Economic Theory Unit 9/12

Profit

The financial gain for a business entity when the revenue generated from a business activity exceeds the expenses, costs, and taxes involved in sustaining the activity.

Gross Profit

The difference between the total revenue and the cost of goods sold (COGS).

Net Profit

The total earnings of a firm after subtracting all expenses (including costs, depreciation, and taxes).

Normal Profit

A condition where enterprises make enough revenue to cover their total costs (explicit and implicit) and remain competitive.

Supernormal Profit

Profit earned above normal profit; also known as economic or abnormal profit, occurring when total revenue exceeds total costs.

Sub-Normal Profit

Profit earned less than normal profit, also referred to as a loss, incurred when total revenue is less than total costs.

Accounting Profit

A company's net earnings shown on their income statement, including total revenue minus explicit expenses.

Economic Profit

The value of cash flow generated above all opportunity costs, different from accounting profits by including both explicit and implicit costs.

Retained Profits

The net income generated by a firm that is kept for future use, not distributed to owners or stakeholders.

Risk Theory of Profit

A theory by F.B. Hawley that profit is a reward for entrepreneurs taking on business risks like obsolescence, market changes, and accidents.

Dynamic Theory of Profit

A theory by J.B. Clark stating that profits arise in a dynamic economy due to changes in population, capital, technology, and consumer wants.

Innovation Theory of Profits

A theory by Joseph Schumpeter stating that economic profits arise from successful innovations introduced by entrepreneurs that reduce production costs or increase demand.

Factors of Production

Resources required by entrepreneurs to create goods and services, including land, labor, capital, and enterprise.

Distribution

The sharing of wealth generated among the different factors of production.

Factors of Production

Resources needed to produce goods and services: land, labor, capital, and entrepreneurship.

Functional Distribution

Share of national income received by people as agents of production (wages, rent, interest, profits).

Personal Distribution

Distribution of wealth and income received by an individual in society through economic activities.

Land

Natural resources gifted by nature, including land surface, air, water, minerals, forests, etc.

Labour

Human efforts used for the production of goods and services.

Capital

Physical goods (money) used for producing other goods and services.

Organisation/Entrepreneur

Services offered by an entrepreneur who controls, organizes, and manages production and takes risks.

Marginal Productivity Theory of Distribution

Theory describing the determination of prices for factors of production and distribution of national income.

Marginal Productivity

The addition one extra unit of the factor of production makes to the total production

Wages

Monetary compensation or remuneration paid to an employee or labor for work done.

Piece Wages

Wages paid to a worker based on the work done (units produced).

Time Wages

Wages paid to the laborer for his services according to time.

Contract Wages

Wages fixed before work starts.

Nominal Wages

Total amount of money received by a laborer for their efforts.

Real Wages

Purchasing power of the individual in terms of goods and services they can buy.

Gross Wage

Total money paid monthly or yearly to an employee before any deductions.

Net Salary

Total payment taken home after deductions.

Subsistence Theory of Wage Determination

Wages are determined by the cost of production of labor or subsistence level and the wages determined will remain unchanged.

Wage Fund Theory

Wages depend upon the demand and supply of labor in the economy or the proportion between population and capital that is available.

Marginal Productivity Theory of Wage Determination

Marginal revenue productivity and average revenue productivity (ARP) of a worker determines the wages payable to him/her.

Rent (in Economics)

A form of payment made to the owner for a factor of production above the costs to bring it into production.

Land Rent

Payment made by a tenant to a landlord for hiring land.

Economic Rent

Price paid or received for any factor of production exceeding the amount needed to retain the factor in its current employment.

Quasi-Rent

Earnings of fixed capital equipment in the short run.

Economic Rent (Type)

Payment made for the use of land or scarce resources.

Gross Rent

Rent payable for land services and invested capital or as a reward for risk.

Scarcity Rent

Price paid for homogeneous land use when supply is scarce relative to demand.

Differential Rent

Rent arising from variations in land fertility.

Contract Rent

Rent agreed upon by a landowner and tenant based on a contract.

Situational Rent

Rent arising from differences in land location, such as proximity to markets.

Quasi Rent

Surplus from man-made production factors with inelastic supply in the short run.

Transfer Earnings

The minimum payment necessary to keep a factor in its present occupation.

Interest

Monetary compensation or reward for borrowing money or the use of capital.

Gross Interest Rate

Total payments by a borrower to a lender for using money, before deducting fees or taxes.

Net Interest Rate

Payment to the lender for the use of money or funds, also called pure interest.

Nominal Interest Rate

Rate of return agreed upon and paid by the investor without adjustment for inflation.

Real Interest Rate

Interest rate adjusted for inflation, showing the real cost of funds to the borrower and yield to the lender.

Liquidity

The ease with which an asset can be converted into cash without affecting its market value.

Abstinence Theory of Interest

Theory that interest is a reward paid to people who save rather than consume their incomes.

Agio Theory of Interest

Theory stating people prefer present goods to future goods which results in interest.

Time Preference Theory of Interest

Theory emphasizing that the supply of loans depends on people preferring money now than in the future.

Loanable Funds Theory

The rate of interest is determined by the demand and supply for loanable funds.

Liquidity Preference Theory

Theory stating interest is the reward for parting with liquidity.

Transaction Motive

The need for cash for current transactions of personal and business exchanges.

Precautionary Motive

The need to hold cash balances for unforeseen circumstances.

Speculation Motive

The need to hold resources in liquid form to take advantage of market changes in interest rates.