Profit is the result exclusively of six dynamic changes i.e.:
- (1) Changes or increase in population,
- (2) Changes in tastes and preferences,
- (3) Multiplication of wants,
- (4) Capital formation,
- (5) Technological advancement and
- (6) Changes in the form of business organisation.
How does profit arise in a dynamic economy?
In the world of reality, according to J. B. Clark profit arises only in a dynamic economy. An economic is said to be dynamic when there is a change in the population growth or change a change in the method of production or a change in the consumer’s want etc. A society which is without these changes is called a static society.
What are the different theories of profit?
The theories are: 1. The Rent Theory of Profit 2. The Wage Theory of Profit 3. The Marginal Productivity Theory of Profit 4. The Dynamic Theory of Profit 5. F.W. Hawley’s the Risk Theory of Profit 6. Knight’s Theory or the Uncertainty-Bearing Theory 7. Modern Theory or Perfect Competition or Demand and Supply Theory of Profit 8. Prof.
What is Clark’s dynamic theory of profit?
It can be concluded that Clark’s dynamic theory of profit is based on a notion that emergence, disappearance, and re-emergence of profits is a continuous process.
Is profit a result of static or dynamic change?
But Profit is the result of dynamic change. Further, Prof. Clark was of this opinion that in a stationary state having static economic conditions of demand and supply, there can be no real or pure profit as a surplus.
What do you mean by dynamic theory of profit?
Dynamic theory of profit was advocated by J.B Clark. He stated that profits rise in that of type of economy where the things change. No profits will be generated n the static economy, where everything remains constant.
Who proposed dynamic theory of profit?
J.B. Clark– J.B. Clark was an American economist and he propounded the dynamic theory of profit in 1900. – His opinion was that profits arise due to dynamic economy, not in a static economy.
What are the 4 theories of profit?
In particular, virtually every theory proposed in the economics or strategy fields to explain profit relies on one or more of four basic causal mechanisms, labeled here as competitive advantage, rivalry restraint, information asymmetry, and commitment timing.
What are the major causes which arise profit according to dynamic theory of profit?
The Dynamic Theory of Profit J.B. Clerk introduced the dynamic theory of profit. According to Clark; profit arises due to the dynamic changes in societies. Clark sees the major function of an entrepreneur and manager in a dynamic world is to take advantage of the generic changes to promote their businesses.
How many theories of profit are there?
The following points highlight the eight theories of profit in economics. The theories are: 1. The Rent Theory of Profit 2. The Wage Theory of Profit 3.
What are the concepts of profit?
Profit simply means a positive gain generated from business operations or investment after subtracting all expenses or costs. In economic terms profit is defined as a reward received by an entrepreneur by combining all the factors of production to serve the need of individuals in the economy faced with uncertainties.
What are the types of profit?
The three major types of profit are gross profit, operating profit, and net profit--all of which can be found on the income statement.
What is Knights theory of profit?
Knight regards profit as the reward for bearing non-insurable risks and uncertainties. He distinguishes between insurable and non-insurable risks. Certain risks are measurable, the probability of their occurrence can be statistically calculated. The risks of fire, theft, flood and death by accidents are insurable.
Why does variation in demand occur?
The variation in demand may take place due to change in fashions, tas les, standard of living, distribution of income, population, new inventions, international repercussion and technological advances etc. A prudent entrepreneur will always keep an eye on future demand for his products.
Is the Clarkian theory of profit wrong?
Professor Knight has criticised the Clarkian theory of profit on the ground that it is wrong to attribute all profits to dynamic changes. According to him, there are certain changes which are of a recurring and calculable nature. They can be anticipated and the output can be adjusted according to that. The profits do not arise on those regular changes but on those which are unforeseen or unpredictable. He thus observes that “It is not dynamic changes no only changes as such which cause profits but the divergence of actual conditions from those which have been expected and on the basis of which business arrangements have been made.”
What are the criticisms of the Dynamic Theory of Profits?
Criticism of Dynamic Theory of Profits: This theory of profit has been criticized on the following grounds. 1. Types of risks : According to Knight all types of dynamic changes do not yield profit. According to him two types of changes takes place in society. a) Foreseeable changes.
How does profit arise in a dynamic society?
According to Clark. profit arises in a dynamic society on account of these changes. These changes affect the demand for and supply of commodities and thus lead to the emergency of profit. These are general dynamic changes. But sometimes dynamic changes may be introduced deliberately by the firms themselves. For example a firm may succeed in cutting down its cost by improving its production techniques and there by increasing its profit.
What is the theory of profit in the reward?
6. Profit in the reward: This theory states that profits arises due to dynamic changes. It does not recognize that profits is the reward for entrepreneurs.
What is dynamic economy?
Dynamic economy means the economy in which frequent changes will occur. In static economy there is no possibility of coming changes. In static economy there will not be any change both in demand and supply. So, profits cannot arise. According to Clark the following things exist in a static economy.
What are the things that exist in a static economy?
According to Clark the following things exist in a static economy. In such society the demand for goods can be estimated easily. There is no risk and uncertainty. Supply will be always equal to demand estimated. The price will be always equal to the cost of production, because there is perfect competition.
What are the five changes that are constantly taking place in a dynamic society?
B. Clark, five main changes are constantly taking place in dynamic society. They are : 1 ) Changes in the number of human wants, 2) Changes in the methods of production, 3) Changes in the capital formation in the economy, ...
Why is the price always equal to the cost of production?
The price will be always equal to the cost of production, because there is perfect competition. In static society the reward is just equal to the marginal productivity of the factors of production and so there cannot be profits. But we are not living in a static society.
What are the three theories of profit?
Theories of Profit. 1. Dynamic Theory of Profit 2. Innovation Theory of Profit 3. Risk Bearing Theory of Profit 4. Uncertainty Bearing Theory of Profit.
Who propounded the idea of profit?
Innovation theory of profit was propounded by Joesph. A.Schumpeter. To Schumpeter, an entrepreneur is not only an undertaker of a business, but also an innovator in the process of production. To him, profit is the reward for “innovation”. Innovation means invention put into commercial practice.
Why does profit not arise on account of risk taking?
According to Knight, profit does not arise on account of risk taking, because the entrepreneur can guard himself against a risk by taking a suitable insurance policy. But uncertain events cannot be guarded against in that way. When an entrepreneur takes himself the burden of facing an uncertain event, he secures remuneration. That remuneration is “profit”.
Who developed the Uncertainty Theory?
Uncertainty theory was propounded by the American economist Frank H.Knight. To him, profit is the reward for “uncertainty bearing”. He distinguishes between “insurable” and “non-insurable” risks.
What happens if an entrepreneur anticipates demand?
Every entrepreneur produces goods in anticipation of demand. If his anticipation of demand is correct, then there will be profit and if it is incorrect, there will be loss . It is the profit that induces the entrepreneurs to undertake such risks.
What are the eight theories of profit?
The following points highlight the eight theories of profit in economics. The theories are: 1. The Rent Theory of Profit 2. The Wage Theory of Profit 3. The Marginal Productivity Theory of Profit 4. The Dynamic Theory of Profit 5. F.W. Hawley’s the Risk Theory of Profit 6. Knight’s Theory or the Uncertainty-Bearing Theory 7.
Who said that profit is the difference between the price and the cost of the production of the commodity?
Prof. J. B Clark propounded this theory in the year 1900. According to him —”Profit is the difference between the price and the cost of the production of the commodity”. But Profit is the result of dynamic change. Further, Prof. Clark was of this opinion that in a stationary state having static economic conditions of demand and supply, there can be no real or pure profit as a surplus. In a stationary economy, the quantum of capital invested, methods of production, managerial organisation, technology, demand pattern etc. remain constant.
Why are there no risk and uncertainty in entrepreneurship?
If they change they can be predicted. Thus, there is no risk and uncertainty. The marginal revenue productivity curve of entrepreneurship would be zero. Therefore, Profit will also be zero. In a static state, profits exist because Profits are not competed away due to the presence of imperfect competition. So what entrepreneurs earn are monopoly profits rather than pure profits. It should be remembered that Manager-entrepreneurs earn wages of management and capitalist—entrepreneurs earn interest.
Why can't profit be calculated accurately?
Because efficiency of entrepreneurs differs, systems and methods of doing work differ, therefore. Profit cannot be calculated accurately.
What is the risk of an entrepreneur?
The entrepreneur’s work is full of risk and uncertainty and profit is given to face this risk. But the workers receive wages simply for his labour. Risk and uncertainty part do not incorporate anywhere in his activities. For labourer risk is of losing the job which is an extreme step.
What does Walker say about profit?
Walker has said that Profit is the rent of ability. ADVERTISEMENTS: He has made a comparative study between different grades of land and entrepreneur’s different abilities. Entrepreneurs of superior ability earn Profits just as superior land earns rent.
What happens to the economy when it changes?
On account of these changes the economy tends to be dynamic. Demand and supply conditions are altered. Some entrepreneurs may get advantageous business positions against others and may reap surplus over costs, as a real profit. In short, those who takes advantage of changing situation can earn real profits according to their efficiency.
What is rent theory?
Rent theory of profit, as developed by Francis L. Walker, says that pure or net profit is the rent of ability. Just as land is heterogeneous in quality, entrepreneurs are also of different qualities. Rent arises due to the differences in productivity of lands. Rent arises in the case of superior or intra-superior land. Rent does not arise in the case of marginal land.
What is marginal productivity?
Marginal productivity theory of distribution can be applied to any input, including entrepreneur. In other words, it is the marginal productivity that determines the reward of an entrepreneur. Profit is determined in accordance with the marginal revenue product of an entrepreneur. Greater the marginal revenue product, greater will be the profit.
What is the main function of an entrepreneur?
According to F. B. Hawley, the main function of an entrepreneur is to bear risk. Profit is the reward for undertaking risk. An entrepreneur produces goods in anticipation. If his anticipation goes right then his currently produced goods could be sold in future.
Is an entrepreneur's only function to bear uncertainty?
In the first place, an entrepreneur’s only function is not to bear uncertainty, though this theory claims so. Profit may arise due to organizational ability, innovation, etc. Knight did no’, consider these. Secondly, it is absolutely difficult to make a monetary measure of uncertainty. Naturally, amount of profit must remain indeterminate.
What is the theory of profit?
Definition: Profit is the financial benefit realized from the business activity when the revenues generated exceeds the costs and expenses incurred in the operation of such activities. Simply, the total cost deducted from total revenue yields profit. The profits of the organization depend on the successful management ...
Why are there so many profit theories?
The main reason behind the formation of so many profit theories is the confusion among the economists arising due to lack of agreement between them regarding the true and proper function of the entrepreneur.
What is the role of an entrepreneur?
Some believed that the function of an entrepreneur is to coordinate and organize the factors of production, others have described the role of the entrepreneur as a risk bearer, while some considered profits as a non-functional income.
Is profit directly linked to entrepreneur?
Although the profits are directly linked to the entrepreneur and his functions, several economists have given their varied views on origin, nature and role of profit.
Who developed the theory of profit?
Walker’s Theory of Profit (Profit as Rent of Ability): One of the extensively recognized theories of profit was stated by F. A. Walker who conceived ‘profit’ as the rent of “exceptional abilities that an entrepreneur may possess” over others.
Who advocated the risk theory of profit?
F. B. Hawley in 1893 advocated the risk theory of profit. According to Hawley, risk in business may arise due to such reasons as obsolescence of a product, unexpected collapse in the market prices, non-availability of essential raw materials, introduction of improved substitutes by competitors, risk due to fire, war and the like.
Why is it difficult to determine the marginal revenue productivity of an entrepreneur?
It is difficult to determine the marginal revenue productivity of the entrepreneur because in any organisation or firm there is always single entrepreneur. As the units of entrepreneur increase in an industry the MRP will decrease and vice versa.
Why did Knight Hawley and Pigou show that entrepreneurs earned profits?
Prior to Knight Hawley and Pigou showed that entrepreneurs earned profits because they had to bear the risks of undertaking productions. But F.H. Knight has significantly advanced the theory of profits based on uncertainty. He has distinguished between risks and uncertainty on the one hand and predictable and unpredictable changes on the other. According to Knight, dynamic changes give rise to profit so far as changes and their consequences are unpredictable in character. Only those changes whose happening cannot be known in advance give rise to profit.
What is the difference between the earnings of the least and the most efficient entrepreneurs?
Walker believes that profit is the difference between the earnings of the least and the most efficient entrepreneurs. Walker assumes a state of perfect competition, in which all firms are presumed equal managerial ability. In Walker’s view, under perfectly competitive conditions, there would be no pure or economic profit and all firms would earn only marginal wages, which is popularly known in economics as ‘normal profit ’.
Why do profits crop up?
Profits crop up because of uncertainty of future. If the future conditions could be completely foreknown in the present, then people would certainly adjust things to the ideal state where all prices would equal costs and profits would not emerge. Ignorance about the future and uncertainty of it gives rise to profits.
What are the functions of entrepreneurs in a dynamic environment?
The major functions of entrepreneurs or managers in a dynamic environment are in taking advantage of the generic changes and promoting their businesses, expanding sales, and reducing costs. The entrepreneurs who successfully take advantage of changing conditions in a dynamic economy make pure profit.
