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Thursday, 12 May 2011

Discuss the various theories of profit which have been offered from time to time

Rent theory of profit :-
This theory is offered by Prof. Walker. He says, that profit is determined just like the rent of land. The main points of this theory are given below :

1. Profit is like run :-
He says that as superior grade of land earned more rent then the inferior grade of land, similarly superior entrepreneur earn more than the inferior.

2. Marginal entrepreneur :-
Just as the rent is measured from no rent land in the same way profits of the superior businessman are calculated from the marginal entrepreneur.

3. Profit is not included in cost :-
Profit is not included in the cost of production, it is something extra just like the theory of Ricardo.

CRITICISM

1. difference in land and entrepreneur :-
Marshall says that there is much difference between the rent of land and entrepreneur's profit.

2. Objection on superior ability :-
Profit can not arise only due to the superior ability but there are so many other factors which are responsible for profit.

3. Nature of profit ignored :-
This theory does not throw light on the nature of profit which is more important.

4. Profit is the part of cost :-
It is also stated that profit is not included in cost , it is not correct.

5. Case of loss :-
In case of land, there is no chance of loss but in case of entrepreneur loss can also be suffered.


Risk-bearing theory of profit :-
F.B Hawlay. says that profit is the reward of risk taking in business. In a business activity we know that there is a chance of loss very moment. The greater the risk, the higher must be the profit. If there would be equal rate of profit in all the business, then nobody would invest the capital in a risky enterprise.

CRITICISM

1. Demand and supply side ignored :-
This theory is ignored the demand and supply aspect.

2. Better management :-
The profit can arise on account of better management instead of risk taking only.

3. Monopoly and by chance profit ignored :-
This theory does not throw light on the monopoly gains and by chance gains.

4. Superiority of entrepreneur :-
Superior entrepreneurs are able to reduce the risks, so it is not correct to say that profit raises due to risk.


Uncertainty theory of profit :-
This theory is offered by Prof. Knight. He says that profit is the reward for uncertainty bearing and not of risk taking in business. He divides the risks in to two kinds.

1. Insurable risks. 2. Non insurable.
Those risks which can not be insured, such as the change in demand due to fashion, these are called uncertainty bearing. According to him profit is the reward of uncertainty bearing rather than risk taking, which are insurable.

CRITICISM

1. Other services ignored :-
The total profit can not be reward of uncertainty in a business because the entrepreneur also performs other functions like bargaining and co-coordinating the business.

2. Demand and supply ignored :-
This theory ignored the demand and supply side.

3. Monopoly and by chance profit ignored :-
This theory does not throw light on the monopoly gains and by chance gains.

4. Restricted supply :-
Profit is not simply reward of uncertainty bearing but it is paid due to restricted supply of the entrepreneur.


Dynamic theory of profit :-
This theory is offered by Prof. Clark. He says that profit is reward of entrepreneurs ability that he uses his creative forces and bringing many changes the makes the business dynamic. Every entrepreneur wants that the cost of his production should be minimum and profit should be maximum.
Prof. Schumpeter says that entrepreneur earns profit by using innovations. So profit is the reward of innovations.

CRITICISM
Prof. Knight criticisms that all profits are not due to the dynamic changes.
This theory also fails to explain that how profit is determined in the market.

Marginal productivity theory :-
According to "Chapman" The profit tends to equal to the marginal social worth of the employer as the labourer gets his marginal net product from the employer." The marginal net product is an amount which the community is able to produce with his help over and above what it could produce without his help. If the marginal productivity is higher then the profit will high. If the marginal product is low then profit will also be low.

CRITICISM
It is very difficult to know the marginal net productivity of entrepreneur.

CONCLUSION
These theories are defective in one way or the other.

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