Theories of profit

In most cases profits may not be commensurate with the degree of risk involved. Managerial Efficiency Theory of Profits: Innovation, as used by Schumpeter, has a very wide connotation.

For example risk, due to fire theft accidents etc. Often, government has to take measures to regulate monopoly profits by putting legal restrictions such as profit ceilings.

Profit Theories: Types and Functions of Profit

Firms with higher managerial skills and production efficiency are required to be compensated by above-normal profits i. They may become zero, when costs are equal to income, and if the costs are higher, profits may actually be converted into loss.

So this is functional theory of profits. In a static economy where no unanticipated changes in demand or cost conditions occur, in long-run equilibrium the firms would be earning only normal rate of profit on their capital and entrepreneurial talent.

As risk acts as a great deterrent, the supply of entrepreneurs is kept down, and those who do take the risk earn much more than the normal return on capital. This is true in theory.

All the theories of profits explained above have some element of truth. Loss from such business risks may be guarded against, at least partly, by wise and prudent management. The changing world offers limitless opportunities to the far-sighted, daring and clever entrepreneurs to make profits by turning the facts of the situation in their favour.

Economies of scale, i. When an entrepreneur introduces a new innovation, he is first in a monopoly position because the new innovation is confined to him only, He therefore makes large profits.

4 Main Theories of Profit

Drucker mentions four kinds of risks: On the other hand, because of rise in cost of production and the subsequent fall in selling price of the commodities, the profit disappears. But in practice it is observed that profits do not tend to equality.

All the theories of profits explained above have some element of truth. The above risks are not insurable with any insurance company because there is no way of calculating the probability of particular events, occurring, and hence, are undertaken by the entrepreneurs themselves.

He takes a risk which others are unwilling to bear, and if he successfully manages the risk, he receives profits.

Innovations Theory of Profits: The management of business has to provide adequately for these costs by generating sufficient profit. But we are not living in a stationary state.

Wage theory of the economic profit: According to this theory, profit is the wage of the entrepreneur which accrues to him on account of the special are the outcome of the exercise for the special ability, assort of the mental labour not much different from the labour of lawyers and judges/5(K).

(2) Uncertainty Theory of Profit: Definition and Explanation: According to Professor Knight: "Profit is the reward for uncertainly-bearing and not of risk-taking in a business".

Top 5 Theories of Profit – Explained!

According to him there are two kinds of risks which entrepreneur has to bear. Nevertheless, your four theories inspired me to think about whether it would be possible to create a typology of theories of profit that that could be universally agreeed upon.

I think this might be difficult, at least using criterea such as necessity, sufficiency, and independence. Theories of Profit Definition: Profit is the financial benefit realized from the business activity when the revenues generated exceeds the costs and expenses incurred in the operation of such activities.

Simply, the total cost deducted from total revenue yields profit. ADVERTISEMENTS: An Introduction to the Theories of Profits! The study of profits which are said to be the reward for enterprise, the fourth factor of production. No doubt profits are associated with entrepreneur and his functions but the economists from time to time have expressed diverse and conflicting views about the nature, origin and role [ ].

The Four Theories of Profit and Their Joint Effects Richard Makadok Emory University As a theory of profit, resource-based theory is focused on a single causal mechanism—competitive.

Theories of profit
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Theories of Profit in Economics