Theories of Profit
Theories of Profit There are various theories of profit, given by several economists, which are as follows:
1. Walker’s Theory of Profit as Rent of Ability
This theory is pounded by F.A. Walker. According to Walker, “Profit is the rent of exceptional abilities that an entrepreneur may possess over others”. Rent is the difference between the yields of the least and the most efficient entrepreneurs. In formulating this theory, Walker assumed a state of perfect completion in which all firms are presumed to possess equal managerial ability each firm receives only the wages which in Walker view forms no part of pure profit. He considered wages of management as ordinary wages thus, under perfectly competitive conditions, there would be no pure profit and all firms would earn only wages, which is known as normal profit.
2. Clark’s Dynamic Theory
This theory is propounded by J.B. Clark According to him, “Profits arise in a dynamic economy and not in static economy.”
A static economy and the firms under it, has the following features: * Absolute freedom of competition. * Population and capital are stationary. * Production process remains unchanged over time. * Homogeneous goods. * Factors of production enjoy freedom of mobility but do not move because their marginal product in very industry is the same. * There is no uncertainly and risk. If there is any risk, it is insurable * All firms make only normal profit.
A dynamic economy is characterized by the following features: * Increase in population. * Increase in capital. * Improvement in production techniques. * Changes in the forms of business organization.
The major function of entrepreneurs or managers in a dynamic economy is to take the advantage of all of the above features and promote their business by expanding their sales and reducing their costs of production.
According to J.B. Clark, “Profit is an elusive sum, which entrepreneurs grasp but cannot hold. It
1. Walker’s Theory of Profit as Rent of Ability
This theory is pounded by F.A. Walker. According to Walker, “Profit is the rent of exceptional abilities that an entrepreneur may possess over others”. Rent is the difference between the yields of the least and the most efficient entrepreneurs. In formulating this theory, Walker assumed a state of perfect completion in which all firms are presumed to possess equal managerial ability each firm receives only the wages which in Walker view forms no part of pure profit. He considered wages of management as ordinary wages thus, under perfectly competitive conditions, there would be no pure profit and all firms would earn only wages, which is known as normal profit.
2. Clark’s Dynamic Theory
This theory is propounded by J.B. Clark According to him, “Profits arise in a dynamic economy and not in static economy.”
A static economy and the firms under it, has the following features: * Absolute freedom of competition. * Population and capital are stationary. * Production process remains unchanged over time. * Homogeneous goods. * Factors of production enjoy freedom of mobility but do not move because their marginal product in very industry is the same. * There is no uncertainly and risk. If there is any risk, it is insurable * All firms make only normal profit.
A dynamic economy is characterized by the following features: * Increase in population. * Increase in capital. * Improvement in production techniques. * Changes in the forms of business organization.
The major function of entrepreneurs or managers in a dynamic economy is to take the advantage of all of the above features and promote their business by expanding their sales and reducing their costs of production.
According to J.B. Clark, “Profit is an elusive sum, which entrepreneurs grasp but cannot hold. It