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Corporations and Other Types of Businesses, Entrepreneurs and Profits

inherent risk, bad decisions, good years, corporate bonds, savings accounts

Entrepreneurs raise money to invest in new enterprises that produce goods and services for consumers to buy—if consumers want these products more than other things they can buy. Entrepreneurs often make decisions on which businesses to pursue based on consumer demands. Making decisions to move resources into more profitable markets, and accepting the risk of losses if they make bad decisions—or fail to produce products that stand the test of competition—is the key role of entrepreneurs in the U.S. economy.

Profits are the financial incentives that lead business owners to risk their resources making goods and services for consumers to buy. But there are no guarantees that consumers will pay prices high enough to cover a firm’s costs of production, so there is an inherent risk that a firm will lose money and not make profits. Even during good years for most businesses, about 70,000 businesses fail in the United States. In years when business conditions are poor, the number approaches 100,000 failures a year. And even among the largest 500 U.S. industrial corporations, a few of these firms lose money in any given year.

Entrepreneurs invest money in firms with the expectation of making a profit. Therefore, if the profits a company earns are not high enough, entrepreneurs will not continue to invest in that firm. Instead, they will invest in other companies that they hope will be more profitable. Or if they want to reduce their risk, they can put their money into savings accounts where banks guarantee a minimum return. They can also invest in other kinds of financial securities (such as government or corporate bonds) that are riskier than savings accounts, but less risky than investments in most businesses. Generally, the riskier the investment, the higher the return investors will require to invest their money.

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