Economics 101: Profits vs. Profit Margins

It's time for another economics lesson. Do you know the difference between a profit and a profit margin? Well, you will once you finish reading this.

A profit is essentially how much money was made. It is calculated by taking the total money earned and subtracting from it total expenses. That's how much money the business actually earned... the profit.

The profit margin is what percentage of the total income was profit. For example, if you earn a total of $100,000 and your profit on that is $10,000, then your profit margin is 10%. It is calculated by taking the profit amount and dividing it by total income.

There are two basic ways to increase your profit. The first way is to increase sales and the amount of income earned. The second way is to increase your profit margin, usually accomplished by increasing prices or decreasing costs.

Many businesses survive on razor-thin profit margins. For example, grocery stores and sporting goods stores survive on an incredibly small 0.2% profit margin... but their sales are high enough to turn that into a respectable amount of profit. Other industries enjoy a much higher profit margin, such as the publishing/periodical industry, which has a 21.8% profit margin.

Now let's apply this to a recent scandal with health insurance companies. PresBo and the Democrats have been raising a lot of commotion about a recent increase in some insurance companies premiums, and they talk about "record profits." Do you have any idea what the profit margin is for health insurance companies?


Would you believe 3.4%?
http://biz.yahoo.com/p/sum_qpmd.html

The link above takes you to the actual data for the most recent quarter. As I write this, health insurance companies are ranked #86 by profit margin... which means that for every dollar of income they earn, they have expenses of 96.6 cents and make a profit of just 3.4 cents.

So let's assume your health insurance premium is $600 per month, for example. Then their profit is a paltry $20.40.

To be honest, this doesn't sound to me like the health insurance companies are earning an exorbitant profit, or that their profits are too high. Their profit margin is relatively low, and they make large profits by a high volume of sales.

As a matter of fact, the "individual mandate" will likely increase their profits by increasing their sales. I mean, if the government forces us to buy insurance, then their sales would HAVE to rise. So if you're upset at the health insurance companies "obscene" profits, then you should oppose ObamaCare... because it would just make insurance companies MORE profitable in the short term.