Rent Theory of Profit This theory was given by Prof.
Walker. This theory is based on Ricardian theory of rent. (According to this theory, profit is the rent of ability. Prof. Walker believed that entrepreneurs differ in ability and efficiency just as various plots of land differ in fertility.) Owing to such difference, entrepreneurs could be (to be paid) graded into marginal and intra-marginal, “Marginal entrepreneurs are the entrepreneurs who earn only normal profit." More efficient and capable entrepreneurs will be in a position to earn differential surplus. Thus, profit is a differential surplus earned by more efficient and able entrepreneurs over marginal entrepreneurs. It implies that profit does not enterinto the price. Profit is determined by the price.
Criticisms
(a) According to this theory, some entrepreneurs do not earn any profit. In practical life, it is not true.
(b) According to this theory, profit does not enter into price but in real life, profit is a part of total cost and such as it enters into price.
(c) According to this theory, profit can never be negative, but the fact is that in circumstances, it can be negative also.
Wage Theory of Profit Profit is the wage of entrepreneur which accures to him on account of his special ability. This theory is given by American economist(Prof. Taussig. According to this theory, profit is a special type of wage earned by entrepreneur.) Prof. Taussig believed an entrepreneur is to put in a special type of labour which requires mental ability and efficiency.
Criticisms (a) This theory ignores that profit is reward of accepting risk and uncertainties.
(b) This theory puts enterprise on the same footing as labour.
3. Marginal Productivity Theory of Profit Credit of this theory, goes to Prof. Chapman, Stigler, Stoneir and Hague. According to this theory reward of entrepreneurs tends to be equal to his marginal productivity. Higher the marginal productivity of entrepreneur more will be his profit. Criticisms
(a) It cannot be calculated as such because there is a single entrepreneur in a firm.
(b) This theory is incomplete because it ignores the supply of entrepreneurs.
(C) This theory does not consider profit that arises by chance.
4. Uncertainty bearing theory of Profit This theory was propounded by Prof. Knight. According to this theory profit is the reward of accepting unsurable risk and uncertainties. Prof. Knight distinguished between risk and uncertainty.
According to him business risk can be of two types:
(a) Insurable risk
(b) Uninsurable risk.
(a) Insurable
Risk Some are the risks that can be forecast and therefore insured.
Example : Fire, accident, theft etc. Therefore, entrepreneur should not get any reward for their risk because these risks are accepted by insurance company not by the entrepreneur. So profit cannot be the reward of such risk.
(b) Uninsurable Risk Some are the risks that cannot be forecast and therefore, cannot be insured. Example : Change in method of production, development of new varieties and substitute of product, change in demànd, new competitor in market and possibility of technical development Profit is the reward of accepting uninsurable risks only, because these risk are accepted by entrepreneurs. Criticisms
(a) Profit is the reward of business abilities of entrepreneur. It is not the reward of accepting uncertainty only.
(b) Uncertainty cannot be measured. Therefore, profit cannot be determined according to this theory.
(c) According to this theory, wherever there is uncertainty, there should be profit but in rea life, it does not hold true.
(d) This theory does not consider.
Demand and Supply Theory of Profit or Modern Theory of Profit According to modern economist, profit is determined by the demand and supply of entrepreneur. Profit is determined in the same manner as price of a commodity. Demand of Entrepreneurs Demand of entrepreneurs depend upon his marginal productivity. Higher the marginal productivity of entrepreneur more will be his demand. Demand of entrepreneur is affected by following factors
1. Economics development
2. Social condition.
3. Possibilities of investment. There is inverse relationship between profit expectation and demand of entrepreneurs. Higher the profit expectation, less will be the demand. Demand curve of entrepreneurs slopes downward to the right as under In this diagram no, of entrepreneurs are known on OX axis and profit expectation on OY axis. DD is demand curve which lopes downward. Supply of Entrepreneurs Supply of entrepreneurs depend upon many factors such as :
1. Size of population.
2. Rate of increase in population.
3. Availability of capital.
4. Industrial development.
5. Social condition.
6. Degree of risk in business. Higher the rate of profit more will be the supply of entrepreneurs. Since, there is direct relationship between rate of profit and the supply of entrepreneurs. Supply curve will slope downward to left In this diagram
(b) number of entrepreneurs are shown on OX-axis and profit expectation on OY-axis, SS is supply curve which moves upward to right.
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