An Introduction to the Theories of Profits Article shared by: 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 of profits.
Types and Functions of Profit Article shared by: Profit is necessarily a residual sum.
Land, labour, and capital are frequently used under contracts whereby they receive a predetermined return. Wet profit is a sum over and above the ordinary costs of business, including such contractual outlays.
Nobody contracts to pay the entrepreneur the residual sum which constitutes net profit. Business profits are, therefore, specially contingent upon successful management risk. Business is faced with a number of uncertainties—technical uncertainties those relating to the future period of the produce and the volume of sales.
The entrepreneur receives a reward for combining the factors of production to meet the economic needs of a world faced with uncertainties. He takes a risk which others are unwilling to bear, and if he successfully manages the risk, he receives profits.
This means that a businessman, in order to earn profits, has to do two things: His most important problem is the selection of business in which he wishes to engage himself. But even thereafter many risks arise. Some of them he may have to bear even though he would rather not; others he may transfer to people more willing to bear them or unable to escape them ; still others he may shift by insurance.
The greater the risk and uncertainty in business, the greater the opportunities for large profits. That all entrepreneurs do not make profits is too frequently overlooked. Some businessmen, of course, make high profits, and usually these cases are the ones that receive greatest public attention; but many businessmen make no profits, and a great many more incur substantial losses.
Since risks and, therefore, profits and losses appear because of changes and uncertainties in a dynamic society, profits vary from year to year.
In fact, all instances of economic uncertainties can be treated as cases of choice between smaller rewards more confidently and a larger one less confidently anticipated.
Profit is necessary to induce the businessman to take risks rather than play safe, no same person would think of investing in a manufacturing industry for a return of 6 per cent if he can get that return on a government security.
He would expect a much higher rate because of the greater risk of a possible loss. The greater the risk, the higher must be the expected gain in order to induce an entrepreneur. However, it is not every risk that can account for the emergence of profit.
Knight, risks inherent in any business are of two things—insurable and non-insurable risks.
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. Definition: Another source of a pure profit (over and above the normal profit) is said to be a Monopoly, characterized by a single seller without any close substitute. Monopoly Theory of Profit posit. 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 [ ].
Those risks which can be calculated statistically and, thus, insured with an insurance firm are of two kinds: These insurable risks are not the responsibility and worry of the organizer, because by paying insurance premium he is relieved of this worry.
However, there are certain non-insurable risks of modern business which are not capable of being reduced to statistical measurement and are not borne by insurance companies.
These risks must necessarily be borne by the entrepreneur himself, if he has to carry on production.
These non-insurable risks are: 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.
In his opinion the term risks should be applied only for those risks which are known and foreseen and, in principle, insurable. Profit is an award for undertaking and managing uncertainties of business.
Knight has advanced the well- known theory that pure economic profit whether positive or negative is related to uncertainty. Another investor might make a loss because his guess turned out to be worse than that of the market.
Profit as a consequence of market imperfection and monopoly: Where a firm possesses monopoly power, it can restrict output and obtain a higher profit than what it could under competitive conditions.
Profit is the result of contrived scarcity. It can exist only in an imperfect market where output is, for various reasons, restricted and the consumers are deprived of the opportunity of alternative sources of supply. Sources of such power are usually found in legal restrictions, sole ownership of raw-materials or sole access to particular markets.
Contrived scarcity must be distinguished from natural scarcity.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. various types of profit theories in economics.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. According to this theory there exists a normal rate of profit which is a return on capital that must be paid to the owners of capital as a reward for saving and investment of their funds rather than to consume all their income or hoard them.
Theories of Profit in Economics In economics, profit is called pure profit, which may be defined as a residual left after all contractual costs have been met, including the transfer costs of management insurable risks, depreciation and payment to shareholders, sufficient to maintain investment at its current level.
(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". According to him there are two kinds of risks which entrepreneur has to bear. Thus, there is no single theory which will explain profit but a synthesis of all the theories mentioned above.
Profit is a reward for the services of the entrepreneur. The supply of the entrepreneurial ability is limited, whereas the demand for their services is very great.