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MEANING. PROFIT IS A FACTOR INCOME ATTRIBUTED TO THE ENTERPRENEUR. MAIN FUNCTION OF ENTERPRENEUR IS TO BEAR UNCERTAINTY OR TAKE RISKS. INCOME THAT ENTERPRNEUR GETS IN RETURN FOR THESE FUNTIOIN IS CALLED PROFIT. CONCRPTS OF PROFIT. GROSS PROFIT GROSS PROFIT= TOTAL REVENUE – EXPLICIT COSTS
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MEANING • PROFIT IS A FACTOR INCOME ATTRIBUTED TO THE ENTERPRENEUR. MAIN FUNCTION OF ENTERPRENEUR IS TO BEAR UNCERTAINTY OR TAKE RISKS. INCOME THAT ENTERPRNEUR GETS IN RETURN FOR THESE FUNTIOIN IS CALLED PROFIT.
CONCRPTS OF PROFIT • GROSS PROFIT GROSS PROFIT= TOTAL REVENUE – EXPLICIT COSTS suppose total revenue of a firm is RS 20 thousand perannum. it pays RS 5000,RS 4000 AND RS 3000 as wages , interest and rent thus its total explicit costs are 5000+4000+3000= RS 12000 thus GROSS PROFIT= 20,000-12000= 8000
ECONOMICE ORPURE PROFIT • By profit in economic is meant net profit . It is called economic or pure profit. It is calculated by deducting implicit cost , depreciation and insurances charges etc . From gross profit • ECONOMICE PROFIT= GROSS PROFIT- IMPILCIT COSTS
The Dynamic Theory Prof. JB Clark propounded the dynamic theory of profit and according to him; profit is the difference between the price and the cost of production of the commodity. But the profit is the result of dynamic change. In a dynamic state, “five generic changes are going on, every one of which reacts on structure of society.” They are (1) population is increasing (2) Capital is increasing (3) Methods of production are improving (4) The forms of industrial establishment are changing the less efficient shops etc. are passing from the field and the most efficient are surviving (5) The wants of consumers are multiplying
The innovative Theory Prof. Schumpeter attributes profit to dynamic changes resulting from an innovation. To start with he takes a capitalist closed economy which is in a stationary equilibrium. This equilibrium is characterised by what Schumpeter calls a “circular flow” which continues to repeat itself for ever. In such a static state, there is perfectly competitive equilibrium. The price of each product just equals its cost of production and there is no profit. Only exogenous factors like whether conditions can cause changes in the circular flow position. In the circular flow position goods are being produced at a constant rate. This routine work is being performed by the salaried managers. It is the entrepreneur who disturbs the channels of this circular floe by the introduction of an innovation. Thus Schumpeter assigns the role of an innovator not to the capitalist but to the entrepreneur.
The uncertainty Bearing Theory Prof. Frank H knight regards profit as the reward of bearing non insurable risks and uncertainties. He distinguishes amidst insurable and non-insurable risks. Certain risks are measurable in as much as the probability of their occurrence can be statistically calculated. The risk of fire theft of merchandise and of death by accident is insurable. Such risks are borne by the insurance company. There are certain unique risks which are incalculable. The probability of their occurrence cannot be statistically computed for the reason that of the presence of uncertainty in them. Such unforeseen risks relate to changes in prices, demand and supply etc. No insurance company can calculate the loss expected from such risks and hence they are non-insurable. Profit according to Knight is the reward of bearing non-insurable risks and uncertainties. It is a deviation arising from uncertainty between earning ex post and ex ante.
The Risk Theory The risk theory of profit is associated with FB Hawley who regards risk taking as the main function of the entrepreneur. Profit is the residual income which the entrepreneur receives for the reason that he assumes risks. The entrepreneur exposes his business to risk and receives in turn a reward in the form of profit since the task of risk taking is infuriating. Profit is an excess of payment above the actuarial value of risk. No entrepreneur will be willing to undertake risks if he gets only the normal return. Hence the reward for risk taking must be higher than the actual value of risk
THEORY OF MONOPOLY PROFIT • According to SAMUELSON , in respect of profit, if most of people are not sceptical , they are definitely critical those who criticise profit for them profit does not assume the form of wage or reward that equalizes risks in competitive market.
CAN PROFIT B ZERO OR PROFIT TEND TO EQUALITY Profit can be zero- they hold that under the condition of perfect competition, each firm get only normal profit in the long run profit. Super normal profit are enjoyed by the firms. Super normal profit are enjoyed by the firms in the short run only. In long-run , news firms entry industry. Total production of the product increases , price of product falls and thus super normal profit disappears. All the firms , therefore will get normal profit . profit cannot be zero- in real life we experience either imperfect competition or monopoly profit cannot be zero . One witness all sorts of changes taking place
NATURE OF PROFIT • Regarding the nature of profit , it is usually said that it is uncertain. IN THIS CONTEXT, PROF. F.H.KNIGHT SAYS, perhaps no term or concept in economic discussion is used with a more bewildering variety of well established meaning than profit. SOME SAYS PRPFIT IS A MIXED AND VEXED INCOME