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Theories of Profit: Risk and Innovation

The document discusses three main theories of profit: 1. Risk bearing theory proposes that the amount of risk an entrepreneur bears in production determines the amount of profit. More risks like technological obsolescence or new competition means more potential profit. 2. Uncertainty theory argues that profit rewards entrepreneurs for bearing uncertainty that can't be calculated through risk, like situations that unexpectedly arise. 3. Innovation theory claims entrepreneurs earn profits by introducing successful innovations that reduce costs or increase demand, such as new production methods, machinery, or organizational techniques. The conclusion states that while each theory explains profits, the dynamic real world means uncertainty, risk, and innovation together are the main causes of profits. Innovation helps entrepreneurs

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Vibhu Vikramaditya
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668 views5 pages

Theories of Profit: Risk and Innovation

The document discusses three main theories of profit: 1. Risk bearing theory proposes that the amount of risk an entrepreneur bears in production determines the amount of profit. More risks like technological obsolescence or new competition means more potential profit. 2. Uncertainty theory argues that profit rewards entrepreneurs for bearing uncertainty that can't be calculated through risk, like situations that unexpectedly arise. 3. Innovation theory claims entrepreneurs earn profits by introducing successful innovations that reduce costs or increase demand, such as new production methods, machinery, or organizational techniques. The conclusion states that while each theory explains profits, the dynamic real world means uncertainty, risk, and innovation together are the main causes of profits. Innovation helps entrepreneurs

Uploaded by

Vibhu Vikramaditya
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd

THEORIES OF PROFIT

BY –
NISHITA BHATTAD
ANANYA SINGH
VIBHU VIKRAMADITYA
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.
Innovation theory of
profit

* The Innovation Theory of Profit was


proposed by Joseph. A. Schumpeter, who
believed that an entrepreneur can earn economic
profits by introducing successful innovations.
* In other words, innovation theory of profit
posits that the main function of an entrepreneur is
to introduce innovations and the profit in the
form of reward is given for his performance.
According to Schumpeter, innovation refers to
any new policy that an entrepreneur undertakes
to reduce the overall cost of production or
increase the demand for his products.

Thus, innovation can be classified into two


categories; The first category includes all those
activities which reduce the overall cost of
production such as the introduction of a new
method or technique of production, the
introduction of new machinery, innovative
methods of organizing the industry, etc.
CONCLUSION
WE HAVE DISCUSSED VARIOUS THEORIES OF PROFIT . THE QUESTION ARRISES WHICH THEORY
SHALL WE ACCEPT ! . HOW DO WE KNOW FOR SURE THAT FOLLOWING ONE PATH WOULD LEAD
US TO GOLD . THE REAL WORLD IS COMPLEX AND THE FACT IS THAT , THERE ARE SEVERAL
CAUSES WHICH GIVE RISE TO PROFITS , BUT THE PRINCIPLE CAUSES ARE UNCERTAINTY , RISK
AND INNOVATION . THE UNCERTAINTY IS DUE TO THE DYNAMIC NATURE OF OUR WORLD , WHICH
WE HAVE NO CONTROL OF . THE RISK INVOLVED IN ANY ACTIVITY IS DUE THE PRESENCE OF
UNCERTAINTY , IF THE OUTCOME WAS KNOWN THERE WOULD BE NO RISK . IN THE LAST BUT NOT
THE LEAST , INNOVATION IS THE ONLY HOPE OF ENTREPRENEUR , IF HE WANTS TO GET AHEAD OF
THE EXISTING COMPETITION AND MAKE PROFITS IN THE LONG RUN .

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