The Economic Theory of Entrepreneurship - Model - Introduction, Assumptions and Propositions

The Economic Theory of Entrepreneurship - Model - Introduction,  Assumptions and Propositions - Version 1

27 October 2018
Prof. Narayana Rao K.V.S.S.

Introduction

Economic theory is developed on the basis of four factors of production. The four factors are land, labor, capital and entrepreneurship.  The factors are owned by some or other persons in the economy at a given point of time. In every period of production, these four factors participate and the production output of the period is distributed to them according to the contracts that they make at the beginning of the production period.

Land and capital are tangible assets separate from persons and they can be given to others. Labor and entrepreneurship are attached to persons and their use implies participation of persons.

Entrepreneur enters into a contract with the owners or holders of land, capital and labor and acquires the required amount to participate in his plan of production. Entrepreneur distributes the proceeds of rewards after the production period is over and sales takes place and the consumers pay him the exchange value.  The way entrepreneurship is described or modeled in the economic theory, implies that there is an active credit market through which entrepreneurs acquire other factors of production.

All owners of factors of production have to survive till they get returns from production and exchange process. Hence, we need to assume that there is enough consumption goods stock with the owners of production to consume during the production cycle.

Entrepreneur tasks.

1. Should be able to come out with a production and exchange plan that is feasible at expected value level and satisfies the desires of owners of factors of production and consumers.

2. He must create trust in the owners of factors of production so that they provide their goods and services on credit to him.

3. He must have trust in potential customers so that he gives his produce on credit to them.

4. He must have the ability to collect exchange value  from the customers to whom he sold his produce on credit.

What are the questions to be answered by the economic theory of entrepreneurship?

1. Supply of entrepreneurship services.
2. Demand for entrepreneurship services.
3. Reward to entrepreneurship.
4. Growth and decline of entrepreneurship services
5. Role of entrepreneurship in economic growth of society.

Managerial Tasks of an Entrepreneur

Management theory has application in the economic theory of entrepreneurship.  Entrepreneurs have to undertake managerial tasks to successfully complete the cycle of entrepreneurship. The cycle of entrepreneurship is  -----------  Production and Exchange Plan - Communication of the Plan to  Owners of Factors of Production - Acquisition of Factors of Production - Execution of Production Process - Communication of Product/Service Information in the Market - Selling - Collection of the Exchange Value - Payment to Owners of Factors of Production. 

The Cycle of Entrepreneurship

Production and Exchange Plan - Communication of the Plan to  Owners of Factors of Production - Acquisition of Factors of Production - Execution of Production Process - Communication of Product/Service Information in the Market - Selling - Collection of the Exchange Value - Payment to Owners of Factors of Production.

Bibliography - The Economic Theory of Entrepreneurship

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Thesis title : On entrepreneurship : a critique of the economic theories of entrepreneurship
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https://espace.library.uq.edu.au/view/UQ:222083


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Entrepreneurship and Economic Theory
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October 2016
https://www.researchgate.net/publication/24114234_Entrepreneurship_and_Economic_Theory/download


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The Entrepreneur in Economic Theory: From an Invisible Man Toward a New Research Field.
FEP Working Papers, No. 459, May 2012
School of Economics and Management, University of Porto.


Gunter, Frank R.
A Simple Model of Entrepreneurship for Principles of Economics Courses
Expanded version of the article published in the Journal of Economic Education, Vol. 43, No. 4, 2012, pp. 1-11.




Tiryaki, Ahmet
Theories of Entrepreneurship: A Critical Overview
Paper avaiable on Web/Internet


Campagnollo, Gilles, & Vivel, Christel
The Foundations of the Theory of Entrepreneurship in Austrian Economics - Menger, Bohm-Bawerk on entrepreneur