- Profits are essentially a reward for taking risks but labourer takes no risks. His reward or wage is primarily for the labour performed by him.
- Wages are paid in advance. Conversely entrepreneur has to take the responsibility of profit or loss.
- The partner of limited firms receive profit but they do not undergo any physical exertion
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Marginal Productivity Theory.
According to this theory profit are determined according to the marginal productivity of the entrepreneur. The marginal productivity is greater due to the reason that the supply of the entrepreneur is short as compared to their demand. As a result of this, profits are also high.
The marginal productivity theory does not help to explain fully how the profits are determined.
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Dynamic Theory of Profit
This theory was presented by Prof. J.B Clark. According to this theory, profits occur due to the reasons that the circumstances are always changing. It is stated that in a static world where the size of the population, the amount of capital, the quantity and quality of human wants, the method of production, technical knowledge etc remain the same profit tend to disappear under the force of competition. Profits represents the difference between selling price and cost. It is a surplus above cost and when there is perfect competition this surplus disappears because when the world is static and everything is known and knowable, there will be risk and no uncertainty and hence no profits. But according to J.B Clark, we are involving a dynamic world and some changes are constantly taking place. A clever entrepreneur forces these changes and by producing new things he can earn profit. It is only because the world is dynamic.
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Risk Bearing Theory of Profit
This theory of profit is associated with the name Prof. Hawley.
According to this theory, profit is the reward for risk and responsibilities which are come by any entrepreneur. The greater the risk, the higher must be expected gain in order induce entrepreneurs to start the business.
According to carver, profit does not arise due to the reason that risk are taken by the entrepreneur by because the superior entrepreneur are able to reduce them.
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Uncertainty Bearing Theory of Profit
This theory was presented Prof. Knight. According to this theory it is uncertainty bearing rather than the risk taking which is the special function of the entrepreneur and leads to profit. According to Knight risks are of two kinds:-
- There are certain risks which can be unforeseen, eg. accidents like fire
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There are certain risks which are not possible to foresee
Risks of the first kind are borne by the insurance companies.
As regards the risks of the second category, these are borne by the entrepreneur. Prof. Knight Calls them not risks but uncertainty. The term risk is applied to those dangers which can be known and foreseen. The entrepreneur gets remuneration for bearing uncertainty. The firm’s risk is applied to those dangers which can be known and foreseen. The entrepreneur gets remuneration for bearing uncertainties and nothing for the risk which have been foreseen.
Like other factors of production, uncertainty bearing has a supply price because no entrepreneur will be induced to face the uncertainty unless a certain return is expected.
Criticism of the theory.
i) Uncertainty bearing cannot be elevated to the status of a factor of production.
ii) Uncertainty bearing is not the sale function of the entrepreneur.
iii) Uncertainty is not the only factor that limits the supply of entrepreneur. Lack of funds, lack of knowledge and lack of opportunities are some of the factors that restrict the supply of entrepreneurs.
Types of Profits
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Normal Profit or Zero Profit TR = TC.
This is a return which is just necessary to cover all its cost of production. Normal profits exist when TR = TC therefore it can be called zero profit.
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Super normal Profit
These are profits which are above the normal profit. They exist when TR is more than TC, therefore it can as be called Abnormal profit.