Economics-For Managers


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Economics For Managers, Management Textbook, Workbook

Microeconomics : Interest And Profit : Chapter 9

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. 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.

Chapter 9 : Overview

What is Interest?
Basic Concepts

Theories Of Rate Of Interest
The Classical Theory of the Rate of Interest
Liquidity Preference Theory of Interest

What is Profit?

Theories Of Profit
Traditional Theories
Modern Theories

Profit Policies
Standards of Reasonable Profits
Reasons for Limiting Profits

Economic Progress And Profits