The other side of the coin is the Supply of the goods and service the consumers desire.
Again – Simple Common Sense — There is a cost to provide any given supply of some desired god or service.
Think about that Tim Horton’s cup of coffee –
- The local Tim Horton’s franchisee has to rent or buy the land on which to place her store.
- She has to build the store, and acquire all of the furniture, machinery, and supplies necessary.
- And perhaps she has to take out a bank loan in order to fund those things.
- All that is “Fixed Costs” – She has to pay for these things whether she sells a single cup of coffee or not.
- In addition, our Tim Horton’s franchisee has to buy coffee, and milk, and sugar, and all of the other sorts of stuff that she plans on selling to you.
- Also she has to hire some help to staff the store.
And she also has to earn an “Economic Profit” –
- This is a sufficient return on her investment attractive enough to keep her interested in selling Tim Horton’s coffee, rather than folding her tent and investing her money elsewhere.
There are lots of different kinds of investments out there, and a prudent investor will need a competitive return on her investment, or she will start looking for other opportunities.
A business will not long survive if the “Total Economic Costs of Production” exceed the price that can be obtained for what is being supplied.
“Opportunity Profit” is the return on the entrepreneur’s investment that entices her to invest her money in this opportunity rather than another one.
Starting up a new business is a risky proposition. No one is going to do that unless they can expect to make enough profit to compensate for the risk.
An already established business can survive nicely on just the “Economic Profit”
But it is the expectation of the “Opportunity Profit” that entices new businesses to start up in competition with the established businesses in the industry.
Or existing businesses to expand their production capacity.
If you were to contemplate setting up a new Coffee Shop in your neighbourhood, you would want to do a little better than just cover your bare costs.
Otherwise, there are lots of other opportunities out there to attract your time and effort.