DEPARTMENT OF TECHNICAL EDUCATION
ANDHRA PRADESH
Name : G. M. Lakshmi
Designation : Lecturer
Institution : GPW Suryapet.
Branch : DCCP
Year/Semester : VI th semester
Subject : Business Economics II
Subject Code : CCP-602.
Main topic : Theories of Profits
Sub-topic :Innovation theory of profit
Duration : 50 minutes.
Teaching Aids : PPT, Animations
CCP 602.30 1
Objectives:
On the completion of this period you would be
able to know:
The Innovation theory of profit
Criticisms against the theory
CCP 602.30 2
Recap
Uncertainty theory was formulated by Prof.Knight
According to him, profits are the result of uncertainty
This theory was criticized by many economists.
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Innovation theory of profit
• Prof. Schumpeter is the father of innovation theory of
profits
• The entrepreneur initiates innovation and when he
succeeds gets profits
• He also attributes profits to dynamic changes
• He resorts to the device of innovations to explain the
emergence of profits.
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Contd…
So innovation is the root cause of profits according
to Schumpeter.
An innovation can be:
The introduction of a new product in to the market.
Discovery of a new market.
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Contd…
Introduction of a new method of production either
by a new machine or by a new method or
organization
Discovery of a new source of raw material
Substantial reorganization of industry.
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Contd…
Under stable conditions, costs and prices are equal
and therefore there will not be any profits.
Innovation gives an advantage to the innovating
organizer.
Disequilibrium sets in and the innovator gets profits.
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Contd…
Thus according to Schumpeter profit is a reward for
innovations.
His theory has the following important points.
5. Profits are both the cause and effect of innovations
Technical knowledge is required for innovations
Innovations give profits and profits encourage such
innovative research.
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2. Innovations profit cannot be permanent.
A new product enjoys profits only temporarily.
When competitors begin to imitate it ,substitutes come
into the market.
Thus competition increases.
This reduces the profits of the innovator
The innovator after sometime gets normal profits.
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Contd…
Again another invention is to be made to get super
profits.
So innovation is a continues process.
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Criticisms:
Schumpeter’s theory has the following defects:
This theory fails to grasp the importance of risk and
uncertainty.
Afterall an innovation itself may be considered as
having a risk element into it.
There is no guarantee that an innovation will be a
ready success.
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Contd…
Innovation is not the only function of an organizer.
He does many other functions also.
Many producers are earning profits even without
innovations.
Both Clark and Schumpeter fail to recognize the
influence of unforeseen risks.
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Contd…
This theory cannot explain the existence of
monopoly profits.
Monopoly profits are permanent and they do not
disappear like innovation profits.
If a monopoly continues to exist, profits continue to
accrue.
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Summary:
Schumpeter says innovation give rise to profits.
With innovations either the cost of production is
lowered, or the product fetches a higher price.
It may be pointed out however, that profits owing to
innovations are only temporary and tend to be
competed.
Thus Schumpeter’s theory of profits is also defective
and incomplete.
CCP 602.30 14
Quiz
1. Innovation theory of profits is advocated by:
c. Prof. Knight
d. . Marshall
e. Schumpeter
f. None of the above
CCP 602.30 15
2. Schumpeter says:
b) Innovations bring profits
c) Profits are reward for performing innovations
d) Both A and B
e) None of the above
CCP 602.30 16
3. Schumpeter says:
b. Technical knowledge give profits
c. Profits encourage innovative research
d. Innovative profits cannot be permanent
e. All the above
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Frequently Asked Questions
1. Explain briefly the innovative theory of profits or
“profit is the reward for innovation-” explain?
2. What are the different types of innovations?
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Thank You
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