Theories of profit

We are now in a position to analyse gross profits. Thus profits are non-contractual income and therefore they may be positive or negative, whereas the contractual income of other factors such as wages, rent and interest are always positive and never negative.

And this combination is a rare one. Risk, Uncertainty and Profits: The ability of the monopolist to enjoy monopoly power and make profit depends ultimately on the restrictions they are able to impose on the entry of the new firms.

Firms with higher managerial skills and production efficiency are required to be compensated by above-normal profits i. It only means that one may have legitimate doubts about whether tacit collusion is worthy the canonical status as a full blown member of such a typology.

Here we are thinking of not gross profits but net profit… The fact is that, in the real world, there are several causes which give Theories of profit to profit, but the principal cause is uncertainty. If the future conditions could be completely foreknown in the present, then competition would certainly adjust things to the ideal state where all prices would equal costs and profits would not emerge.

It is evident that changes disturb the long-run competitive equilibrium achieved and thereby give rise to profits.

Theories of Profit in Economics

This implies that in their efforts to maximise private profits business firms should not harm social welfare. Note that this certainly does not mean that it is uninteresting to study the interaction between collusion and, say, competences, as Makadok does very well.

In this first type of innovations are included the introduction of a new machinery, new and cheaper technique or process of production, exploitation of a new source of raw materials, a new and better method of orgainising the firm, etc. It should be noted that positive profits accrue to those entrepreneurs who make correct estimate of the future or whose anticipations prove to be correct.

Monopoly Theory of Profit

A rich entrepreneur of a bold and venturesome spirit, who has made up his mind to invest a big proportion of his wealth, can bear greater uncertainty.

Disappearing of profit does not mean that profit arise in dynamic economy once only, but it means that the managers take the advantage of the changes taking place in the economy and thereby making profits.

THEORIES OF PROFITS Economics Assignment Help

What output he should produce, what price, higher or lower, he should fix for his output. This permits management to share the profit if and when it reaches a certain predetermined level. These non-insurable risks relate to the outcome of Theories of profit decisions made by the entrepreneur.

Factors of production enjoy freedom of mobility but do not move because their marginal product in very industry is the same. Now, what is innovation? The experience of free market economics of the USA, Great Britain, Japan, and Canada over the past several decades reveals that contribution of profit-driven business firms to their economic growth and increase in social welfare has been quite significant.

For example, a rise in the use of plastic or aluminum in automobiles might drive down the profits of steel manufacturers; a rise in the demand for quartz watches might reduce the profits of firms producing automatic watches. His candidates are 1 Collusion i. In most cases profits may not be commensurate with the degree of risk involved.

Therefore, these payments, though implicit, must be deducted to find out the net or pure profit of the business. There are factors for which S. For example, in several cities Government grants license to some private firms to provide public utility services such electricity, gas, telephone etc.

One Part represents compensation for actual or average loss supplementing the various classes of risk. A part of the confusion in the theory of profit is due to the lack of agreement among economists about the true or proper function of the entrepreneur.

In the static world, there is no change, hence no profit in an economy where nothing changes, there can be no profit. Successful innovations as important dynamic changes and as source of profit have been, in brief, explained above.

But it is not entirely of the nature of rent. Numerous smaller innovations have been made in recent years.

Top 5 Theories of Profit – Explained!

Thus no uncertainty arises due to insurable risks as far as individual entrepreneurs are concerned and therefore they cannot give rise to profits.

Knight with uncertainty, by Schumpeter with innovations, by Hawley with risk-bearing, and by Joan Robinson.Dynamic Theory of Profit • Clark defines profit as the difference between selling price and the cost resulting in the changes in demand and supply conditions. Profit is /5(3).

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.

Profit: Meaning and Theories of Profit

Monopoly Theory of Profit posit. 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).

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.

THEORIES OF PROFITS Profit as Rent of Ability One view of profits makes them analogous to rent. The Rent Theory of Profit, as be called. was. 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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