Question

Describe briefly the Innovation Theory of Profit.

Answer 1

Innovation Theory of Profit:

1. The innovation theory of profit was propounded by Joesph. A.Schumpeter.
2. Schumpeter says an entrepreneur is not only an undertaker of a business but also an innovator in the process of production.
3. Profit is the reward for “innovation”.
4. According to Schumpeter, an innovation may consist of the following:
   • Introduction of a new product.
   • Introduction of a new method of production.
   • Opening up of a new market.
   • Discovery of new raw materials
   • Reorganization of an industry/firm.

When any one of these innovations is introduced by an entrepreneur, it leads to a reduction in the cost of production and thereby brings profit to an entrepreneur. To obtain profit continuously, the innovator needs to innovate continuously. The real innovators do so. Imitative entrepreneurs cannot innovate.