THEORIES OF PROFIT

Risk bearing theory

of profit
• F. B. Hawley established his risk theory of
profit in 1893. According to Hawley, risk in
business arose from product obsolescence, a
sudden fall in prices, superior substitutes,
natural calamities, or scarcity of certain
crucial materials.
• In simple words its means , how much risk
the entrepreneur will bear during the
production determines the amount of profit
enjoyed by him
* According to risk bearing theory an
entrepreneur envisages with various types of
risks .An entrepreneur faces risk in production
when technology becomes obsolete. When more
rivals enter in to the production, or when new
products or new process of production are
launched, a firm will meet competition risk.
When there is drastic fall in prices due to
economic recession .
 Uncertainty theory
of profit .
* Frank Hyneman Knight established the
Uncertainty Bearing Theory of profit .
* He proposed that the profit , the entrepreneur
seeks is the reward for bearing uncertainty .
• According to knight there is difference
between risk and uncertainty. Many situations
may arise during the process of production
which can be anticipated or whose probability
of occurrence can be statistically estimated.
• These situations are known as insurable risks.
The loss from insurable risks can be avoided
by paying some fixed premium. Therefore,
these insurable risks do not cause uncertainty.
For instances risks are associated with the loss
of property due to fire accident, or loss due to
theft and robbery, etc. These losses can be
recovered by purchasing insurances.