CONCEPT OF PROFIT Profit is the reward of

CONCEPT OF PROFIT Profit is the reward of entrepreneur. Another definition: Profit is excess of income over cost.

ECONOMISTS VIEW ON PROFIT �According to Keynes, profit arises due to rise in price level. �According to Joan Robinson, Chamberlin and M. Kalecki greater the degree of monopoly power more the profits made by the entrepreneurs. �According to F. H Knight, profit arises due to uncertainty. Contd…

Continued… �According to Schumpeter, profit arises due to innovations. �According to Hawley, profit is a result of risk – bearing. �According to J. B. Clark, profit is a dynamic surplus.

GROSS PROFIT AND NET PROFIT �

Dynamic theory of Profit �In a dynamic economy changes occur. The changes are unanticipated and hence disequilibrium in demand supply which creates the profit situation. �The dynamic change primarily may be classified into two types- i) Innovations and ii) Exogenous changes. �Innovations: In the form of new product, better product, cheaper cost of production, new marketing strategy, etc. The innovation creates opportunity for the innovator to exercise monopoly power. �Exogenous Changes: In this situation the changes are outside the firm, for example, changes in government policy, international market policy (say, WTO), etc.

Schumpeter’s Innovation Theory of Profit �Mainly innovation can be divided into two parts: �i) Reduction in the cost of production. �ii) Increase in demand for product.

Knight’s Theory of Profit: Risk and Uncertainty. �Uncertainty- which is not predictable. �Risk- i) Insurable risk, ii) Not insurable risk. �Non-insurable risk and uncertainty creates the profit. The firm which takes initiative despite the uncertainty and risk, if the firm becomes successful, then it makes profit.

Chamberlin’s Monopoly Theory of Profits �