INNOVATION

THEORY
OF PROFIT
 Joseph Alois
Schumpeter
The one who
proposed the
INNOVATION THEORY
OF PROFIT
 He believed that the main
function of the entrepreneur
is to introduce innovations
in the economy and the
profits are reward for
performing this function.
This theory explains that
economic profits arise
because of successful
innovations introduced by
the entrepreneurs
 DENOTATION:
the action or process of
innovating

WHAT a new method, idea, product,

etc.

IS
CONNOTATION:
INNOVATION any new measure or policy
adopted by an entrepreneur to
? reduce his cost of production
or to increase the demand for
his product
Innovation can be
classified into
two categories
F I R S T
C A T E G O R Y

Two Categories:

S E C O N D
C A T E G O R Y
 First Category

includes all those activities which reduce

the overall cost of production such as the
introduction of a new method or technique of
production, the introduction of new
machinery, innovative methods of organizing
the industry, etc.
 Second Category

includes all such activities which increase the

demand for a product. Such as the introduction of a
new commodity or new quality goods, the emergence
or opening of a new market, finding new sources of
raw material, a new variety or a design of the
product, etc.
 In addition,

The innovation theory of profit posits that

the entrepreneur gains profit if his innovation
is successful either in reducing the overall cost
of production or increasing the demand for his
product
Profits caused by a particular
innovation tend to be competed
away as others imitate and also
adopt it. An innovation ceases
to be new or novel, when others
also come to know of it and
adopt it.
 PATENT

An entrepreneur can earn larger profits for

a longer duration if the law allows him to
patent his innovation. Such as a design of a
product is patented to discourage others to
imitate it.
 SOURCES:
http://www.economicsdiscuss
ion.net/profit/top-5-
theories-of-profit-
explained/6101

https://businessjargons.com
/schumpeters-innovation-
theory-of-profit.html