Theories of profit

It is to be noted that the accounting profit is also called gross profit. If prices are higher, or costs lower than were anticipated, entrepreneurs will receive a return in excess of the alternative product of their resources.

short notes on theories of profit

In view of uncertainty about future conditions he cannot be sure whether, given his price and output decisions, he will make profits or losses.

So also intra marginal entrepreneurs earn a surplus over marginal entrepreneur.

Innovation theory of profit wikipedia

Because of strong barriers to the entry of new firms, monopoly firms can continue to earn economic profits even in the long run. In developing countries like India, monopoly mainly arises due to the limited size of domestic market for industrial products. In a way all enterprises are risky, for an element of uncertainty is present in them and every entrepreneur aims at making large profits. The institutional theory emphasises unearned nature of profit as monopoly profit. The entrepreneurs undergo risk in production; but the labourer undertakes no such risk. It is well known that the society has always been dynamic. In symbol, Where M stands for monopoly profit, and other symbols have their usual meanings. Firms with monopoly power restrict output and charge higher prices than under perfect competition. Therefore, profit can be protected if we can: 1 Introduce patent laws to protect the advantageous position of the entrepreneur, and 2 Ensure repeated innovations so that profits continue emerging out them for a long time. It is only the unpredictable, provision can be made for such changes and the expenditure can be included in the cost of production. Innovational profit is thus, never permanent, in the opinion of Schumpeter. Theory 3. Profit is thus a surplus.

Chamberlin, M. Profit as a Reward for Innovation: We can speak of some other types of changes as well in a dynamic economy. An organization invests in research and development activities for its further expansion, if it earns high profit.

Decision-making is done by the salaried managers who control and organise the corporation.

Dynamic theory of profit

Related posts:. Each theory explains profit in terms of one function rather than in terms of all the functions. The external changes are of two kinds, namely, regular changes and irregular changes. As a result, the organization would attract more investors, which are crucial for the growth of the organization. It is these disequilibrium conditions that brings into existence positive or negative economic profits for some firms. Therefore, the Uncertainty-bearing Theory cannot explain the quantum of profits except in a vague and general way. This theory has presented a very narrow view of the function of the entrepreneur. Moreover, other factor like barriers to entry, product differentiation, etc. Top 5 Theories of Profit — Explained!

In fact, the less able may secure more dividends if they possess more shares. However Prof Knight criticized the dynamic theory on the basis that only those changes that cannot be foreseen yield profits.

Theories of profit

Profit is the reward for this strategic role, Innovations are not possible by all entrepreneurs. Innovation theory of profit has been popularised by Joseph Schumpeter , The theory explains profit as the differential surplus rather than a reward for an entrepreneur. Clearly, the fact that the average rate of return for these firms was in the neighbourhood of 20 percent is partly responsible for the large number of new computer firms. The organization would lose its competitiveness, if it does not invest in research and development activities. These non-calculable risks are uncertain, while calculable risks are certain and can be anticipated. Profit due to Monopoly or Friction 3. The typical dynamic change is an invention. According to this theory there is a direct relationship between profit and uncertainty bearing. According to Knight these foreseen risks are not genuine economic risks eligible for any remuneration of profit. Similarly, he has to bear risk as a result of his decision regarding mode of advertisement and expenditure made on it, regarding variation in product design. It is therefore, not possible to have one marginal revenue productivity curve for all entrepreneurs. This causes above-normal profits to be earned by the monopolistic firms.

If there are no profits in a static state, it means there is no entrepreneur.

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Top 5 Theories of Profit