PROFIT=TOTAL REVENUE-TOTAL COST DEFINITION Classical economists have regarded profit maximization as the sole objective of the business in any capitalist economy. Ordinary language - profit is all about excess of income over costs of production. PROFIT=TR-TC PROFIT=TOTAL REVENUE-TOTAL COST

GROSS PROFIT VS NET PROFIT Gross profit is surplus of total money expenditure incurred by a firm after the production process Net Profit is pure economic profit earned by entrepreneur for his services &efficiency. Net Profit= Gross Profit-(payment for using entrepreneur’s own land, labour& capital)

ELEMENTS REWARD FOR BEARING RISKS. REWARD FOR INNOVATION MONOPOLY POWER PRODUCT DIFFERENTIATION WINDFALL PROFIT/GAIN

INNOVATION Invention innovation

MONOPOLY POWER Single seller Large number of buyers. No close substitute High price

PRODUCT DIFFERENTIATION

Windfall gain Occurrence of some Unexpected events.

PROFIT & OTHER FACTOR INCOME 1. Non-Contractual vs. Contractual Income: 2. Residual vs. Non-Residual Income: 3. Nature of Profits and of Other Incomes: Profit can be zero when there is neither a gain nor a loss; sometimes it can be even negative when there is a loss in business. But other incomes are always positive. 4. Role of Risk: 5. Fluctuating Nature of Profits:

Hawley’s Risk Theory Of Profit “The riskier the industry the higher its profit rate” Since entrepreneur take the risks of business, he is entitled to receive profit as his rewards. Profit is commensurate with risk.

Criticisms There are no functional relationship between risk and profit. •Profit is not based on entrepreneur's ability to undertake risks, but rather as his capability of risk avoidance. •The theory disregards many other factors attributable to profit and just concentrate on risks

UNCERTAINTY BEARING THEORY According To Hawley Profit Is The Reward For Bearing Risk. The Concluding Point Of Hawley’s Theory Is The Starting Point Of Knight,s Theory. Knight Classified Risk As INSURABLE NON-INSURABLE

PRODUCTION DISTRIBUTION TIME LAG According To Him Profit Is The Reward For Taking Non Insurable Risk (Uncertainty). PRODUCTION DISTRIBUTION TIME LAG Causes Change In Economic Variables Some Part May Remain Unsold

DIFFERENT TYPES OF UNCERTAINTIES MARKET BEHAVIOUR TECHNOLOGICAL CHANGE CHANGE IN COMPETETIVE FIRM’S BEHAVIOUR CHANGE IN GOVERNMRNT POLICY TRADE CYCLE

QUESTIONS Differentiate Between Normal And Super Normal Profit, Gross And Net Profit. Profit And Other Incomes Describe The Elements Of Gross Profit /Net Profit. Insurable & Non Insurable Risk Invention & Innovation Windfall Gain