Managerial Economic

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Profit rates differ among firms in a given industry and even more widely among firms in different industries. Please explain the factors which contribute to different profit rates.

Profit rates differ among firms in any given industry in variety of industries. Several theories are explained below to show which the factors are influences the profit of a firm;

A. Risk Bearing Theory of Profit
The idea was conceived initially by an American economist, F.H. Hawley. Hawley believed that a circle of production begins the moment an entrepreneur contracts the services of other factors of production, it takes a full round only when the goods have been sold and revenue realized by the entrepreneur. The circle takes time before it is completed. During all this time, the entrepreneurs have to honors his contractual obligations and wait for the goods to get ready for sale. He has also to guard himself against possible fire, theft etc. finally, if his estimates go wrong, the entrepreneur may not be in a position to realize even the expenses that he has incurred on the production. An entrepreneur has to bear these risks and enjoy the surplus of revenue over costs, as Hawley himself puts it, “the profit of an undertaking, or the residue of the product after the claims of land, labors and capital are satisfied, is not the reward of management or coordination of risks but of the risks and responsibilities that the undertaker subjects himself to”. Apparently higher the risks, few entrepreneurs will come forward and therefore higher the surplus that will be for those who decide to undertake it.

B. Frictional Theory of Economic Profits
Economic profits or losses are frictional profit theory. It states that markets are sometimes in disequilibrium because of unanticipated changes in demand or cost conditions. Unanticipated shocks produce positive or negative economic profits for some firms.

For example, automated teller machines (ATMs) make it possible for customers...
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