BATCH 21 - GROUP 1
Milind R. Chandane - KHR2010SMBA21P009 KHR2010SMBA21P009
Sunita Kadam - KHR2010SMBA21P014 KHR2010SMBA21P014
Samrat Mazumder - KHR2010SMBA21P028 KHR2010SMBA21P028
Kaushal Patel - KHR2010SMBA21P042 KHR2010SMBA21P042
Divya Suresh - KHR2009SMBA18P042 KHR2009SMBA18P042
Vaibhav Gupta - KHR2010SMBA21P049 KHR2010SMBA21P049
THEORIES OF PROFIT
INTRODUCTION
Profit is the reward of the entrepreneur, en trepreneur, rather rather of the entrepreneurial functions. Profits differ from from the returns on other factors of production such as land - rent, labour wages, capital interests. Ordinary language - profit is all about excess of income over costs of production. It includes earnings of self used factors entrepreneurs own land, capital and his own labour work called respectively.
But in economics, profit is regarded as a reward for the entrepreneurial functions of final decision making and ultimate uncertainty bearing. As a difference between total revenue and total cost as a reward for risk taking or uncertainty- bearing as a reward for innovation and so on.
PES OF PROFIT TY 1.
Gross Profit and Net Profit: Gross Profit is the surplus profit which accrues to a firm when it subtracts its total expenditure from its total revenue. Gross Profit = Total Revenue Total Cost. Which includes net profit, remuneration for the factors of production such as rent, interest, wages etc and depreciation and maintenance charges.
Profit or Pure Profit is the residual left with the entrepreneur after deducting the remuneration for the factors of production contributed by entrepreneur, depreciation and maintenance charges and extra personal profits from gross profits. Net Profit is a reward for co-ordination, reward for innovation, reward for risk taking and reward for uncertainty bearing. Net
2.
Business Profit and Economic Profit: Business Profit/Accounting Profit excess of revenue receipts over the cost of production of goods and services. Business Profit = Total Revenue Explicit Cost. Economic Profit includes both explicit and implicit cost of production. Economic Profit = Total Revenue Explicit and Implicit Cost
3.
Normal Profit and Super Normal Profit:
Normal
Profit is the profit which accrues to an entrepreneur in the long period, where price of the product = average cost (MC = MR and AR = AC). It is included in the cost of production. Super Normal Profit is a kind of surplus which accrues to the super marginal entrepreneurs, where price of product is higher than average cost (Price > AC). It is not included in cost of production.
THEORIES OF PROFIT
Risk Theory of Profit
Uncertainty - Bearing Theory of Profit
Schumpeters Innovation Theory of Profit
Marginal Productivity Theory
Keynesian Theory of Profit
RISK OF PROFIT THEORY
Risk Theory of Profit was advocated by an American Economist Prof. Hawley. Profit arise because the entrepreneur undertakes the risk of the business. If the entrepreneur is not rewarded he will not be prepared to undertake risks.
Higher the risk greater is the possibility of profit.
PES OF RISK TWO TY 1.
2.
Insurable Risks: These are predictable/measurable and which are insurable for fire, theft, flood, accident etc (which are the risks in business).
Non Insurable Risks: These are unforeseeable risks or cannot be measured/identified. For instance, competitive risks, technical risks, risk of government risk arising out of business cycle.
UNCERTAINTY -BEARING OF PROFIT THEORY
Uncertainty-Bearing Theory was advocated and developed by Knights. It is also called as Modern Theory of Profits. According to Knight, pure profits are linked with uncertainty and risk bearing. There is a direct relationship between profit and uncertainty bearing. Greater the uncertainty bearing, higher the level of profits. It is considered as a separate factor of production.
SCHUMPETERS THEORY OF INNOVATION
The theory propounded by Schumpeter explains the changes caused by innovation in the productive process.
According to this theory, profit is the reward of innovations. Innovations refers to all those changes in the production process with an objective of reducing the cost of production. Innovation always reduces cost of production.
CHOOSING A HISTORICAL ROOT: INNOVATION THEORY
CHOOSING A CURRENT ENG SY S METHOD: STRATEGY DEVELOPMENT
OVERVIEW
CONNECTIONS BETWEEN AND INNOVATION THEORY STRATEGY DEVELOPMENT
WHICH MODERN DISCIPLINES ARE IMPACTED BY SCHUMPETERS WORK?
FORMS OF INNOVATION
Introduction of a new technique or a new plant.
Changes in the internal structure or organizations setup.
Changes in the quality of the raw material.
New sources of energy.
Better method of salesmanship.
TECHNOLOGICAL INNOVATION
Innovations revolutionize production in ways even innovators cant foresee 1954 ex pert vision of 2004 home computer
MARGINAL PRODUCTIVITY THEORY
It was developed by Prof. Chapman Profits are equal to marginal worth of the entrepreneur and are determined by marginal productivity of the entrepreneur. When the marginal productivity is high, profits will also be high and vice-versa. But it is difficult to measure the marginal productivity of the entrepreneur. In case of other factors such as land, labour and capital, marginal productivity can be measurable either increasing or decreasing the units of factors.
THREE(OR FOUR) MARGINALS
The focus of marginal productivity theory is on marginal product. There are, however, three related "Marginals" that need to be noted:
Product: This is the change in total product resulting from an incremental change in the quantity of the variable factor input used. Marginal Physical Product: This is another term for marginal product which serves to emphasize that production is measured in physical units rather than monetary units. Marginal
Revenue: This is the change in total revenue resulting from an incremental change in the quantity of the output produced. Marginal Revenue Product: This is the change in total revenue resulting from an incremental change in the quantity of the variable factor input used. Marginal Revenue Product = Marginal Product x Marginal Revenue Marginal
KEYNESIAN THEORY OF PROFIT
Relates money supply variability and uncertainty to inflation and deflation. Variability of prices is a major cause of business cycles. Wages and other costs of production adjust more slowly than prices. Therefore price variability affects profits and therefore investment. Investment cycles cause business cycles.
THE GENERAL THEORY
If the consumer is an economic optimizer, he/she must be unable to buy the goods they planned to buy because of some kind of constraintrisk, convention, social institutions, cash, or ...? According to the classical model, the consumer has insatiable wants. The consumer sells his/her labor in exchange for enough income to buy the goods. The money value of the incomes received must be equal to the value of the output produced. So how can unsold goods pile up in warehouses, causing firms to lay off workers?
(2) The GENERAL THEORY
Says Law cannot hold. (Supply creates its own demand.)
If spending constraints are in effect, then there will be a difference between (unlimited) demand and effective demand.
Actual (effective) demand will usually be deficient to purchase total output.
(3) THE GENERAL THEORY
Microeconomics and macroeconomics do not operate on the same basis. One cannot assume that what is true for the economic agent at the level of the individual consumer or firm is true in aggregate. This amounts to the fallacy of composition. In microeconomics, relative price effects dominate. This is not true in macroeconomics. In macroeconomics, income effects dominate, making income more important in determining aggregate economic behavior.
(4) THE GENERAL THEORY
Therefore, consumption depends primarily upon income, not interest rates. C { C(r), but rather C = C( Y ).
People dont change their standard of living simply because the interest rate changes a few points.
(5) THE GENERAL THEORY
Saving occurs as the result of a habit, convention, or social norm. People on average set aside a certain percentage of their income. Saving is not a function of interest rates. S { S(r), but rather S = S( Y ). Investment is related to interest rates, but also to business peoples expectations for the future. That is, I = I(r,E).
(6) THE GENERAL THEORY
If S = S(Y ) and I = I(r,E), then there is no coordinating variable to bring supply and demand together in the loanable funds (capital) market. There is no reason to assume that supply equals demand in this market. There is no reason to believe that there will be adequate funds available to provide adequate investment demand. Since AD = C + I + G + NX , if investment demand is deficient, then AD < AS, and inventories may pile up, with unemployment a natural outcome. Without the coordinating variable, this will be the normal outcome, with AD = AS only happening accidentally.
(7) THE GENERAL THEORY
Investment is a large and long-term commitment, and is based on weakly supported expectations about the future. This makes investment very different from consumption. Investment decisions will be erratic and emotional, and the risks associated with investment are very high. As a result, business decision makers will tend to under-invest, further worsening the problem of deficient investment.
(8) THE GENERAL THEORY
It may be a natural outcome of the organization and institutions of modern economies that prices and wages may not be fully flexible. This would result in markets (like the labor and goods markets) being unable to clear, leading to unemployment and aggregate supply exceeding demand.
(9) THE GENERAL THEORY
Money plays a key role in the economy. The use of money leads to uncertainty, and makes piercing the veil impossible. A money economy is fundamentally different from a barter economy. The classical dichotomy cannot hold. Interest rates are established in the money market. People may rationally hoard money, holding money for purposes other then making transactions. Equilibrium is not AD=AS. It is a state that persists.
CONSUMPTION
7000 6000
n o it 5000 p4000 m u3000 s n2000 o C1000 0 0
2000
4000
6000
Real GDP
8000
10000
CONSUMPTION FUNCTION
= c
mpc = (C/(Yd = marginal propensity to c onsume C
(C (Yd
C = C + mpc x Yd 0 Or C = C + cYd 0
C 0 Yd
ORIGINAL AGGREGATE EX PENDITURE MODEL 45o line
Real GDP exceeds planned expenditure
10.0
Total Ex penditure C+I+G
8.0
Aggregate planned expenditure 6.0 (trillions of 1992 4.0 dollars/year) C0
f
b
c
a
Equilibrium expenditure
Planned expenditure exceeds real GDP
G I
0
e
d
2
4
6
8
10
Real GDP (trillions of 1992 dollars per year)
ALGEBRA OF THE MODEL Y=C+I+G But C = C0 + c(Y- T), So Y = C0 + c(Y-T) +I+G Y = C0 + cY cT + I + G Y cY = C0 + I + G c T Y(1-c) = C0 + I + G Ct
*! Y
1 1
c
?C 0
I G
A cT
But this means that ( Y !
( Y
!
( Y !
But ( Y !
1 1
( G
c
1 1
( I
c
1 1
c
c
1
c
( C
( T
POLICIES OF PROFIT
The main motive of the businessman is to make profits. Every firm tries to maximize profits. The amount of profit that a firm makes shows its success and efficiency. The profit that a firm makes should not be at the point of exploitation of the people. It should be done through maximizing sales and achieving the lowest cost of production. Businessman should provide goods and services of good quality at reasonable prices.
