Q.Explain F. H. Knight's Risk and Uncertainty-bearing theory of profit. How does Knight distinguish between "risk" and "uncertainty"?

Knight's whole theory rests on a single sharp distinction: some dangers to a business can be measured and insured against, and some genuinely cannot.

F. H. Knight's theory begins with a distinction that had often been blurred before him: the difference between RISK and UNCERTAINTY, which sound similar in everyday language but mean quite different things in his theory.

Risk refers to a danger whose probability of occurring CAN be calculated with reasonable accuracy from past experience or statistics — the chance of a fire damaging a factory, or of a shipment being lost at sea, for example. Because risk is calculable, it CAN be insured against: a firm simply pays a known insurance premium, and the insurance company bears the cost if the event occurs. Knight argued that this insurance premium is, economically speaking, just an ordinary COST of production, exactly like rent, wages, or raw material costs — bearing INSURABLE risk earns no special reward called "profit." …