Knight theory of the profit, Managerial Economics

Frank H. Knight treated profit as a residual return to uncertainly profit. Obviously knight made a distinction between risk and uncertainly he divided risk into calculable and non-calculable risks. Calculable risks are those whose probability of occurrence can be statistically estimated on the basis of the available data. For example risk due to the fire, theft accidents etc, are calculable and such risks are insurable. There remains however an area of the risk in which the probability of the risk occurrences cannot be calculated. For instance, there may be a certain element of cost which may not be accurately calculable and the strategies of the competitors may not be precisely assessable. The risk elements of such incalculable events are not insurable. The area of the incalculable risk is the area of the uncertainty. It is in the area of uncertainty that business decision making becomes a crucial function of an entrepreneur. If his decisions are proved right by the subsequent events, the entrepreneur makes profit and vice versa. Thus according to the knight profit arises from the decision taken and implemented under the condition of the uncertainty. In his view the profit may arise as a result of decisions concerning k the state of market, decisions which result in the increasing the degree of the monopoly decisions with respect to holding stocks that holding stocks that give rise to windfall gains, and decision taken to introduce new techniques or innovations. 

Posted Date: 8/4/2012 7:34:48 AM | Location : United States

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