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Frictional Profit Theory and Innovation Profit Theory - Coursework Example

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The paper "Frictional Profit Theory and Innovation Profit Theory" states that generally, though disequilibrium conditions are corrected with time, restriction of innovative activities solely depends upon the efficiency of the researchers employed by a firm…
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Frictional Profit Theory and Innovation Profit Theory
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Download file to see previous pages The significance to be paid on any particular type wholly depends upon the investor and manufacturer’s choice of short term or long term prospects.
The present paper deals with two variants of profit theory, viz., frictional profit theory and innovation profit theory. Each of these concepts defines or explain economic profit in their own discreet ways and hence, are relevant in deciding various aspects of the underlying business, for the benefit of investors as well as manufacturers to some extent. Furthermore, the economy gains as well if economic units sort out the most efficient avenues of production or investment since that would mean speedier progress towards national growth.
Broadly speaking, there are two different explanations to economic profit, namely, disequilibrium theories of profit and compensatory theories of profit. While the previous theory explains the logic behind an industry earning super-normal profits despite the presence of market disequilibria or discrepancies, the latter accomplishes how innovative activities taking place in a firm can assure super-normal profits to the same. Nonetheless, both these theories encompass many others within themselves (Hirschey, 2009, p. 12). Of them, only two belonging to each type will be discussed underneath, namely, frictional profit theory and innovation profit theory. The discussion will involve a comparison between the two concepts inclusive of evidence in support of the logics underlying them.
Frictional theory of profit, as the name suggests, is the generation of super-normal profits due to frictions present in the economy. These are untimely events, leading to shocks in the market and thus confusing the normal state of the market. The industry is often characterised by a large number of buyers and sellers so that there is no scope to earn a super-normal profit. However, a sudden shock might shift the of the demand or supply curves or even change their slopes in a manner which is conducive for reaping abnormally high profits. Changes in these conditions do not occur due to any deliberate regulations but are caused completely due to exogenous factors (Fogiel & Rycroft, 1992, p. 848).  ...Download file to see next pagesRead More
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