Chapter 4: Book Outline

Question 1

Comparative statics

Answer 1

implies that demand and supply curves exist independent of the institutions of market exchange.

Question 2

study of entrepreneurship is seen to have

Answer 2

direct policy relevance and focuses on practitioners

Question 3

Joseph Schumpeter

Answer 3

• ‘New Combinations’ is the essence of entrepreneurship
• Ent. is the catalyst for change
• ## creative desctruction

Question 4

5 types of ‘new combinations’

Answer 4

1. New Productions - something consumers aren’t familiar with, or an improvement in the quality of an existing product.
2. New Production Methods - Can be a technological improvement to reduce costs or a new way of handling a product commercially
3. New Markets - either by creating a new market, or selling the product in an existing market where it wasn’t previously sold.
4. New sources of materials - either newly created or simply applied from other sectors they might be raw materials of half-manufactured.
5. New organizations of industry - market power or more competition

Question 5

innovation

Answer 5

the discovery of new combinations

Question 6

innovation is more likely to come from

Answer 6

new firms rather than old ones

Question 7

innovation is

Answer 7

unavoidable part of progress.

Question 8

Richard Cantillon

Answer 8

• Ent is the undertaker of business ventures;
• Ents know the price of their inputs when they are bought; don’t know price when they will be able to sell outputs
• Ents are risk

Question 9

Frank Knight

Answer 9

• Uncertainty vs. Risk

Question 10

Risk can be _____; Uncertainty ______

Answer 10

Measured; can’t

Question 11

entrep. discovery is a

Answer 11

signal

Question 12

Profit

Answer 12

residual earnings after all contractural claims - incurred for the use of the resources - have been met and therefore profit is the reward, but not the return, for ent.

Question 13

Israel Kirzner

Answer 13

• Assumed there is a single commodity, no innovation, and a single time period, no uncertainty. He posited that entrepreneurs exploit profit opportunities via reckless arbitrage.
• “alertness” is “costless discovery”

Question 14

Ent is not just anticipating demand but

Answer 14

anticipating unarticulated demand

Question 15

key to innovation is

Answer 15

thinking in terms of satisfying customer needs, rather than making modifications and improvements to existing products.

Question 16

the act of ent is the

Answer 16

best guess judgement of those best able to anticipate what will be of value to customers. An ent is someone that is performing that function.

Question 17

Ent is the pursuit

Answer 17

of opportunity without regard to resources currently controlled.

Question 18

Coase

Answer 18

• The Nature of the Firm

- Transaction costs

Question 19

Coase Theorem

Answer 19

When transaction costs are zero the allocation of property rights will be the same regardless of initial endowments

Question 20

Price Discrimination

Answer 20

charging different customers different prices for the same product. Based on different customers’ willingness to pay.

Question 21

3 Main Forms of Price Discrimination

Answer 21

1. Perfect
2. Direct
3. Indirect

Question 22

Perfect Price Discrimination

Answer 22

Where the price reflects the unique marginal value of each customer and captures all consumer surplus.

Costly to engage in; more common when the sales price is high.

Question 23

Direct Price Discrimination

Answer 23

Certain groups of people have similar demand curves

Question 24

In order for direct price discrimination to work, it must be

Answer 24

reaosnable easy to know which group any individual belongs to and you must be able to prevent those who receive the good for less to sell it on to those who have to pay more.

Question 25

Direct Price Discrimination segments customers into two groups

Answer 25

• those with an inelastic demand (Not very responsive to price changes) you charge a high price
• Those with an elastic demand (very responsive to price changes) you charge a low price

Question 26

Indirect Price Discrimination

Answer 26

Accept that customers with a high willingness to pay could get away with pretending that they had a low willingness to pay but you use a hurdle to discourage them from doing so

Question 27

Examples of Indirect Price Discrimination strategies

Answer 27

• quantity discounts
• coupons
• performance-based
• purchase/usage restrictions
• paywalls
• drop out discount
• knowledge-based

Question 28

price discrimination only applies

Answer 28

if it is the same good

Question 29

Ludwig Von Mises

Answer 29

assumption that the incentive problem was solved; pointed out that even if there’s a transformation in human nature, this doesn’t solve the economic problem of knowing how to allocate scarce resources.

Question 30

States goals of socialism

Answer 30

• increased prosperity
• efficient use of resources
• elimination of business cycles
• elimination of monopoly power
• equitable distribution of wealth

Question 31

Mises argued that socialist planning was

Answer 31

impossible

• without private property there is no exchange
• Without exchange there are no prices
• Without prices there is no information

Question 32

Mise argued that socialism was

Answer 32

inconsistent with its stated aims. Socialism cannot deliver on its promises because ‘socialism is the abolition of rational economy’.

Question 33

Oskar Lange

Answer 33

• ‘Market socialism’

- What if central