The Only Way to Define Profit

At the beginning of this book, I pointed out that we live in a world of scarce resources and infinite wants. I also noted that one of the important postulates of the marketplace is that more goods and services from a given set of resources are better than less.

There is only one way to be certain that we are getting the most out of a given set of resources. We have to examine alternative uses for those resources. In other words we have to find out what it is we are giving up (the forgone goods and services). And, as we already know, any time we look at alternative uses for our resources, we are taking stock of opportunity cost.

Remember Farmer Jones? Remember the chief financial officer? Both of their businesses were driven by alternative uses of their resources (their opportunity cost). Both of them were looking beyond their accounting profit to their economic profit. And what did they learn by doing this?

Whenever a company's profit more than covers its opportunity cost, there are no other more productive uses for its resources. It is using its resources efficiently. The same holds true when profit is equal to opportunity cost. Whenever profit does not cover opportunity cost, there are more productive uses for the resources. The company is not using its resources efficiently.

Now you know why economists describe profit as being equal to, greater than, or less than opportunity cost. Any other description of profit begs the question of efficiency and ignores the issue of scarce resources.