It is exciting and diverse. It is changing quickly. It relies on the weather, uses an incredible

Figure 4. The process of selling agricultural products in the Chorsu market
*Source: Picture of Chorsu market

Even though the accounting profit would still be positive, the negative economic profit clearly indicates problems. Should this trend continue for a few years, it would make sense for Susan to sell out, unless she feels that the freedom and psychological rewards from running her own business offset the negative economic profit.

First, many of the “imputed” values for implicit costs in reality are hard to estimate. In the case of Susan Lambert, what interest figure will yield the “correct” opportunity cost for the situation? For some people the 8 percent rate will apply, but other investors have the know- how and time to research other possibilities and invest at rates of 12 percent or higher. The same argument applies to the salary figure specified: this may or may not be realistic, depending on the situation.
Second, a potentially faulty assumption is made that employment in industry would be currently available for Susan. Furthermore, a change in employment might cause personal or family problems. Weighing adjustments of this kind, in dollar terms, can be extremely difficult if not impossible. It also explains why accountants do not try to measure them.
Finally, different types of investments may be difficult to directly compare with one another in a way that will satisfy the opportunity cost concept. For example, investment in blue-chip or high-quality stocks cannot be directly compared with speculative ventures such as investing in futures and options funds, since the two types of investments involve two completely different classes of risk. Having raised these limitations of the implicit cost idea, it is also clear that this concept is a powerful one for managers making resource allocation decisions.
In a free market system, economic profits should not exist. The theory goes that other firms will be attracted into markets earning economic profit. Once this happens, production will increase, prices will drop, and economic profits will fall to zero. But in the real world economic profits do exist. And the possibility of earning economic profit is the motivating force behind most business decisions.
There are four explanations for economic profit in our market economy. First, profit is the reward for taking a risk in a business. When a private property owner invests personal resources in a business project, there are no guarantees of a return to this investment. The greater the risk involved, the greater the potential profit for successful ventures, if the venture is to attract any investors. Second, profits result from the control of scarce resources. In the UZB economic system, most property is owned and controlled by private citizens. If a citizen owns a resource that others want, the others will bid the price up, which generates a profit for its owner. The greater the demand for a resource, the higher its price will be, and the greater the profit reward to its owners. Third, profits exist because some people have access to information that is not widespread. Resource owners who have special knowledge, such as secret processes or formulas, can use this information exclusively and can thereby maintain significant advantages over their competition. The concept of patents and copy- rights evolved as part of a formal attempt to encourage creativity by ensuring that the creator profits from his or her ideas. Fourth, profits exist simply because some businesses are managed more effectively than others. The managers of such businesses are often creative planners and thinkers whose day-to-day organizations are extremely efficient. The reward for doing the job well often results in economic profit.
The profit motive is the “spark plug” of a free market economic system. The prospect of earning and keeping economic profit serves as the incentive for creativity and efficiency among people. It stimulates risky ventures and drives people to develop ways of cutting costs and improving techniques, always in an effort to satisfy consumers’ desires.
The economics of markets
Supply and demand, and the resulting market equilibrium price and quantity, are among the most fundamental economic concepts. Supply is defined as the quantities that sellers are willing and able to place on the market at different prices during a particular time period. The law of supply reflects a direct relationship between price and quantity, which means sellers are willing to provide more products for sale in the market as prices increase. The buyer or consumer side of the market is represented by the demand curve. Demand is the quantity that consumers are willing and able to buy in the market at various prices during a particular time period. As with supply, we are concerned with a price–quantity relationship. The law of demand finds an inverse relationship between price and quantity, or buyers are willing to purchase less as price increases. The supply and demand relationship can be described in three ways. To illustrate, assume that a food manufacturer sells an organic gluten-free breakfast cereal to grocers, with prices ranging from $20 to $40 per case. From market research, they have data on how many cases will be sold per month at the different prices. Supply and demand can be portrayed as a table of prices and quantities called a demand and a supply schedule (Table 3.2). For each price, demand is the total quantity sold, while the total quantity produced represents what a firm will supply.