various types of profit theories in economics

1. Managerial Economics

2. IntroductionIntroduction

3. EconomicsEconomics
The economics derived from the Greek word
(Oikos:(Oikos: “a house” & nomos: manager)“a house” & nomos: manager)
means a prudent management of once
house hold affairs . But, it has now come
to mean the study of business affairs in
general. So can say economics is study of
managing maximum gains out of scarce
resources

4. Management + EconomicsManagement + Economics

5. DefinitionDefinition
“Managerial economics is concerned with
the application of economic principles and
methodologies to the decision process
with in the organization .it seeks to
establish rules and principles to facilitate
the attainment of the desired economic
goals of management.”
- douglas

6. Key points of definitionKey points of definition
• Decision making
• Economic methodology
• Economic goals of firm

7. Decision makingDecision making
It is the process of selecting best out of
alternative opportunities open to the firm.

8. Economic methodologyEconomic methodology
It is a relation between ideas , thoughts ,
intuitions & experience with economic
tools& techniques .

9. Economic goals of firmEconomic goals of firm
In the nutshell it is making maximum gains
out of available resources

10. Scopes of managerial economicsScopes of managerial economics
• Micro – when something is concerned with
individual (person firm or household)
• Macro – something related to the
environment as a whole

11. Micro economic theoriesMicro economic theories
• Operational issues
. Theory of production
. Theory of price determination
. Theory of profit & capital budgeting
. Theory of demand

12. Macro economic theoriesMacro economic theories
• Environment or external issues
• Theories of national income
• Theories of economic growth & fluctuations
• Theories of national trade &monitory mechanism
• Theories of government policies

13. Why do managers need to knowWhy do managers need to know
managerial economics?managerial economics?
• What to produce?
• How to produce?
• For whom to produce?
• How much to produce?
so that can organization
generate maximum gains.
& economics has the ans to all
these problems

14. But economic theories are too theoretical to
applied directly to the business decision
making but when knowledge logic &
analytical tools are added to these
theories it becomes managerial
economics
which helps the manager in rational
business decision making.

15. ObjectivesObjectives
ofof
businessbusiness firmfirm

16. ““Profit”Profit”
As a sole objectiveAs a sole objective

17. ProfitProfit
Different things to different people
Example- commission
salary
fees , ect

18. In economic terms profit meansIn economic terms profit means
pure profit or economic profitpure profit or economic profit
• Economic profit - It is difference
between actual earning & opportunity cost
• Opportunity cost – it is the expected
income forgone form second best
alternative

19. Profit theoriesProfit theories

20. Theory of rentTheory of rent
by ,by , profprof.. F.A. walkerF.A. walker
“profit is the rent of ability”
Rent – remuneration for the use of land to
land lord
Profit – reward for ability of entrepreneur

21. According to professor walker
As rent is the difference between least & the
most fertile land similarly, profit is the
difference between earnings of the least &
the most efficient entrepreneurs

22. CriticismCriticism
- Rent & profit are not similar
. rent is always positive
. profit is positive as well as negative
- Absence of marginal entrepreneur
- profit is not the rent of ability

23. Dynamic theoryDynamic theory
by , prof. J.B.clarkby , prof. J.B.clark
According to clark – profit arises in a
dynamic economy not in static .

24. CriticismCriticism
• All economies are dynamic
• Profit is not the result of each change
• Theory ignores uncertainty & risk taking

25. Theory of riskTheory of risk
By , Prof. HawleyBy , Prof. Hawley
“NO RISK NO GAIN”

26. CriticismCriticism
• All risk do not lead to profits
• Profit is to avoid risk
• There is no direct relationship between
risk & profit

27. Theory of innovation
by, prof. schumpeter
Profit is reward for innovation

28. Theory of uncertainty bearing
by, prof. knight
“Profit is the reward for
uncertainties bearing”

29. Criticism
• uncertainty is not measurable
• Profit is not the reward for uncertainty
bearing only

30. Other business objectivesOther business objectives
• Sales revenue maximization
• Maximization of firms growth rate
• Consumer satisfaction
• Long run survival
• Entry prevention

31. Consumer
behavior :Utility

32. Meaning
“ utility is want satisfying power of
commodity’’

33. • Utility is subjective/not measurable
• Utility is variable
• Utility is different from usefulness
• No legal or moral connotations
Characteristics:

34. Total utilityTotal utility
It is sum of the utility derived by the
consumer from the number of units of
goods & services he consumed.
TuTunn = U= Uxx + U+ Uyy + U+ Uzz

35. total utility
0
10
20
30
40
50
60
70
1 2 3 4 5 6
total utility
No. of
units
consumed
Total
utility
1
2
3
4
5
6
30
50
60
65
60
45

36. MARGINAL UTILITYMARGINAL UTILITY
It is the change in total utility obtained from
the consumption of additional unit of
commodity .
MU = change in TU
change in Q

37. no.of
units
consumed
Total utility Marginal
utility
1 30 30
2 50 20
3 60 10
4 65 5
5 60 -5
6 45 -15 -20
-10
0
10
20
30
40
50
60
70
1 2 3 4 5 6
total utility
marginal utility

38. Law of diminishing marginal utilityLaw of diminishing marginal utility
As the quantity consumed of a
commodity increases , the utility
derived from each successive unit
decreases , consumption of all
other commodities remaining the
same.

39. No. of units
consumed
Marginal utility
1 30
2 20
3 10
4 5
5 -5
6 -15
marginal utility
-20
-15
-10
-5
0
5
10
15
20
25
30
35
1 2 3 4 5 6
marginal utility

40. AssumptionAssumption
• No small units are consumed
• Taste & preference remain same
• There must be continuity in consumption
• Consumer should be of sound mental
health

41. ConsumerConsumer’s Equilibrium’s Equilibrium
• Consumer will attain its equilibrium
(maximum satisfaction) at the point, where
marginal utility of a product divided by the
marginal utility of a rupee, is equal to the
price.
• Consumer’s equilibrium = Marginal utility of a product
Marginal utility of a rupee
= its price

42. Steps:Steps:
• Generation of alternatives
• Evaluation of alternatives
• Choice of the best alternative
Assumptions:Assumptions:
• Consumer behaviour is rational.
• Consumer behaviour is consistent.
• There are two commodities in consideration.

43. Law of Equi-Marginal UtilityLaw of Equi-Marginal Utility
• This law states that the consumer
maximizing his total utility will allocate
his income among various
commodities in such a way that his
marginal utility of the last rupee spent
on each commodity is equal.
• Or
• The consumer will spend his money
income on different goods in such a
way that marginal utility of each good

44. Limitations of Law of Equi-Limitations of Law of Equi-
Marginal UtilityMarginal Utility
• ## It is difficult for the consumer to know the marginal
utilities from different commodities because utility cannot
be measured.
• # Consumer are ignorant and therefore are not in a
position to arrive at an equilibrium.
• # It does not apply to indivisible and inexpensive
commodity.

45. The Budget Constraint,The Budget Constraint,
or Budget Lineor Budget Line

46. Part of an Indifference MapPart of an Indifference Map

47. An Indifference CurveAn Indifference Curve