Meaning:

Profit refers to the financial gain or benefit that an individual or business receives from an investment, business operation, or entrepreneurial activity. It is one of the key motivations for engaging in economic activities and is crucial for the sustainability and growth of businesses. The innovation theory of profit given by J.A Schumpeter a great economist.

Definition: Profit may be defined as a reward for making innovations, a reward for accepting risk and uncertainties, a result of imperfection in the market, any one of these conditions or a combination of them can give rise to economic profit.

INNOVATION THEORY OF PROFIT

Joseph A Schumpeter a German economist has propounded this theory in a way it is an improvement over JB clerk theory of profit. Schumpeter explain the changes caused by innovation results in profit according to him profit is the reward for the innovation, innovations are changes which are introduced in the process of production and business with object of reducing the cost of production they help in widening the gap between the production cost and selling price of the product they succeed in reducing cost of production below the selling price this leads to the emergence of profit.

Innovation may be defined as commercial or practical application of an innovation it may take the following forms;

• Introduction of a new variety of product and product improvement.
• Introduction of new techniques of production discovery and opening of a new market.
• Change in the internal organization of a firm.
• Conquest of new source of raw material new modes of advertising and sales promotion etc.
• The Motive for innovation is to earn profit. Hence it is the cause of innovation. Thus Innovation will act as both cause and effect simultaneously.

Conclusion:

Profits are temporary and tend to be competed away in the long run. In the beginning the innovator innovate and gain more profit as long as it’s remain as secret. This state of affairs cannot continue indefinitely. Other entrepreneurs follow this innovation in swarm- like cluster sooner the rival copy it and so it loses its novelty. Hence additional profit disappears the pioneer will make another innovation and gain more profits. Again it will become old when rivals copy it thus profit appears, disappears and reappear. He remarks profits are caused by innovation and disappear by invitation. _______________________________________________________________

There are different types of profit they are:

1. Accounting Profit: This is the most straightforward type of profit, calculated by subtracting total costs (including explicit and implicit costs) from total revenue. Accounting profit provides a tangible measure of financial performance.
2. Economic Profit: Economic profit takes into account not only explicit costs but also implicit costs, including the opportunity cost of resources. It is calculated by subtracting both explicit and implicit costs from total revenue. Economic profit provides a more comprehensive view of the true cost of doing business.
3. Normal Profit: Normal profit is the minimum level of profit required to keep a firm in its current industry and prevent owners and investors from seeking better returns elsewhere. It is the profit necessary to cover all costs, including opportunity costs.
4. Supernormal or Excess Profit: Supernormal profit, also known as excess profit, refers to a level of profit that exceeds normal profit. It is a situation where a business earns more than the minimum required to stay in the industry, often due to temporary advantages such as innovation, monopoly power, or unique market conditions.
5. Monopoly Profit: Monopoly profit is a specific type of supernormal profit earned by a firm that has a monopoly or significant market power. In a monopoly, the firm is the sole provider of a particular product or service, allowing it to set prices higher than the competitive market equilibrium.
6. Entrepreneurial Profit: Entrepreneurial profit is the reward for risk-taking and innovation. Entrepreneurs often earn profits by identifying opportunities, taking risks, and introducing new products or services to the market.

also read: explain the loanable theory of interest.