Differences of the four existing profit theories

NAME             : Aisyah Rizana Rahmah

CLASS / NPM : 3-EA-18/10213505

COURSE         : Operations Management

QUESTION!

1. Look for the differences of the four existing profit theories:

• The Frictional Economic Profit Theory

• Monopolistic Economics Profit Theory

• Innovative Economy Profit Theory

• Economic Profit Compensation Theory

ANSWER:

Profit theory in economics

     According to the theory of earnings in the economy, the rate of profit or profit in each company has different rates of profit depending on each of each type of industry. There are several theories that explain this difference as follows:

• Frictional Theory of Profit.

    The Frictional Economic Profit Theory states that markets are often not in equilibrium because of unanticipated changes in product demand or cost conditions. The result is a positive or negative economic profit for some companies. In the long term, the industry will protect itself by installing an entry barrier and exit barrier, so that the rate of return will be normal (equilibrium). This theory emphasizes that profits increase as a result of long-run equilibrium.

• Monopoly Theory of Profit 

     This theory suggests that some firms, due to factors such as economies of scale, high capital requirements, patents, or import protection, can develop a monopoly position that allows them to maintain above-normal earnings for longer periods of time. This theory says that some firms with monopoly power can limit output and emphasize higher prices than when firms operate in perfect competitive conditions.

• Innovation Theory of Profit 

       The theory of innovation is also related to friction. In innovation theory, above-normal earnings can arise as a result of successful innovation. However, companies that have succeeded in innovation are not immune from competition attacks from imitator companies. In innovation theory, above-normal earnings can arise as a result of successful innovation. However, companies that have succeeded in innovation are not immune from competition attacks from imitator companies. Therefore, companies need to innovate constantly.

• Economic Profit Compensation Theory

        The compensation theory of economic profit states that above-normal returns are merely rewards for highly successful firms meeting customer needs, maintaining efficient operations, and so on.

This theory also recognizes economic profit as an important reward for the entrepreneurial function of owners or managers.

        Every company and product begins as an idea to better serve the needs that exist or are perceived by potential or potential customers. This need remains unfulfilled until an individual takes the initiative to design, plan, and implement a solution. This opportunity for economic profit is an important motivation for entrepreneurial activity.