Normal Profit

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Normal Profit
Some writers introduce the concept of normal profits. As Prof. Knight points out, normal profits, belong to the equilibrium state, or to the state in which changes are taking place which can be anticipated and calculated. Of course, it is difficult to imagine a world entirely devoid of change. But we can have societies, specially old established societies, in which conditions are relatively static and business methods have become more or less of a routine nature. Absence of Uncertainty. In a static society (or state of equilibrium), resources are more or less fixed and have attained such a distribution among various industries that there is no motive for transferring them from one employment to another. There is no tendency for any firm to enter or leave the industry.

Uncertainty, therefore, would be at a minimum and competition perfect. Under such conditions, pure profits will tend’ to disappear and the entrepreneurs will earn only wages of superintendence. Normal profits, therefore, practically amount to earnings of management. They are just sufficient to induce an entrepreneur to stay in the industry. In a progressive state also, similar results can follow, provided competition is unrestricted and changes can be anticipated. But since changes are nut uniform, entrepreneurs in some industries may be able to make higher profits than in others, Surplus profits can arise, in the short-run, in a dynamic world even though the factor of uncertainty is absent. But this will only be a temporary condition. In the long run, industries yielding profits higher than the normal will attract entrepreneurial ability and other factors of production. The rate of profits in such industries will tend to fall. In industries, which are being depleted of such factors, profits will rise, until the normal level of profits is established. But normal profits in a dynamic world need not necessarily be equal to the wages of a hired manager, even though the factor of uncertainty is absent. TIle very fact that change exists, even though it can be anticipated. means heavier responsibility on the entrepreneur than in a purely static state. To keep up the supply of entrepreneurs, therefore, inducement must be given to them to take up such responsibility. But this additional payment will be kept within narrow limits by the forces of competition. Exist lIcc of Uncertainty. In a dynamic world, with clement of uncertainty in existence, even under competition profits can be kept permanently above the normal level. Super-normal profits also call permanently arise. where the supply is in the hands of a monopolist and demand is inelastic. This will be so whether uncertainty exists or not. It should be noted that uncertainty in its turn is not something constant. There are degrees of uncertainty. The greater the degree of uncertainty, the higher must be the profits to compensate the entrepreneurs for bearing its risks monopolist and demand is inelastic. This will be so whether uncertainty exists or not. It should be noted that uncertainty in its turn is not something constant. There are degrees of uncertainty. The greater the degree of uncertainty, the higher must be the profits to compensate the entrepreneurs for bearing its risks

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Normal Profit