Entrepreneur | ICSE Class 10 Economics Notes

This note covers the entrepreneur as a factor of production: the meaning of entrepreneurship, the functions an entrepreneur performs, the qualities of a successful entrepreneur, and the role of entrepreneurs in economic development, with definitions, comparisons and worked examples.

What is meant by an entrepreneur?

An entrepreneur is the person who organises the other factors of production, land, labour and capital, and bears the risk of the business. The entrepreneur brings these factors together, decides what to produce and how to produce it, and accepts that the money invested may be gained or lost.

Definition: An entrepreneur is a person who organises land, labour and capital into a productive enterprise, takes the decisions about production and bears the risk of loss or gain from the business.

The reward of the entrepreneur is profit. Profit is not fixed in advance, unlike rent, wages or interest.

It is what remains after all other factor payments have been made, and it may be negative if the firm makes a loss. This is why the entrepreneur is called the risk-bearer of production.

The entrepreneur is the fourth factor of production, and the entrepreneur's activity is called entrepreneurship. Land, labour and capital are passive on their own: land does not decide what to grow, and capital does not decide where to invest.

The entrepreneur is the active factor that sets the others to work. In small firms the entrepreneur may also supply labour and capital personally; in a large company the entrepreneurial functions are shared: the shareholders bear the risk, and the board of directors and senior managers take the decisions.

Note: The word entrepreneur comes from a French word meaning "to undertake". An entrepreneur is therefore literally one who undertakes a venture.

What are the functions of an entrepreneur?

The functions of an entrepreneur run from the first idea to the final sale. They can be grouped as follows.

1. Idea and innovation: the entrepreneur thinks of a product or service that people want, or a new and better way of making an existing one.
2. Organising the factors: land, labour and capital are hired or bought and combined in the right proportions.
3. Decision making: the entrepreneur decides what to produce, how much to produce, which method to use and what price to charge.
4. Risk bearing: the entrepreneur invests money and time in advance and accepts that the venture may fail.
5. Management and coordination: the entrepreneur supervises workers, arranges finance and keeps the different parts of the business working together.
6. Marketing and selling: the product must reach buyers, so the entrepreneur arranges distribution, advertising and sale.

These functions are not performed once and forgotten. The entrepreneur keeps reviewing decisions as costs, prices and demand change, and adjusts production accordingly. A firm that keeps making the same product in the same way while buyers move to something else will lose sales, so the reviewing function is continuous.

The functions also overlap. A decision about what to produce is at the same time a decision about which factors to hire, and it carries a risk, because the money spent on those factors is committed before any buyer is found.

Marketing is not a separate stage that begins after production: the entrepreneur usually has to judge the market before deciding what to make.

This is why the entrepreneur is described as the organiser of the whole process rather than as one more worker in it.

How does the entrepreneur differ from the other factors of production?

The four factors of production can be compared by their nature, their reward and the bearing of risk.

Land, labour and capital are the passive factors: on their own they do not decide what to produce or how to produce it. The entrepreneur is the active factor that combines and directs them.

The table shows the special position of the entrepreneur. Rent, wages and interest are usually agreed in advance and paid whether the firm does well or badly.

Profit alone is residual: it is what is left after these payments, and it can be a loss. The entrepreneur is therefore the only factor that bears the uncertainty of the business.

A second difference lies in decision making. Labour usually carries out work decided by others, and the owners of land and capital usually do not manage the enterprise. The entrepreneur takes the production decisions and answers for them.

This is why the entrepreneur is described as the organiser of production rather than as one more input.

What is the role of the entrepreneur in economic development?

The role of the entrepreneur in economic development can be seen in several ways.

1. Creating employment: every new enterprise needs workers, so entrepreneurship adds to job opportunities.
2. Increasing production: new firms add to the output of goods and services in the economy.
3. Promoting innovation: entrepreneurs introduce new products, new methods and better machines, which raise productivity.
4. Raising national income: higher production and employment together increase the income of the country.
5. Balancing regional development: entrepreneurs who set up units in less developed areas help spread industry and income across regions.
6. Earning foreign exchange: goods produced by entrepreneurs may be exported, bringing in foreign currency.
7. Utilising local resources: entrepreneurs turn local raw materials and local skills into useful products.
8. Encouraging capital formation: entrepreneurs draw the savings of households and banks into new investment in machines, buildings and tools.

Because of these contributions, governments often encourage new enterprises through loans, training and simpler rules. The entrepreneur is thus a driver of change, not merely a producer of goods.

The contributions are linked to one another. A new enterprise that hires workers and buys local raw materials raises incomes in its area, and those incomes become demand for other goods, so further production becomes worthwhile.

An enterprise that exports earns foreign currency, which the country can use to buy goods it does not produce itself.

An enterprise that introduces a better method shows other firms what is possible, and they may copy it, so the gain in productivity can spread beyond the first firm.

None of these results is automatic: they depend on the enterprise actually being set up and on it finding buyers for what it makes.

What is the entrepreneur's reward?

Profit is the reward of the entrepreneur. It is found by deducting total cost from total revenue.

Profit = Total revenue − Total cost

Total cost includes the payments made to the other factors: rent for land, wages for labour and interest on capital. What remains is the entrepreneur's profit, which may be positive or negative.

Going beyond the syllabus

These ideas extend the unit and are not needed for the questions on it.

Entrepreneurs are often classified by the scale and purpose of their venture. A business entrepreneur sets up a commercial firm, while a social entrepreneur sets up an organisation to solve a social problem. A first-generation entrepreneur starts a new enterprise, while an inherited entrepreneur continues a family business. These labels help describe the variety of entrepreneurship, but the core functions of organising, deciding and bearing risk remain the same in every case.

The labels also help explain why the same economy can show very different amounts of entrepreneurship in different places. A region with many first-generation entrepreneurs is usually one where new firms are being started, while a region where most enterprises are inherited may be one where few new ventures begin. Neither label says anything about the ability of the individual: an inherited entrepreneur may reorganise a family firm completely, and a first-generation entrepreneur may fail. What the labels describe is the starting point of the venture, not its quality.

Another useful distinction is between the entrepreneur and the manager. In a small firm the same person usually does both jobs. In a large firm the owners may appoint paid managers to run the day-to-day work, while the entrepreneur keeps the decisions about what to produce and bears the risk of the result. The manager earns a salary, which is a form of wages, while the entrepreneur earns profit, which is residual and may be a loss. This is why the two roles are treated separately even when one person performs both.

Worked example 1. A small firm sells goods worth ₹5,00,000 in a year. It pays ₹1,20,000 as rent, ₹2,00,000 as wages and ₹80,000 as interest on borrowed capital. Find the entrepreneur's profit.

Answer: Total cost = ₹1,20,000 + ₹2,00,000 + ₹80,000 = ₹4,00,000. Profit = Total revenue − Total cost = ₹5,00,000 − ₹4,00,000 = ₹1,00,000. The entrepreneur earns a profit of ₹1,00,000.

Worked example 2. A firm has total revenue of ₹3,00,000. Its rent is ₹60,000, wages ₹1,50,000 and interest ₹50,000. Find the profit or loss.

Answer: Total cost = ₹60,000 + ₹1,50,000 + ₹50,000 = ₹2,60,000. Profit = ₹3,00,000 − ₹2,60,000 = ₹40,000. The entrepreneur earns a profit of ₹40,000.

Worked example 3. A firm has total revenue of ₹2,00,000. Its rent is ₹50,000, wages ₹1,20,000 and interest ₹40,000. Find the profit or loss and state what the entrepreneur bears.

Answer: Total cost = ₹50,000 + ₹1,20,000 + ₹40,000 = ₹2,10,000. Profit = ₹2,00,000 − ₹2,10,000 = −₹10,000. The firm makes a loss of ₹10,000, which the entrepreneur bears. This shows the risk-bearing function of the entrepreneur.

Worked example 4. An entrepreneur invests ₹1,00,000 of savings and borrows ₹1,00,000 at 10 per cent interest a year. The firm's revenue is ₹3,50,000 and its other costs (rent and wages) are ₹1,80,000. Find the profit after paying interest.

Answer: Interest = 10 per cent of ₹1,00,000 = ₹10,000. Total cost = ₹1,80,000 + ₹10,000 = ₹1,90,000. Profit = ₹3,50,000 − ₹1,90,000 = ₹1,60,000. The entrepreneur's profit is ₹1,60,000 after meeting the interest payment.

In each example the rent, wages and interest are paid first, and the entrepreneur keeps whatever is left. When the remainder is negative, the entrepreneur has to meet the shortfall from savings or borrowings, which is exactly what bearing risk means.

What qualities make a successful entrepreneur?

Certain personal qualities are usually associated with successful entrepreneurship. No single quality is enough on its own: a person with ideas but no organising ability, or with capital but no willingness to take a decision, is unlikely to succeed as an entrepreneur. The qualities below usually work together.

• Initiative: the willingness to start something without waiting to be told.
• Risk-taking ability: readiness to commit savings and effort when the outcome is uncertain.
• Foresight: the ability to judge future demand and future costs.
• Organising ability: skill in bringing together and managing people, money and materials.
• Self-confidence and perseverance: the strength to continue after setbacks.
• Knowledge of the market: understanding of what buyers want and what competitors offer.

Initiative comes first because an enterprise begins with someone deciding to act. Foresight and market knowledge then guide the decision about what to produce.

Organising ability turns the plan into a working unit, and perseverance keeps it going when early results are poor. Risk-taking ability is needed throughout, because every commitment of money is made before the outcome is known.

These qualities are personal, and they are not evenly spread among people. That is one reason why entrepreneurship cannot be switched on for a whole economy by a single rule.

Training can teach market knowledge and organising methods, and credit can supply finance, but the willingness to begin and to carry on after a setback rests with the individual.

A person who has capital but no initiative will usually lend the money rather than start a firm, and a person with initiative but no foresight may commit resources to a product that buyers do not want.

Definition: Foresight is the ability of an entrepreneur to judge future demand and future costs before committing resources to a venture.

How do entrepreneurs help in the growth of small and large enterprises?

Entrepreneurship appears at every scale. A small enterprise may be a single shop, a tailoring unit or a repair workshop run by one person with a few helpers. A large enterprise may employ hundreds of workers and use heavy capital.

In both cases the same functions are performed: an idea is turned into a plan, factors are organised, decisions are taken and risk is borne.

Small enterprises matter because they are numerous and labour-intensive, so they absorb workers. Large enterprises matter because they use modern technology and produce on a scale that small units cannot. A growing economy usually needs both kinds of entrepreneur.

The two scales also differ in the risk borne. In a small enterprise the owner's own savings and time are usually at stake, and a loss falls directly on the entrepreneur and the family.

In a large enterprise the money comes from many owners and from lenders, and the risk is shared among them, though the entrepreneur who directs the enterprise still answers for the decisions.

The functions are the same, but the amount of capital committed and the number of people affected are very different.

Draw a circle labelled "Entrepreneur" in the centre. Draw four arrows pointing into it from boxes labelled "Land", "Labour", "Capital" and "Idea/Innovation".

Draw one arrow pointing out to a box labelled "Goods and services sold in the market", and a second arrow returning to the centre labelled "Profit or loss".

What are the advantages and limitations of entrepreneurship in an economy?

Advantages

• It combines idle or scattered resources into productive use.
• It creates employment and raises incomes.
• It encourages innovation and better methods of production.
• It increases the output of goods and services and adds to national income.
• It can develop backward regions and use local materials.

Limitations

• Entrepreneurship depends on individual ability, which is not evenly spread.
• New enterprises need capital, and shortage of finance can hold them back.
• Risk of failure is real, and losses fall on the entrepreneur.
• In some situations entrepreneurs may lack information about markets, technology or government support.

These limitations explain why training, credit and market information are often provided to new entrepreneurs. The advantages and limitations together show that entrepreneurship is a powerful but not automatic source of growth: it works best when ability is supported by finance and information.

Glossary

• Entrepreneur: the person who organises land, labour and capital, takes production decisions and bears the risk of the business.
• Entrepreneurship: the activity of setting up and running an enterprise, carried out by the entrepreneur, the fourth factor of production.
• Factor of production: a resource used to produce goods and services: land, labour, capital or entrepreneur.
• Profit: the reward of the entrepreneur; total revenue minus total cost, which may be negative.
• Risk bearing: accepting that the money invested in a venture may be lost.
• Innovation: the introduction of a new product, method or market by an entrepreneur.
• Residual reward: a reward that is what remains after other payments are made, as profit is.
• Enterprise: a business unit set up and run by an entrepreneur.
• Capital: produced means of production such as machines, tools and buildings used in business.
• Foresight: the ability to judge future demand and costs before committing resources.

Common errors and misconceptions

• Misconception: The entrepreneur and the capitalist are the same. Correct: The capitalist supplies capital and earns interest; the entrepreneur organises all factors and bears risk, earning profit.
• Misconception: Profit is a fixed payment like wages. Correct: Profit is residual and may be a loss; wages, rent and interest are usually agreed in advance.
• Misconception: Only large businesses need entrepreneurs. Correct: Every enterprise, small or large, needs someone to organise factors and take decisions.
• Misconception: The entrepreneur only provides money. Correct: Providing money is one part; organising, deciding, managing and bearing risk are equally important.
• Misconception: Entrepreneurship carries no personal cost. Correct: The entrepreneur invests savings and time and may lose both if the venture fails.
• Misconception: Land, labour and capital can produce without an organiser. Correct: They are passive until an entrepreneur combines them into a productive enterprise.

Exam-style questions with model answers

Q1. Define the term entrepreneur. [2 marks]

1. An entrepreneur is the person who organises land, labour and capital into a productive enterprise.
2. The entrepreneur takes the decisions about production and bears the risk of profit or loss from the business.

Q2. State any two functions of an entrepreneur. [2 marks]

1. Organising the factors of production: the entrepreneur brings together land, labour and capital in the right proportions.
2. Risk bearing: the entrepreneur invests money in advance and accepts that the venture may fail.

Q3. Explain any three ways in which entrepreneurs contribute to economic development. [3 marks]

1. They create employment: every new enterprise needs workers, so setting up firms adds to the jobs available in the economy.
2. They increase production and national income: new firms add to the output of goods and services, and the incomes earned in producing them add to the national income.
3. They promote innovation: entrepreneurs introduce new products, new methods and better machines, and other firms copy them, so productivity rises.

Q4. Distinguish between the entrepreneur and labour as factors of production. [4 marks]

1. Nature: labour is human effort, mental or physical, while the entrepreneur organises all the factors.
2. Reward: labour earns wages, while the entrepreneur earns profit.
3. Risk: labour does not bear the risk of the business, while the entrepreneur does.
4. Decision making: labour usually carries out work decided by others, while the entrepreneur takes the production decisions.

Q5. Explain any four functions of an entrepreneur. [4 marks]

1. Idea and innovation: the entrepreneur thinks of a product or service that people want, or a new and better way of making an existing one.
2. Decision making: the entrepreneur decides what to produce, how much to produce, which method to use and what price to charge.
3. Management and coordination: the entrepreneur supervises workers, arranges finance and keeps the different parts of the business working together.
4. Marketing and selling: the entrepreneur arranges distribution, advertising and sale so that the product reaches buyers.

Q6. Explain the role of the entrepreneur in economic development. [5 marks]

1. Creating employment: new enterprises need workers, so entrepreneurship adds to job opportunities.
2. Increasing production: new firms add to the output of goods and services in the economy.
3. Promoting innovation: entrepreneurs introduce new products and better methods, raising productivity.
4. Raising national income: higher production and employment together increase the country's income.
5. Balancing regional development and earning foreign exchange: units set up in less developed areas spread industry and income across regions, and goods that are exported bring in foreign currency.
6. Encouraging capital formation: entrepreneurs draw the savings of households and banks into new investment in machines, buildings and tools, which adds to the capital stock of the economy.

Q7. "The entrepreneur is the only factor of production that bears risk." Explain this statement. [5 marks]

1. Land earns rent, labour earns wages and capital earns interest; these payments are usually agreed in advance.
2. They are paid whether the firm does well or badly, so their owners do not bear the business risk.
3. The entrepreneur invests money and time before any revenue comes in.
4. Profit is residual: it is what remains after rent, wages and interest are paid, and it may be a loss.
5. Since the loss falls on the entrepreneur, the entrepreneur alone bears the uncertainty of the venture. For example, if revenue is ₹2,00,000 and rent, wages and interest come to ₹2,10,000, the other factors are still paid in full and the entrepreneur bears the loss of ₹10,000.

Key takeaways

• The entrepreneur is the fourth factor of production, organising land, labour and capital into a productive enterprise.
• The reward of the entrepreneur is profit, which is residual and may be a loss.
• The main functions of an entrepreneur are innovation, organising the factors, decision making, risk bearing, management and marketing.
• Entrepreneurs aid economic development: they create employment, raise production and national income, promote innovation and encourage capital formation.
• Rent, wages and interest are usually fixed in advance; profit alone carries the risk.
• The entrepreneur innovates, makes decisions and bears risk, and these functions run from the first idea to the final sale.
• Profit, the entrepreneur's reward, is what remains of total revenue after rent, wages and interest have been paid.
• Profit is calculated as total revenue minus total cost, where total cost includes rent, wages and interest.

Test yourself

What is the reward of the entrepreneur?

Profit. It is the residual amount left after rent, wages and interest are paid, and it may be negative if the firm makes a loss.

Name the four factors of production.

Land, labour, capital and entrepreneur. The entrepreneur organises the other three into a productive enterprise.

Why is the entrepreneur called the risk-bearer?

Because the entrepreneur invests money and time in advance and accepts that the venture may fail, with the loss falling on the entrepreneur.

What is the reward of the entrepreneur?

Profit. It is what remains of total revenue after the other factors have been paid rent, wages and interest, and it may be negative.

How does entrepreneurship help employment?

Every new enterprise needs workers, so setting up businesses adds to job opportunities in the economy.

A firm has revenue of ₹2,50,000 and total cost of ₹2,20,000. What is the profit?

Profit = ₹2,50,000 − ₹2,20,000 = ₹30,000. The entrepreneur earns a profit of ₹30,000.

Why are land, labour and capital called passive factors?

Because on their own they do not decide what to produce or how to produce it; they need an entrepreneur to combine and direct them.