THEORIES OF PROFIT: INNOVATION THEORY AND RISK THEORY OF PROFIT

•      THEORIES OF PROFIT: INNOVATION THEORY AND RISK THEORY OF PROFIT

•     MICRO ECONOMICS/BUSINESS ECONOMICS

•      SHASHI AGGARWAL ECONOMICS AND LAW CLASSES

•     THE INNOVATION THEORY

1.       GIVEN BY SCHUMPETER AND HE DEFINED THE TERM INNOVATION IN A BROAD SENSE ALL THOSE INVENTIONS AND CHANGES DUE TO WHICH COST OF PRODUCTION CAN BE REDUCED OR AVERAGE REVENUE CAN BE INCREASED OR THE DIFFERENCE BETWEEN COST AND REVENUE CAN BE ENLARGED CALLED INNOVATIONS.

2.       PROFIT TO DYNAMIC CHANGES RESULTING FROM INNOVATION

3.       ASSIGNS THE ROLE OF AN INNOVATOR TO THE ENTREPRENEUR NOT TO THE CAPITALIST

4.       ENTREPRENEUR IS THE PERSON WHO INTRODUCES SOMETHING ENTIRELY NEW

5.       INNOVATION IN ONE FIELD MAY INDUCE INNOVATION IN OTHER FIELD

6.       PROFIT IS CAUSE AND EFFECT OF INNOVATION

•     INNOVATION THEORY

•     INNOVATION MAY CONSIST OF-

1.       THE INTRODUCTION OF NEW PRODUCT

2.       THE INTRODUCTION OF NEW METHOD OF PRODUCTION

3.       THE OPENING OF NEW MARKET

4.       THE DISCOVERY OF A NEW SOURCE OF RAW MATERIAL

5.       THE REORGANIZATION OF AN INDUSTRY

PROFIT IS TEMPORARY PHENOMENON, OTHER ENTREPRENEUR IMITATE THE INNOVATION.

•     CRITICISM

1.       NO IMPORTANCE TO ELEMENT OF UNCERTAINTY IN THE DETERMINATION OF PROFIT

2.       DOES NOT REGARD PROFIT AS THE REWARD FOR RISK TAKING

3.       INCOMPLETE THEORY

•     RISK THEORY OF PROFIT

1.       ASSOCIATED WITH AMERICAN ECONOMIST F.B HOWLEY( ENTERPRISE AND THE PRODUCTION –PROCESS)

2.       RISK TAKING AS THE MAIN FUNCTION OF ENTREPRENEUR

3.       THERE IS TIME GAP BETWEEN SALE AND PRODUCTION

4.       HOWLEY” THE PROFIT OF AN UNDERTAKING IS NOT THE REWARD OF MGMT. OF COORDINATION BUT OF RISK AND RESPONSIBILITIES

•     FOUR KIND OF RISK:-

1.       REPLACEMENT RISK: REFERS TO DEPRECIATION. CAN BE CALCULATED

2.       RISK PROPER:- DUE TO TIME LAG BETWEEN PRODUCTION AND SALE. THERE CAN BE SO MANY UNFORESEEN CHANGES. SO ENTREPRENEUR MAY HAVE TO BEAR THE LOSS. WOULD BE WILLING TO BEAR THE RISK ONLY IF HE GETS A REWARD FOR THE SAME.

3.       UNCERTAINTY

4.       OBSOLESCENCE

•     CRITICISM

1.       REWARD FOR REDUCING RISK

2.       NOT A REWARD FOR ALL TYPES OF RISK

3.       NARROW THEORY

4.       NO PROPORTIONAL RELATION BETWEEN PROFIT AND RISK