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Theories of Profit
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.
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 = Total Revenue Cost Profit = Total RevenueTotalTotal 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
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.
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 cant be quantified to impute profit.
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.
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