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    Theories of Profit

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    Gyanesh
    The document discusses several theories of profit: 1. Classical economists viewed profit maximization as the sole objective of businesses, but in practice firms rarely seek to maximize profits due to considerations like maintaining goodwill, avoiding high taxes, and limiting risk. 2. Hawley's risk theory of profit claims that the riskier the industry, the higher the profit rate, as entrepreneurs deserve profits as rewards for the risks they take. However, critics argue profit depends more on risk avoidance than risk-taking. 3. Knight's theory distinguishes insurable risks from non-insurable uncertainties, arguing pure profit comes from dealing with the latter, though uncertainty is not the sole determinant of profit.

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    Theories of Profit

    Uploaded by

    Gyanesh
    21K views16 pages
    The document discusses several theories of profit: 1. Classical economists viewed profit maximization as the sole objective of businesses, but in practice firms rarely seek to maximize profits due to considerations like maintaining goodwill, avoiding high taxes, and limiting risk. 2. Hawley's risk theory of profit claims that the riskier the industry, the higher the profit rate, as entrepreneurs deserve profits as rewards for the risks they take. However, critics argue profit depends more on risk avoidance than risk-taking. 3. Knight's theory distinguishes insurable risks from non-insurable uncertainties, arguing pure profit comes from dealing with the latter, though uncertainty is not the sole determinant of profit.

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    The document discusses several theories of profit: 1. Classical economists viewed profit maximization as the sole objective of businesses, but in practice firms rarely seek to maximize profits due to considerations like maintaining goodwill, avoiding high taxes, and limiting risk. 2. Hawley's risk theory of profit claims that the riskier the industry, the higher the profit rate, as entrepreneurs deserve profits as rewards for the risks they take. However, critics argue profit depends more on risk avoidance than risk-taking. 3. Knight's theory distinguishes insurable risks from non-insurable uncertainties, arguing pure profit comes from dealing with the latter, though uncertainty is not the sole determinant of profit.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    21K views16 pages

    Theories of Profit

    Uploaded by

    Gyanesh
    The document discusses several theories of profit: 1. Classical economists viewed profit maximization as the sole objective of businesses, but in practice firms rarely seek to maximize profits due to considerations like maintaining goodwill, avoiding high taxes, and limiting risk. 2. Hawley's risk theory of profit claims that the riskier the industry, the higher the profit rate, as entrepreneurs deserve profits as rewards for the risks they take. However, critics argue profit depends more on risk avoidance than risk-taking. 3. Knight's theory distinguishes insurable risks from non-insurable uncertainties, arguing pure profit comes from dealing with the latter, though uncertainty is not the sole determinant of profit.

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    of 16

    Theories Of Profit

    Divya Jain
    Introduction
    • Classical economists have regarded profit
    maximization as the sole objective of the
    business in any capitalist economy.

    • In practice, firms rarely seek to maximise


    profits.
    Reasons For Limiting Profit
    • Maintaining Business Goodwill
    • Wage Consideration
    • Avoiding High Taxation & Government’s
    Intervention
    • Avoiding Risk
    • Obstructing Potential Competition
    • Goal Of Domination & Leadership in
    Market
    Reasons For Limiting Profit (contd.)

    • Enlightened Self-Interest
    • Idealism & Service Motivation
    • Liquidity Preferences
    Profit
    • Profit may mean the compensation
    received by a firm for its managerial
    function. It is called normal profit which is
    a minimum sum essential to induce the
    firm to remain in business.

    Profit =Profit
    Total Revenue
    = Total – Total
    Revenue – Total Cost Cost
    Features of Profit
    • It is not a predetermined contractual
    payment.
    • It is not a fixed remuneration.
    • It is a residual surplus.
    • It is uncertain.
    Gross Profit
    • Gross profit is surplus of total money
    expenditure incurred by a firm after the
    production process.

    Gross Profit = Net Profit + Implicit rent + Implicit Wages+ Implicit Interest +
    normal profit + depreciation & maintenance charges
    + non-enterprenerial profit
    Net Profit
    • Net Profit is pure economic profit earned
    by entrepreneur for his services &
    efficiency.
    Net Profit = Gross Profit – (Implicit rent + Implicit Wages+ Implicit Interest +
    normal profit + depreciation & maintenance charges
    + non-entrepreneurial profit)

    Net Profit = Economic Profit or Pure Business Profit


    Hawley’s Risk Theory Of Profit
    “The riskier the industry the higher its profit
    rate”
    Since entrepreneur take the risks of
    business, he is entitled to receive profit as
    his rewards.
    Profit is commensurate with risk.
    Criticisms:
    • There are no functional relationship
    between risk and profit.
    • Profit is not based on entrepreneur's
    ability to undertake risks, but rather as his
    capability of risk avoidance.
    • The theory disregards many other factors
    attributable to profit and just concentrate
    on risks.
    Knight’s Theory Of Risk Uncertainty
    And Profit
    Knight defines pure profit as “the difference
    between the returns actually realized by
    entrepreneur and competitive rate of
    Interest in high class gilt-edged securities”

    • Acc. To him, Risks are of two type:


     Insurable risk
     Non insurable risk
    Examples of Non-insurable Risks

    • Demand Fluctuation
    • Trade Cycle
    • Technological changes
    • Outbreak of war
    • Changes in Govt. policies
    • Competition
    Criticisms:
    • Uncertainty-bearing is not sole
    determinant of profit.
    • It is business ability rather than
    atmosphere of uncertainty which a leads
    to high reward of profits.
    • Theory does not suit to monopoly
    business phenomenon.
    • The uncertainty element can’t be
    quantified to impute profit.
    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 the surplus over cost.
    • Changes that causes profit to emerge:
     Increase in population
     Changes in tastes and preferences
     Multiplication of wants
     Capital formation
     Technological advancement
    Criticism:
    • It gives an artificial dichotomy of ‘profit’
    and ‘wages of management’
    • All dynamic changes lead to profit, but
    only unpredictable changes gives rise to
    the profit.
    • Clarks theory not stress the element of the
    risk involved in the business due to
    dynamic changes.
    Thank You

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