Managerial Economics Essay Example | Topics and Well Written Essays - 2000 words - 2

Managerial Economics - Essay Example Hence, 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 define 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 a 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 comparison between the two concepts inclusive of evidences 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. An industry is often characterised by a large number of buyers and sellers, so that there is no scope to earn super-normal profit. However, a sudden shock might shift the