Enterprise and Profit Flashcards
chapter 17
define ‘ enterprise ‘ !
…the factor of production that organizes other factors of production in order to produce a good or service and takes all the risk in the hope of making a profit.
what is the return to enterprise?
profit or loss
how does enterprise differ from the other factors of production?
- IT CAN EARN A LOSS
the other factors are guaranteed a return; enterprise depends on consumer demand, other firms,… - RETURNS CAN VARY
can vary from supernormal profits to losses; other factors have a contractual entitlement (e.g. agreed wage) - RETURN IS RESIDUAL
receives its return after all the other F.o.P have received their payments
what are the 2 categories of risks an entrepreneur may face?
insurable risks
non-insurable risks
what is meant by insurable risks?
risks that can be mathematically estimated and an entrepreneur can insure against occurring. …
e.g. theft of stock or cash, fire to premises and damage to stock caused by fire, accidents to members of staff and accidents to members of the public.
what is meant by non-insurable risks?
risks that the entrepreneurs cannot insure again occurring. an insurance policy cannot be purchased to provide compensation and the entrepreneur suffers the entire loss…
e.g. bad decision making, industrial relations disputes, changes in taste/fashion , entry of competition into the market,…
what is normal profit?
the minimum amount of profit an entrepreneur must receive if they are to stay in production in the long run.
it is the supply price of the factor of production enterprise and included in the ac curve.
what are supernormal profits?
any profit earned by entrepreneurs in excess of normal profit.
example of economic rent if it lasts in the long run and an example of quasi rent if its earned in the short term.
what are implicit and explicit costs?
EXPLICT COSTS: how much it costs to run a business. (i.e. insurance, wages, light, heat, etc.)
IMPLICT COSTS: any income you forego to run your business. (i.e. he could have earned money in his old job)
different of an accountant and an economist calculating profits?
the accountant would only subtract the explicit costs;
the economists subtract explicit and implicit costs…
why are profits important in a market economy?
ENSURE RISK-TAKING
encouraging entrepreneurs
INDICATE THE BEST USE OF RESOURCES/ CONSUMER DEMAND
allocates Profits to the best use
ENCOURAGE INVESTMENT
future investment, entry of new firms into the market
CONTINUITY OF PRODUCTION
ensures future production of certain goods
SNP REWARDS INNOVATION
Efficiency and innovation are encouraged
SOURCE OF REVENUE TO THE GOVERNMENT
entrepreneurs are taxed by the government
why are entrepreneurs important in an economy?
THEY CREATE EMPLOYMENT
they need labour. they take pressure of the gov. by creating jobs
THEY ORGANISE THE OTHER F.O.P
risk-takers. also increase choice of goods/services.
DECIDE WHAT PRICES TO BE CHARGED
hing there will be demand at these p. levels. competition might force prices down again
ENCOURAGE FUTURE INVESTMENT
put money and skills into a business, may encourage future investment by others
GENERATE REVENUE FOR THE GOVERNMENT
through taxation revenues on profits earned, reduce gov. social welfare bill
CREATE WEALTH IN THE COUNTRY
increase in GNP, helps increase the standard of living in a county.
what is the rent of ability?
the economic rent / SNP earned by an entrepreneur due to their business acumen, innate talent or natural talent.
e.g. premier football player has superior football skills and talent.
how can enterprise be encouraged?
government can give incentives and tax breaks to new start up companies.
availability of credit and lower interest repayments would lower the cost of and encourage risk- taking.
relaxing business regulations and reduce administrative payments
do all entrepreneurs earn the same level of profit?
no.
all entrepreneurs don’t earn the same level of profit due to rent of ability. some are better than others and can earn SNP or an economic rent. entrepreneurs cannot be replaced easily by another because of talent and business acumen possessed. if the entrepreneur works in a competitive industry, they may earn lower profits than an entrepreneur in a less competitive industry.
