Question1- Define profit. Explain the demand and supply theory of profit determination.
Meaning and definition of profit
In the form of means of production the reward received by the entrepreneur or adventurer for taking a risk is called profit. In other words that part of the national income which the adventurers get in the process of distribution is called profit. Benefit There is a remnant by nature that is the portion that remains for the courageous after rewarding other means of production is called profit. According to Schumpeter “Profit is the reward for the action of the adventurer or it is the risk uncertainty and risk of innovation. is payment.
According to Prof. Speet “ Profit is generally a risk – taking payment. “
According to Meyers “ The real income received by the owners of a business after deducting all costs from the total revenue is called profit.
Demand and supply theory of profit
Modern profit theory
This theory is the modern theory of profit determination. According to this principle just as the price of other means of production is determined by their demand and supply similarly the profit ( price ) of the adventurer is also determined by its demand and supply. This Type theory has two aspects – (1) the demand of the courageous and (2) the fulfillment of the courageous.
( 1 ) Demand for adventure: –
Demand for adventure depends on its marginal productivity. The higher the marginal productivity of the adventurer the greater the demand for adventure. In addition to the marginal productivity of the adventurer to demand the adventurer
( a ) scale of origin
( b ) Factors also influence factors such as a the degree of risk in the industry
( c ) the level of industrial development.
The demand for adventurers increases as the scale expands. The demand for sassy increases along with industrial development. Marginal Income Productivity of Adventurers for a Firm (MRP) is difficult to ascertain. Because there is only one adventurer in the firm and it is not possible to increase or decrease its quantity. Thus instead of the firm the marginal income productivity of the adventurer for the entire industry is ascertained as the number of adventurers in the industry It is possible to make changes. While doing this we have the belief that all adventurers working in a particular industry are equally skilled. It is worth mentioning here that there is an inverse relationship between the number of adventurers and the marginal income productivity due to which the MRP curve From left to right falling down that is with a negative slope.
( 2 ) Fulfillment of adventure :-
Fulfillment of adventure also depends on many factors like – size of population level of industrial development achievement of capital distribution of income and share of risk in business etc. Prominently fulfilling adventure in any industry Depends on the rate of profit to be received from the said industry. If the rate of profit in the industry is high the supply of adventurers will be high otherwise it will be less. Thus there is a direct relationship between the rate of profit and the supply of the adventurer. due to which the supply curve of the adventurer is rising from the bottom to the right. But in perfect competition all adventurers are of equal ability. Thereby each adventurer gets a simple benefit equal to the transfer proceeds only. The fulfillment line of adventurers in this situation There will be a horizontal line on the OX axis.
Determination of profit – Determination of profit is done at the point where the demand of the adventurer is equal to the supply of the adventurer. In other words the demand curve of adventurers i.e. Marginal Revenue Productivity (MRP) and supply curve SS of adventurers are equal to each other.
Short Answer Questions
Question 1- Differentiate between economic profit and accounting profit. (2006; 2005) Distinguish between.Economic Profit and Accoụnting Profit
Total Profit or Gross Profit or Accounting Profit
There are two types of costs of any producer or firm.
( a ) Explicit Costs
The payment made by the adventurer to the external means of production in return for their services comes under explicit costs.
( b ) Implicit Costs
An adventurer also uses some such means which he himself owns that is he does not have to buy those resources from outside such as his own land capital inspection or management services. etc. Businessman The rewards that a person should receive for these resources are called unexplained costs.
The remainder after deducting explicit costs from the total revenue is called total profit or gross profit or accounting profit.
In other words the total revenue received by a producer or firm from the sale of its goods. (Total Revenue ) the amount paid as a reward for the various means used in generation and for the services of land labour capital and organization and depreciation on assets The remainder after deducting maintenance expenses and insurance expenses is called total profit or gross profit or accounting profit. The reward of the adventurer ‘s own means is not to be paid to an outsider.
Economic Profit – Net profit ( actual profit or economic profit ) is the profit that the adventurer gets only for taking the risk. The remainder after deducting both ‘ explicit costs ‘ and ‘ unclear costs ‘ from the total revenue is called It ‘s called ‘ economic benefit ‘. In short –
Economic Profit = Total Revenue – Explicit Costs – Unexplained Costs
Economic Profit = Total profit – unclear costs
Net profit can be both positive and negative. In fact profit is a reward that can be negative.
Difference between economic profit and accounting profit
( 1 ) The balance left after deducting explicit costs from the total revenue is called accounting profit while the balance left after deducting both explicit and implicit costs from the total revenue is called economic profit.
( 2 ) Accounting profit is mostly positive while net profit can be both positive and negative.
Question 2- “ Profit is the reward of bearing uncertainty. Explain
This theory has been formulated by the American economist Professor Knight. According to this principle the gain to the adventurer is not to take risks but to bear uncertainty. According to Professor Knight “ The main task of an entrepreneur is to deal with production uncertainties have to endure. The return of bearing the uncertainties is called profit and the amount of profit depends on the degree of bearing the uncertainty. Professor Knight distinguishes between risk and uncertainty. According to him not all types of risks carry uncertainty.
Professor Knight has divided business risk into the following two parts :-
( 1 ) Known or Certain Risks
Known or certain risks are those which can be predicted in advance such as theft fire etc. Such risks can be insured in advance so they are called insurable risks. is called. This type of risk does not really create any uncertainty as the adventurer gets assured by insuring them. Therefore Knight says that for certain risks the adventurer should not get any reward because the act of taking the risk is not given by the insurance companies. Have done it and not the courageous. The insurance premium paid for these risks is added to the cost of production.
( 2 ) Uncertian Risks
These are those risks which can not be predicted and which can not be insured. These are also called insurable uninsurable risks. For example as a result of changes in the interests and fashions of individuals. Changes in demand conditions risks arising from changes in government policy business cycle risks technical risks etc. These risks lead to uncertainties. Because of the risk borne by the adventurer it is only because the adventurer gets the benefit as a reward. There is attainment. In fact the quantum of profit depends on the degree of such risks.
Determination of profit
Knight says that tolerating uncertainty is also a separate means of production and like other means this means also has its own ‘ demand – price ‘. Similarly there is a supply price to bear the uncertainty. and if the quantum of profit is less than this supply price i.e. the minimum limit then no courageous will be ready to take the uncertainty. According to Knight “ Profit is determined at the point where the demand price its supply take uncertainty. ” Equals the price.
(1) According to critics the function of adventurer is not only to bear uncertainties but he also establishes coordination in the means of production. This act of adventurer is not given any attention in this theory.
(2) Profit can also be a result of monopolistic power not just a consequence of suffering uncertainty.
(3) Profit is also the result of the courage of the adventurer.
( 4 ) Prof. Knight considers uncertainty as a separate element in itself but in practice we will hardly find any such different means.
Question 3- Differentiate between ordinary and additional profit.
Distinguish between normal profit and surplus profit.
Every entrepreneur bears the risks and uncertainties of his business with the hope that he will get profit in future. In the short run he may have to suffer loss but in the long run he must get a certain amount of profit. otherwise he will leave that business. The profit received in the long run is known as ordinary profit ; Therefore the normal profit for an entrepreneur in a business is that low level of profit which enables the entrepreneur to work in the industry and make Just enough to keep.
In fact normal profit like wages cost and interest forms part of the cost and is included in the price.
According to Mrs. John Robinson “ Normal profit is that level of profit at which there is no tendency for new firms to enter the business or for old firms to leave the industry.
Excess or Surplus or Abnormal or Super Normal Profit – Abnormal profit is the profit that an adventurer gets in addition to the normal profit. This is achieved by skilled adventurers because of their skill or because of the imperfection of the market as compared to the marginal adventurers. In simple words when the ‘ real profit ‘ is more than the normal profit then the difference between the two is called abnormal profit. Under perfect competition the actual profit in the short run may be greater than equal to or even less than the normal profit. But in the long run the actual profit is equal to the normal profit. Under imperfect competition and monopoly along with normal profit additional profit is also obtained. In fact it is the amount of additional profit that attracts new firms.
Difference between normal profit and additional profit
(1) Normal profit is the reward for taking a known risk while additional profit is the reward for taking on an unknown risk.
(2) Normal profit is included in the cost of production whereas abnormal profit is not included in the cost of production.
( 3 ) Normal profit is available to all adventurers whereas unusual benefit is received only by the most marginal adventurers.
( 4 ) Normal gains remain constant while abnormal gains increase and decrease according to the recession.
( 5 ) Normal gain is always positive whereas unusual gain can be negative. Loss is called negative gain.
Question 4- Discuss the newly introduced principle of profit.
Innovation theory of profit
This principle of profit has been propounded by Professor Schumpeter. According to this principle profit is the reward for innovations. Innovations mean such changes in the production process which bring down the cost of production of the commodity. innovation many These can be of various types such as using new production techniques and machines in place of old production techniques and machines finding new sources of raw materials production of new goods establishment of new market and reorganization of industry etc. In these new Due to incentives differences arise in the prices and costs of the commodity and this difference is the advantage of the adventurer.
The benefits arising out of innovation are temporary in nature. When a new technology is used by an adventurer he continues to get the benefit of this new technique until it is not adopted by other adventurers. Like other competing firms If we adopt a new method of production with the hope of profit in the same way the quantity of profit starts decreasing and finally it ends. Therefore it would not be fair to say that profit accrues due to new innovation and gets lost due to imitation. more profit Firms always adopt some innovation to achieve this. New innovations are helpful in economic development and profit is obtained by this innovation. Profit in this view encourages new innovations. If the new enforcement is successful then benefit is received. Thus according to Schumpeter “ Profit is both the cause and the result of new innovations.
(1) According to Schumpeter profit is not the reward of risk but the result of innovation. In fact profit is the reward for risk.
( 2 ) Not all entrepreneurs make use of innovations whereas all adventurers accrue the profits.
( 3 ) In fact apart from innovations many elements produce profit but in this theory no consideration is given to other factors affecting profit.
(4) This theory is unable to determine the quantum of profit.
Question 5 : Differentiate between rent and profit. How does some part of rent exist in every income ?
Rent and Profit
Both rent and profit are surplus payments determined by the price. Rent is the excess of the actual income of a factor over the opportunity cost of that factor while profit is the excess of the total revenue of a business firm or producer over the cost of production. industries in which The fulfillment of this should be completely inelastic in them the entire income of the adventurer is in the form of rent. Professor Walker has described profit as an asset to merit. Walker is of the view that every advantage includes a reward for the merit of the adventurer which is equal to Ricardo ‘s rent. It’s like that. It is clear that some part of the profit definitely remains in the rent. That is why both profit and rent accrue to the same. It is necessary to state here that all incomes must have some rent but all incomes must have a share of profit. is not. In some situations the adventurer may suffer loss in such a case the profit is lost.
Difference between rent and profit
( 1) Rent is a contractual income whereas profit is a residual income.
(2) The levy arises due to the limitation of the means while the profit arises due to enduring uncertainty and taking risks.
( 3 ) Rent is always positive whereas profit can be both positive and negative.
( 4 ) Profit fluctuates more rapidly than rent. In other words rent is static while profit is dynamic