Net profit = Gross Profit - Implicit costs.

Liquidity preference means the preference of the people to hold wealth in the form of liquid cash rather than in non-liquid assets like bonds, securities, gold, building.

(i) Profit is earned by the entrepreneur for his entrepreneurial function.
(ii) It is the amount left with the entrepreneur after he has paid for all the other factors.

(i) Nominal or money wages are the wages paid in terms of money.
(ii) Real wages are the wages paid in terms of goods & services.

Personal distribution - the distribution of national income among individuals.
Functional distribution - the distribution of income among four factors of production.

Distribution means division of income among the four factors of production in terms of rent to landlords, wage to labourer, interest to capital and profit to entrepreneurs.

(a) Gross profit: Gross profit is the surplus which accrues to a firm when its total expenditure is subtracted from its total revenue.
(b) Net Profit:
(i) Net (or) pure (or) economic (or) true profit is the residual left with entrepreneur after deducting all expenses.
(ii) Net Profit = Gross Profit - Implicit cost
(c) Normal Profit: It refers to the minimum expected return to stay in business.
(d) Super Normal Profit: Super Normal Profits are over and above the normal profit.

(i) According to Hawley profit is the reward for risk taking in business.
(ii) Every business involves some risks. Since the entrepreneur undertakes the risks, he receives profit.
(iii) If the entrepreneur does not receive the reward, he will not be prepared to undertake the risks
(iv) Thus higher the risks, the greater are the profit.
(v) Every entrepreneur produces goods in anticipation of demand.
(vi) If his anticipation of demand is correct, then there will be profit.
(vii) It is the profit that induces the entrepreneur to undertake such risks.

(i) According to Clark profit is the difference between price and cost of production.
(ii) Profit is the reward for dynamic changes in society-like increase in population, increase in volume of capital, improvement in methods of production, change in forms of industrial organisation and increase in wants of consumers.

SI.No	Rent	Quasi Rent
1	Rent accrues to land	Quasi - Rent accrues to man made appliances
2	The supply of land is fixed forever.	The supply of man made appliances is fixed for a short period only.
3	It enters into price.	It does not enter into price.
4		It is temporary.

Nominal wage or money wage:
It is paid in terms of money.
Real wage:
The wages are paid in terms of goods & services
Piece wage:
The wages are paid on the basis of quantum of work done.
Time wage:
The wages are paid on the basis of the amount of time that the worker works.

Transaction motive:
(i) The desire of the people to hold cash for the current transactions.
(ii) The amount kept for this motive depends on the income. M_t = f(y)
Precautionary motive:
(i) The desire of the people to hold cash to meet unexpected expenditure such as sickness, accidents.
(ii) The amount for this purpose depends on income. M_p = f(y)
Speculative motive:
(i) The desire of the people to hold cash in order to take advantage of the future changes in price of bonds and securities.
(ii) The amount for this purpose depends on the rate of interest. M_s = f(i)

Introduction:
In his book "The general theory of employment, interest and money" in 1936, Keynes propounded the liquidity preference theory of Interest.
Theory:
Interest is the reward for parting with liquidity for a specified period of time.
Meaning:
Liquidity preference means the preference of people to hold wealth in the form of liquid cash and not in non-liquid assets like bonds, securities, bills of exchange, land, building, gold.
Motives:
Transaction motive:
It relates to the desire of the people to hold cash for the current transaction. M_t = f(y)
Precautionary motive:
It relates the desire of the people to hold cash to meet unexpected expenditures such as sickness, accidents, fire. M_P = f(y)
Both these motives depend on the income level.
Speculative motive:
It relates to the desire of people to hold cash in order to take advantage of market movements regarding the future changes in the price of bonds
There is inverse relation between liquidity preference and interest rate. M_s = f(i)
Determination of interest rate:

(i) The rate of interest is determined by the demand for and the supply of money.
(ii) The demand for money is liquidity preference for speculative motive.
(iii) The supply of money is determined by the policies of the government and the central bank.
(iv) The supply of money consists of coins, currency notes and bank deposits.
Equilibrium:
(i) In the short run supply of money is constant.
(ii) LP is liquidity preference curve M₂ M₂ is supply curve of money.
(iii) Both curves interest at E, which is the equilibrium point.
(iv) If LP increases from LP to L₁P₁ & money supply being constant, the interest rate increases from OI to OI₁. (fig a)
(v) Suppose LP is constant (fig b).
(vi) If supply of money is OM₂, the interest is OI₂ & if the supply of money is reduced from OM₂ to OM₃, the interest would increase from OI₂ to OI₃. If money supply increases, interest rate decreases.
Criticism:
(i) This theory does not explain the existence of different interest rates prevailing in the market at the same time.
(ii) It explains interest rate in the short-run.
Conclusion:
The Keynesian liquidity preference theory is an improvement over other theories.

Introduction:
(i) Marginal productivity theory of distribution was developed by Clark, Wicksteed and Walras.
(ii) This theory explains how the prices of various factors of production are determined.
Assumptions
(i) All the factors of production are homogeneous, can be substituted for each other and are perfectly mobile.
(ii) There is perfect competition in the factor & product market.
(iii) There is full employment with no technological change.
(iv) The theory is applicable only in long run.
(vi) The entrepreneurs aim at profit maximisation.
(vii) There is no government intervention in fixing the price of a factor.
Explanation:
(i) The reward for any factor of production is equal to the marginal productivity of that factor.
(ii) The greater the productivity of a factor higher will be its reward.
(iii) The price of a factor of production depends upon its productivity.
(vi) The price will be equal to marginal revenue product of that factor.
(v) Under certain conditions, the price of a factor will be equal to both the average and marginal products of that factor.
Marginal productivity under perfect competition:

(i) fig (a) x axis represents factor units.
(ii) y axis shows factor price & revenue.
MRP = Marginal revenue product curve.
ARP = Average revenue product curve.
AFC = Average factor cost curve.
MFC = Marginal factor cost curve.
(iii) AFC is horizontal & MFC coincides with it.
(iv) The firm is in equilibrium (maximum profit) when MFC = MRP at Q by employing ON units of factors & paying (OP price or NQ) where MFC = MRP = ARP.
(v) The price paid to the factor NQ is equal to MRP (NQ) and ARP (NQ) beyond Q no employer will employ factors because after that point, the price paid to the factor is more than MRP and ARP.
Marginal productivity under Imperfect competition:

(i) fig(b) AFC represents the price paid to the factors. It increases as the number of factors demanded by the employer increases.
(ii) As AFC rises, MFC lies above AFC. It represents the MC paid to the factors.
(iii) At the point Q, MFC = MRP, where the employer attains his maximum profit and so he stops employment of the factors at the point.
(iv) But the AC paid is NRSO and AR is NQ or OP
(v) Total revenue is NQPO.
(vi) Exploitation per unit of factor is RQQ
(vii) But the total number of factors is ON. Thus the total exploitation of factor by the employer is RQ XSR = PQRS (shaded area).
Criticisms:
(i) Factors of production are not homogeneous.
(ii) They cannot be substituted for each other.
(iii) It cannot be applied in the short run.
Conclusion:
This theory is also called "General Theory of Distribution" or "National Dividend Theory of distribution".