Enterprise and Profit

Enterprise is the factor of production that takes the initiative and bears the risk involved in setting up a business to produce goods
How Enterprise Differs from the Other Factors of Production?
1. It can Earn a Loss
2. Return Can Vary: From Supernormal Profit to to losses
3. Return is Residual: Enterprise receives its return after all other factors have received their payments
Risks Involved in Running a Business
1. Insurable Risks: these are risks that can be mathematically estimated
  1. Theft of Stock
  2. Fire to Premises
2. Non-Insurable Risks: these are risks the entrepreneur can't insure against occuring
  1. Loss of Profit
  2. Bad-decision making
  3. Changes in Trends or fashion
Profits
1. Normal Profits: the minimum amount of profit an entrepreneur must receive to stay in production in long run
2. Supernormal Profits: any profit earned in excess of normal profit
Why Are Profits Important in a Market Economy?
1. Encourage Investment
2. Provide Funds for Expansion
3. Source of Revenue for Government
4. Continuity of Production
5. Encourage Risk-taking
The Importance of Entrepreneurs in an Economy
1. They Create Employment
2. They Create Wealth in the Country
3. Generate Revenue for Government
4. They Organise the other factors of production
5. Encourage Further Investment
Rent of Ability: is the economic rent (SNP) earned by an entrepreneur due to their innate talent
How Can Enterprise Be Encouraged?
1. Giving incentives & tax breaks to new start-up companies
2. Availability of credit & low interest repayments
3. Mass media highlighting successful companies to create an optimistic economic outlook

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Enterprise and Profit

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