.
3. The final stage of each round consists of a report explaining the stand’s performance that day. This report includes information about profits/losses, status of inventory, and the level of the stand’s reputation. Students should keep this information in mind during the first stage of the following round.
4. The game takes 14 rounds to complete. If it seems like it will take too much time to complete the entire game, try to play at least 5 rounds.

Discussion Questions: Coffee Shop Game

1.  How important was paying attention to the customer’s thoughts, and other relevant details (such as the weather)?

1. Very important. If the students ignored this, they were unable to create value for the customers, and as a result, were unable to make a profit.
2. At the same time, if they paid close attention to the information contained in the in-game directions and the customer’s thoughts, they were able to make higher profits.
3. In order to be successful, a business must create value for its customers, and in order to create value for its customers, it must be able to accurately determine what customers want. This is a learning process, and profits—or lack thereof—play a central role.

Lesson Recap

• Profits are a valuable signal to producers that shows how well they are creating value for their customers.

 

• High profits indicate that their products are highly valued, whereas low profits indicate that their products are not valued that highly and that there are superior ways to use the resources in question.

 

• Some individuals become extremely wealthy through serving the masses of people in society. Their high profits are proof that they used scarce resources efficiently in providing the things that are most needed and valued by others.

 

 

Additional Resources

Article: Profit Not Just a Motive, by Steven Horwitz (FEE.org)

“However, if the more important role of profits is to communicate knowledge about the efficiency of resource use and enable producers to learn what they are doing well or poorly, the argument becomes much more complicated. Now the critics must explain what will tell producers what they should do and should not do in the absence of profits to tell them.”

 

Article: The “Character” of Profit and Loss:  Entrepreneurial Virtues by Michael C. Munger [Advanced]

 

Podcast: Munger on Exchange, Exploitation and Euvoluntary Transactions with Russ Roberts and Michael C. Munger (econtalk.org, 72 mins)

“Mike Munger of Duke University talks with EconTalk host Russ Roberts about the psychology, sociology, and economics of buying and selling. Why are different transactions that seemingly make both parties better off frowned on and often made illegal? In theory, all voluntary transactions should make both parties better off. But Munger argues that some transactions are more voluntary than others. Munger lists the attributes of a truly voluntary transaction, what he calls a euvoluntary transaction and argues that when transactions are not euvoluntary, they may be outlawed or seen as immoral. Related issues that are discussed include price gouging after a natural disaster, blackmail, sales of human organs, and the employment of low-wage workers.”