Dynamic theory of profit

An American economist J.B. Clark propounded the dynamic theory of profit in 1900. According to him, profit is the difference between the selling price and the cost of production of good Commodity. But profit is the result of dynamic changes, which mean change in the condition of demand and supply. Now, in competitive long run equilibrium, as the price equals to the average cost of production, an entrepreneur cannot earn pure profit. In this condition, a normal profit is included in the cost of production. But this normal profit is called a wage received as a reward for supervision and management of an entrepreneur by Clark.

To know the state of dynamic changes Clark has divided the whole economy into two parts. (i) Static economy (ii) Dynamic economy.

(i)   Static economy

This is the stationary state of economy where no changes in the condition of demand & supply are made. So, all the factors affecting demand and supply are assumed to be constant in such a economy. There is no uncertainty & risk at all in these types of economy. As all the factors are constant, all the firms including industry are constant in such a situation. Hence, the cost of production of good is equal to the price. This creates no profits to the entrepreneur in static economy. According to Prof. Clark, the entrepreneur gets only wages for his labor and interest on his capital in such a static economy.

But due to same reasons, if price is more than the cost of production, then the entrepreneur may earn profit, which will be only frictional profit and a kind of short-term phenomenon. But after some time, due to perfect competition in the economy, this profit will be disappeared.

(ii)  Dynamic economy

The world is changing day by day. So the static economy is only an imaginary concept. So, there is change in the factors affecting demand for and supply of goods. Due to these changes, the state of equilibrium also after in the economy in this condition, if entrepreneur can make the situation favorable he gets profit.

4 thoughts on “Dynamic theory of profit”

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