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The Case:

Pakistan recently joined the 3G and 4G club by issuing licenses to Telecom companies. It is being considered giant leap for Pakistan. Four cellular companies, Mobilink, Telenor, Ufone and Zong took part in bidding. All four companies got 3G license while Zong also got 4G license. Due to 3G services faster data connectivity will be available to mobile phone users which means one can download with highest speed vis a vis faster web surfing will be a lot more fun. Due to this technology, people will attain uninterrupted video streaming on phones, enable video calls and big MMSs. Telecom industry experts hope that the number of high-speed data users will grow in Pakistan between 25 million and 45 million by 2020, which will add around Rs.400 billion to the economy and Rs.23 billion to tax revenues. Additionally the introduction of the new technology would create 100,000 new jobs and revolutionize e-commerce, e- learning, e-security etc. Launching of 3G and 4G technology will increase the demand for 3G mobile phone handsets.


Carefully read the above scenario and find out which theory of profit will apply to 3G mobile phone handsets dealers and why? Give reason.

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Replies to This Discussion

i think we have to discuss these theories according to GDB
• Risk-Bearing Theories of Profit
• Frictional Theory of Profit
• Monopoly Theory of Profit
• Innovation Theory of Profit
• Managerial Efficiency Theory of Profit

Muge to innovation theory of profit lag rahi ha  

wrong wo risk bear krrhi han

Nops.. Risk Bearing nae hai cz risk kya bear kia?? 3G and 4G le lia or ala services hain many people wl use that ... Innovation Theory of Profit ko google krain mjy b Innovation lg rha ha

1. Dynamic Theory of Profit

The dynamic theory of profit was given by J.B. Clark. According to him profit accrues because the society is dynamic by nature. Since the dynamic nature of society makes future uncertain and any act, the result of which has to come in future, involves risk. Thus profit is the price of risk taking and risk bearing. It arises only in a dynamic society which means in a society where changes does not occur i.e. it is static by nature the risk element disappears and hence the profit element does not exist there.

Actually, a society is said to be dynamic when there is a change in its population, change in trends of the people, change in stock of the capital, change in the supply of entrepreneurs etc. when all these factors becomes constant, the future also becomes certain and the risk element disappears from the society.

- See more at: http://www.guesspapers.net/1397/different-theories-of-profit/#sthas...

2. Marginal Productivity Theory of Profit

According to this theory, profit always equals to the marginal productivity of the entrepreneur. The marginal productivity of the entrepreneur cannot be evaluated in the case of the firm because there is only one entrepreneur in a firm. It is however can be easily done in an industry where the number of the firms can be calculated and hence the marginal productivity of various entrepreneurs can be measured.

According to this theory the profit depends upon the marginal production. Greater the marginal production greater will be the profit.


Wages Theory of Profit

According this theory the services of the entrepreneur are also classified as labour though of a superior type. These entrepreneurs do a lot of work in organizing the business unit as well. The entrepreneurs in the shape of profit pay to themselves for service just as managers are paid for their services. It means that profit is a wage for the entrepreneur for the services rendered by them

4. Un-Certainty Breaking Theory of Profit

According to Prof. Knight

“Profit is the reward for uncertainty bearing and not the risk bearing”.

Prof. Knight has regarded uncertainty bearing as a factor of production. Knight’s theory classifies the position that profit arises because of the joint action of uncertainty bearing and capital.

5. Risk Bearing Theory of Profit

According to F.B. Hawley, “Profit is reward for risk bearing which is the most important function of an entrepreneur”. Hawley believes that risks are unpleasant and therefore no one likes to bear it, until and unless some reward is insured. Profit is a reward for bearing these risks.

Hawley’s Risk Theory of Profit
The risk theory of profit was initiated by F. B. Hawley in 1893. According to Hawley, risk in business may arise due to such reasons as obsolescence of a product, sudden fall in the market prices, non-availability of crucial raw materials, introduction of better substitutes by competitors, risk due to fire, war and the like. Risk taking is regarded as an inevitable accompaniment of dynamic production, and those who take risk have a sound claim of a separate reward, referred to as ‘profit’. Hawley simply refers to profit as the price paid by society for assuming business risk. He suggests that business people would not assume risk without expecting adequate compensation in excess of actuarial value, that is, premium on calculable risk.

Knight’s Theory of Profit
Frank Knight treated profit as a residual return to uncertainty bearing, not to risk bearing as in the case of Hawley’s. Knight divided risk into calculable and non-calculable risks. Calculable risks are those risks whose probability of occurrence can be statistically estimated on the basis of available data. Examples of these types of risks are risks due to 15 fire, theft, accidents, and the like. Calculable risks are insurable. Those areas of risk in which the probability of its occurrence is non-calculable, such as certain elements of production cost that cannot be accurately calculated, are not insurable.

Schumpeter’s Innovation Theory of Profit
The innovation theory of profit was developed by Joseph A. Schumpeter. Schumpeter was of the opinion that factors such as emergence of interest and profits, recurrence of trade cycles are only incidental to a distinct process of economic development; and certain principles which could explain the process of economic development would also explain these economic variables or factors. Schumpeter’s theory of profit is thus embedded in his theory of economic growth.
In his explanation of the process of economic growth, Schumpeter began with the state of stationary equilibrium, characterized by equilibrium in all spheres. Under conditions of stationary equilibrium, total receipts from the business are exactly equal to the total cost outlay, and there is no profit. According to the Schumpeter’s theory, profit can be made only by introducing innovations in manufacturing technique, as well as in the methods of supplying the goods. Sources of innovation include:
1. Introduction of new commodity or a better quality good;
2. Introduction of new method of production;
3. Opening of a new market;
4. Discovery of new sources of raw material; and,
5. Organizing the industry in an innovative manner with the new techniques.


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