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Profit (Theories of Profit (Dynamic Theory of profit (difference btwn…
Profit
Theories of Profit
Risk-Bearing theory
entrepreneur is to bare risk that is associated with setting up of the business and that which is associated with management of the business
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rent theory
states that Profit is the rent of superior entrepreneur over marginal of less efficient entrepreneur
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types
Accounting/Gross
-Total earnings of an organization
-Difference between revenue and cost, including both overheads and manufacturing expenses
-costs are generally explicit costs
-calculated as Total revenue - costs(wages & salaries, Rent, interest, cost of materials )
-used to assess financial stability of an organisation
-used to determine the taxable income
economic
-takes into account both explicit and implicit/opportunity costs(foregone costs which would have been gained from the next best alternative use of resources)
-Total revenue-(explicit + implicit cost)
-not always positive(economic loss)-indicates that business resources can be better employed elsewhere
-indicates that resources are efficiently utilized
-determined by economic principles
-helps in determining the entry,stay or exit of an organisation
key profit concepts
abnormal = supernormal or monopoly profit - price>AC
Normal Profit = minimum reward enough to keep factors of production in current use
Subnormal profit = economic loss - price<ATC
profit maximisation = marginal cost = marginal revenue
profit per unit = profit margin =AR-ATC
This is a reward that is made through business or investment by combining the factors of production to serve the need of consumers