PROFIT

Concept &Nature; Theories of Profit: Innovations Theory of Profit Risk & Uncertainty Bearing Theory of Prodit

Concept of Profit
Profit means the compensation received by a firm for its managerial functions. It is called normal profit which is a minimum sum essential to induce the firm to continue the business. Profit is a reward for true enterpreneurial function. It is a reward earned by the entrepreneur for bearing the risk. It is termed as supernormal profit.

Concept of Profit
Profit may also imply monopoly profit. It is earned by the firm through extortion because of its degree of monopoly power enjoyed in the market. It may not be related to any useful or specific function. Monopoly profit is not a functional reward. Profit may also refer to windfall profit. It is an unexpected reward earned by a firm just by mere chance. It is also an undeserved reward, as it is not earned for any specific function. The above concepts are socially unjustifiable.

Features of Profit
Profit is the return to entrepreneurial ability It is not a contractual payment It is not a fixed remuneration It is a residual surplus It is uncertain It may be positive or negative. A negative net profit means a loss. It is widely fluctuating, while other factor incomes are more stable over time.

Innovations Theory of Profit

Propounder of the theory: Prof. Joseph Schumpeter Schumpeter explains profit in terms of innovations in the process of production. Innovations refer to all those changes in the production process the objective of which is to reduce the cost of the commodity. This causes a gap between the existing price of the commodity and its new cost. If the innovation is successful, it will give rise to profits.

Innovations Theory of Profit

Schumpeter emphasizes the function of an entrepreneur as one different from bureaucratic/administrative functions Innovation and growth of a firm is the real job of the entrepreneur. Desire to earn profit is the main motive for introducing innovations. Innovations menas commerical application of new scientific inventions and discoveries

Innovations Theory of Profit

Innovations can be classified as:
Product innovations such as techniques of production, methods of production, method of organisation and operation, etc all of which affect the cost and quality of the product. Market innovations such as discovery & exploitation of new market territory, introducing new products, new varieties of the product and improvement, new modes of advertising and sales propoganda.

Innovations Theory of Profit

Any form of innovation leads to a profit. It is known as innovational profit. It is temporary in nature. An innovator would earn innovational profit till other firms successfully imitate him and compete for it. Innovational Profit disappears due to imitation. And it is time for another innovation. Innovational Profit appears, disappears & reappears. Innovational profits are found in modern progressive business.

Risk & Uncertainty Bearing Thoery of Profit

Since the entrepreneur undertakes the risk of the business, he is entitled to receive profit as his reward Prof. Hawley The riskier the business, the higher is the expected profit rate. Prof. D.M. Holland If there is no hope for substantial profit, no one will be willing to risk money by investing it in a business. Profits commensurate with risks.s

Risk & Uncertainty Bearing Thoery of Profit

Prof. Knight presented a refinement of Prof Hawleys risk bearing theory of profit. Prof. Knights theory is considered as the modern theory of profit. According to Prof. Knight, pure profit are linked to risk-bearing and uncertainty Risks are classified as (a) insurable risks and (b) non-insurable risks

Risk & Uncertainty Bearing Thoery of Profit

Some risks are predictable because they are certain and hence are insurable.
For instance, fire, theft, floods, accidents, etc

Business losses arising out of such risks are compensated by the insurance company. Such risks are not the real risk attributed to entrepreneurial functions. A true entrepreneurship lies in bearing noninsurable risk and uncertainties. Unforeseeable risks are non-insurable.

Risk & Uncertainty Bearing Thoery of Profit

Non-insurable, unpredictable risks are:
Demand fluctuations Trade cycles Technological changes Competition Structural changes Changes in Government policies Outbreak of War