Economics For Managers
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Chapter 9 : Interest And Profit
Interest
What is Interest?
Basic Concepts
Theories Of Rate Of Interest
The Classical Theory of the Rate of Interest
Liquidity Preference Theory of Interest
Profit
What is Profit?
Theories Of Profit
Traditional Theories
Modern Theories
Profit Policies
Standards of Reasonable Profits
Reasons for Limiting Profits
Economic Progress And Profits
Chapter Summary
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In this chapter, we discussed the meaning of interest and
profit. Interest is the reward paid by borrowers for lending capital. Interest
consists of two components namely, gross interest and net interest. Several
economists have propounded theories defining interest in different ways. The
classical theory of the rate of interest states that the determination of the
rate of interest can be done when the forces of demand for capital meet the
forces of supply of capital.
According to this theory, equilibrium rate of interest can be determined
effectively by understanding the forces that influence the demand for capital
and the supply of capital. Keynes criticized this theory and developed another
theory of the rate of interest. According to Keynes theory of the rate of
interest, determination of interest is dependent on the demand for and supply of
money in the economy. |
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Keynes proposed that interest is the equilibrium
between the demand for and supply of money. He said that interest
rate is purely a monetary phenomenon. Profit is the reward for
entrepreneurship. It is the remuneration earned by the entrepreneur
for utilizing his entrepreneurial abilities and running a business.
Profit too like interest has two components namely, gross profit and
net profit. Various theories have been propounded by several
economists to define profit. These theories can again be classified
into traditional and modern theories. Prominent among the
traditional theories was Walker's rent theory. Some of the important
modern theories of profit are – dynamic theory of profit by Clark,
innovation theory of profit by Schumpeter and the
uncertainty-bearing theory by Knight.
Each of these theories tried to explain profit in a different way.
In fact, even now, there is no definition of profit that is
universally acceptable. Profit policies can be used by entrepreneurs
to make the business function efficiently under diverse conditions.
The two main issues that have to be considered while drafting profit
policies are – standards of reasonable profits and reasons for
limiting profit.
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