2new risk theory of profit 2
TRANSCRIPT
-
8/7/2019 2NEW RISK THEORY OF PROFIT 2.
1/22
RISK THEORY OF PROFIT
BY
MAHESHKUMAR PATIL
NADER HAJIZADEH
RAZIEH JAHANDIDEH
ELNAZ ALASVAND
-
8/7/2019 2NEW RISK THEORY OF PROFIT 2.
2/22
RISK THEORY OF PROFIT
F. B. Hawley emphasized risk taking as the
function of the entrepreneur for which he needsthe inducement of profit.
If risk is not properly rewarded nobody would bewilling to undertake risk. Higher the risk the
greater must be the possibility of profit.
-
8/7/2019 2NEW RISK THEORY OF PROFIT 2.
3/22
Cont
Hawley held that profit is the reward for risk and
responsibilities that the undertaker subjecthimself to replacement or depreciation iscalculated and provided for an item of cost.
Obsolescence is not calculable because to
anticipate technical progress is difficult. Buteven then it is counted as a cost.
-
8/7/2019 2NEW RISK THEORY OF PROFIT 2.
4/22
Cont
Business risk and certainty are not provided for
in costs in the conventional sense.
The entrepreneur bears these in anticipation ofprofit. But for profit, nobody will bear theserisks. They are called staying in business.
The greater the amount of risk involved in abusiness higher is the expected profit necessaryto induce entrepreneur to bear risk.
-
8/7/2019 2NEW RISK THEORY OF PROFIT 2.
5/22
RISK CURVE
-
8/7/2019 2NEW RISK THEORY OF PROFIT 2.
6/22
DISCUSSION
The situation is easily understood from theconventional diagram.
If the curve CD represents the relative importanceof successive agents of a series, or units of somereally fundable agent, then under perfectcompetition every unit will get the product DE, anda certain group E'Ewill get FDE'E.
If now these EE'units combine so as to becomemarginal as a group, they can get instead D'DE'E,gaining D'DFover the former arrangement.
-
8/7/2019 2NEW RISK THEORY OF PROFIT 2.
7/22
CONT
The owner of the group can prevent the substitutionof a (marginal) unit outside the group for any unit init, and so cause a larger product to be dependent onthe employment of the group than the aggregatemarginal products of its members.
Similar agencies outside the combination will onlyget the wage DE, and the surplus income received byour consolidated block will come out of the shares ofthe agencies with which it is combined, not out of anincrease in the price of the product to consumers.
-
8/7/2019 2NEW RISK THEORY OF PROFIT 2.
8/22
CRITICISMS
Prof. Carver said that profit accurse to theentrepreneur not because he undertake risk, but
because he avoids risk with the use of his businessability. Profit is the reward for risk reduction instead of
risk-taking. According to critics there is no direct relationship
between profit and risk-taking. In reality, manyother factors besides risk influence profit.
-
8/7/2019 2NEW RISK THEORY OF PROFIT 2.
9/22
CONT
According to Knight, there are two types of risks
(I) foreseeable riskThe former can be anticipated and provided
against through insurance.For example the riskof fire in a factory can be covered through fire
insurance. The premium so paid may be makesprovision against it; it creases to be risk.
-
8/7/2019 2NEW RISK THEORY OF PROFIT 2.
10/22
CONT
(II)Unforeseen risk
Unforeseen risk on the other hand cannot beforeseen by entrepreneur and as such theycannot be covered through insurance.
For example, the risk of commercial loss inbusiness is an unforeseeable risk or uncertaintyrisk.
-
8/7/2019 2NEW RISK THEORY OF PROFIT 2.
11/22
DISADVANTEGE
It does not make distinction between known risk
and unknown risk.
It has lot of criticism.
-
8/7/2019 2NEW RISK THEORY OF PROFIT 2.
12/22
CONCLUSION
The risk theory is not the a complete explanation
of profit although it must be admitted thatentrepreneurs undertake risks and expectreward for doing so that a part of due theirearning is due to this element.
-
8/7/2019 2NEW RISK THEORY OF PROFIT 2.
13/22
Objectives of a business firm
Profits Maximization
Staff Maximization
Sales Maximization
Growth Maximization
Managerial Utility Maximization
-
8/7/2019 2NEW RISK THEORY OF PROFIT 2.
14/22
Profit maximization is always assumed to be the
most important objectives of any firm The aim should be earn satisfactory profits and
not maximum profit.
Profits Maximization
-
8/7/2019 2NEW RISK THEORY OF PROFIT 2.
15/22
We show the firm producing 20 units of output, thelevel of output where MR = MC.
At that level of output the firm sells its product for10 per unit.
This means the firm's total revenue is 10 x 20 =200. At 20 units of output ATC = 7 so total cost is
20 x 7 = 140.
So profit = TR - TC = 200 - 140 = 60.Oraverage profit is 10 - 7 = 3 per unit, so profitis 20 x 3 = 60.
-
8/7/2019 2NEW RISK THEORY OF PROFIT 2.
16/22
-
8/7/2019 2NEW RISK THEORY OF PROFIT 2.
17/22
Staff Maximization
Now a days business and corporation run by
professional manager, as there is the separationfrom of ownership from control.
The manager aims at maximization staff ratherthan profit.
When the firm possesses the degree ofmonopoly in the market manager may tread ofsome profits for an expansion in the size of thestaff.
-
8/7/2019 2NEW RISK THEORY OF PROFIT 2.
18/22
Sales Maximization
The notion that business firms is primarily
motivated by the desire to achieve the greatestpossible level of sales, rather than profitmaximization
For firms operating in relatively competitivemarkets, facing relative fixed prices, andrelatively constant average cost, then increasingsales is bound to increase profits, too.
-
8/7/2019 2NEW RISK THEORY OF PROFIT 2.
19/22
Growth Maximization
Corporate managers try to maximize the rate of
growth of output or total sales revenue ratherthan maximizing profit.
The managers pursue multiple goals in which
along with sales maximization the objective ofachieving the highest possible growth of outputis paramount.
-
8/7/2019 2NEW RISK THEORY OF PROFIT 2.
20/22
Managerial Utility Maximization
The utility of managers will be increased if their
status improves by an enlargement of staffexpenditures, as this shows ability to manage, orif managerial salaries and profits are higher thanan acceptable minimum level.
-
8/7/2019 2NEW RISK THEORY OF PROFIT 2.
21/22
Being a good employer
A happy work force can contribute to a firm
through lower turnover , productivityand higher profits.
There is positive relationship between better
employers and profits.
-
8/7/2019 2NEW RISK THEORY OF PROFIT 2.
22/22