2new risk theory of profit 2

8/7/2019 2NEW RISK THEORY OF PROFIT 2.

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RISK THEORY OF PROFIT

BY

MAHESHKUMAR PATIL

NADER HAJIZADEH

RAZIEH JAHANDIDEH

ELNAZ ALASVAND


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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.


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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.


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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.


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RISK CURVE


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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.


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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.


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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.


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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.


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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.


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DISADVANTEGE

It does not make distinction between known risk

and unknown risk.

It has lot of criticism.


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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.


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Objectives of a business firm

Profits Maximization

Staff Maximization

Sales Maximization

Growth Maximization

Managerial Utility Maximization


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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


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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.


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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.


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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.


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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.


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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.


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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.


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2new risk theory of profit 2

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