In economics, profit is called pure profit, which may be defined as a residual left after all contractual costs have been met, including the transfer costs of management insurable risks, depreciation and payment to shareholders, sufficient to maintain investment at its current level. Theories of Profit in Managerial Economics There are various theories of profit in economics, given by several economists, which are as follows: 1. Walker’s Theory of Profit as Rent of Ability This theory is pounded by F.A. Walker. According to Walker, “Profit is the rent of exceptional abilities that an entrepreneur may possess over others”. Rent is the difference between the yields of the least and the most efficient entrepreneurs. In formulating this theory, Walker assumed a state of perfect completion in which all firms are presumed to possess equal managerial ability each firm receives only the wages which in Walker view forms no part of pure Continue reading
Economics Basics
Important Types of Price Elasticity of Demand
Generally, consumers and sellers react differently in the market in response to a given change in the price of some products or services. In most cases, especially where the goods produced are elastic, when the prices of such commodities increase, customers counter the adjustment by lowering the quantity of the goods they consume. Similarly, if the cost decreases, buyers are likely to purchase a good volume of the product being offered. In other words, the consumption of the goods moves in the opposite direction from the prices. The products that portray such behavior are mainly consumer durables that customers can postpone their usage when the prices increase too high. For instance, assuming the cost of a car increases, the buyer may opt not to buy the product, thus reducing the number of items sold significantly. By understanding the concept of price elasticity of demand, such as various types and critical factors Continue reading
The Great Depression – Facts, Causes, and Effects
The Great Depression is a term denoting the economic crisis that emerged in the United States and some European countries. The crisis began in 1929 and continued until the end of the 1930s. The term “depression” is mostly used to refer to events solely in the U.S., where virtually entire American nation was particularly strongly affected by a depressive state in addition to the economic decline. The term “global economic crisis” is commonly used for other countries that have experienced the same events (UK, Germany, France, and other European countries to a lesser extent). Large industrial cities had suffered the most from the crisis, but rural areas were also affected. Crises in world history occur from time to time. However, according to the researchers, the Great Depression is one of the most prolonged crises in the history of the industrialized countries. It is considered that it started with the collapse Continue reading
Total, Average and Marginal Revenues
When a firm undertakes the task of production and purchases inputs it incurs cost. Having produced the output, on selling it the firm earns some income. The income receipt by way of sale proceeds is the revenue of the firm. We can study the concept of revenue by distinguishing between total revenue, average revenue and marginal revenue. Total Revenue (TR) Total revenue is the sale-proceeds or the aggregate receipts obtained by the firm for selling its product. Each unit of output sold in the market fetches a price and when this price is multiplied by the number of units sold we obtain the total revenue. Thus the total revenue depends on two factors: The price of the product (P) The units of output sold (Q) Thus, Total Revenue = Price x Quantity sold or, TR = P x Q For example, if the price of one Continue reading
Effects of Inflation on Different Groups of Society
It is true that in times of general rise in the price level, if all groups of prices, such as agricultural prices, industrial prices, prices of minerals, wages, rent and profit rise in the same direction and by the same extent, there will be no net effect on any section of people in the community. For example, if the prices of goods and services, which a worker buys rises by 50 per cent and if the wage of the worker also rises by 50 per cent then there is no change in the real income of the worker, ie., his standard of living will remain constant. However, in practice, all prices do not move in same direction and by same percentage. Hence, some classes of people in the community are affected by inflation more favorably than others. This is explained as follows: Producing Classes: All producers, traders and speculators gain Continue reading
Economic Systems – Planned Economy, Free Market Economy and Mixed Economy
System of Planned Economy Under the conditions of the planned economy, all decisions concerning what to manufacture, how to manufacture and to whom to manufacture are approved by the sole center or group. This economy is based on collective ownership. Fixed production assets are owned by the government, and resources, production and the quantities of future products are distributed according to a plan. The type of the system of the command economy was prevailing in the USSR, Cuba, and North Korea. The plans of the system of the centralized economy are drawn up and implemented by the authorities and governmental political leaders after consulting with highly ranked professionals: engineers, economists, industrialists, and other experts. These planners decide which products to manufacture and which services to render. Their vote is decisive in approving decisions whether new undertakings are to be constructed, how many employees are to be employed at undertakings, whether Continue reading