1. CONCEPT OF PROFIT
Presentation of:-Microeconomics business
Presented by:-Roshni Tamang
:-Namrata Chaulagain
Submitted to:-Manish Dewan
2. CONTENTS INCLUDED:-
• Concept of profit:-
-meaning of profit
-types of profit
• Dynamic theory of profit
-meaning
-criticisms
• Innovation theory of profit
-meaning
-criticisms
3. CONCEPT OF PROFIT
Meaning of profit
-Profit is the share of enterpreneurs on the total earnings.
-In other words, profit is the part of income of the firm that is available after all
payments such as rent ,interest and wages have been made.
-Generally, profit is difference between revenue received from the sale of output and
cost of firm. It can be shown as follows:-
Profit=total revenue-total cost
=TR-TC
=P*Q-TC
where,
P=price
Q=Quantity sold
4. TYPES OF PROFIT
A. Business profit:-
*Business profit is defined as the difference between total revenue
and explicit cost .
i.e.
Business profit=total revenue-explicit cost
B. Economic profit:-
*Economic profit is defined as the difference between total revenue
and economic cost
i.e.
economic profit=total revenue-economic cost
=total revenue-(explicit cost + implicit cost)
=total revenue-explicit cost-implicit cost
=business profit-implicit cost
5. DYNAMIC THEORY OF PROFIT
Meaning:-
• Propounded by J.B Clark in 1900.
• Clark defined profit as the difference between price of the product and its cost of
production.
• To explain this theory clark considered two types of economy:-
I ) Dynamic economy-Due to various changes in society profit arises.
II) Static economy-no changes in the economy.
6. CRITICISMS
• All types of dynamic changes do not generate profit.
• Important determinants of profit like skill and efficiency of business to organize
business is ignored.
• Explanation of dynamism is not complete.
• This theory cannot explain the process of determination of size of profit.
• External factors also effects profit which is ignored.
• The innovation of producers also generate profit which is not explained.
7. INNOVATION THEORY OF PROFIT
Meaning:-
• Developed by Joseph Alois Schumpeter in 1934.
• Innovation refers to any new idea, policy or method adopted by a firm that either
increases demand for the product or decreases cost of production.
• This theory assumes that there is existence of perfect competition , closed and
laissez-faire economy.
• Innovations are classified into two categories:-
I. Cost reducing innovations:-Includes all those activities which reduce the cost of
production.
II. Demand expanding innovations:- Includes all those activities which increase the
demand for a product.
8. CRITICISMS
• Narrow definition of profit.
• A few descriptions of innovative activities.
• Similar to dynamic theory.
• Profit may not be temporary as explained by this theory.
• Unable to determine the size of profit.
• Unable to explain about monopoly gain and windfall gain.
