LESSON 8

8.1       ENTREPRENEURSHIP

An entrepreneur is a person who undertakes the risk of initiating, financing, and controlling business with a major aim of making profits.

Entrepreneurship refers is the capacity/ ability to identify and generate innovative business ideas, mobilize resources, organizing other factors of production and manage risks for the growth of the business.

8.2       Functions of an entrepreneur

• Initiates/starts the business. This is the prime function of an entrepreneur/ he comes up with the idea to start a business.
• Co-ordinates the other factors of production. He coordinates and combines other factors such as land, labour and capital and makes arrangements for rewarding the factors.
• Undertakes risks. Undertakes risks and uncertainties when investing (such as losses and industrial action/ strikes)
• He is a decision taker. Makes major decisions in business such as what to produce and the method to be used.
• Controller of the business. He manages the enterprise, supervises and controls all activities of the firm.
• He is an innovator. Improves on the existing structure of the business such as improving on the buildings, improving on the production techniques to ensure good running of business.

8.3       Factors determining the supply of entrepreneurship

• Level of education and training. High level of education and training widens people’s exposure to opportunities and thus leads to high level of entrepreneurship while low level of education and training limits people’s exposure to opportunities and thus reduces the supply of entrepreneurship.
• Natural and acquired qualities. A large number of people with vast natural abilities leads to high supply of entrepreneurship while a small number of people with natural talents leads to low supply of entrepreneurship.
• Level of economic rent. High economic rent leads to high supply of entrepreneurship while low economic rent results into low supply of entrepreneurship.
• Social—cultural factors such as religion, cultural beliefs. Strong belief in social and cultural norms limits the supply of entrepreneurship since many people fear under taking risks in business and attach a lot of value to the norms. However less value attached to social norms leads to high supply of entrepreneurship.
• Government policy of taxation and subsidization towards investment. Favorable government policies such as reduced taxation on investment leads to high supply of entrepreneurship while poor policies like high taxation of investment leads to low supply of entrepreneurship.
• Availability of capital and other economic resources. More capital available encourages entrepreneurship while shortage of capital leads to low supply of entrepreneurship.
• Size of the market of commodities. A large market size for commodities produced encourages entrepreneurship while a small market size for the commodities produced leads to low supply of entrepreneurship.
• Price level of commodities. Higher price level encourages production and thus increases the supply of entrepreneurship while low prices of commodities discourages production and thus low supply of entrepreneurship.
• Political climate of the country. Political stability encourages production leading to high supply of entrepreneurship while political instability discourages the supply of entrepreneurship.
• Level of development of economic infrastructure. Improved infrastructure such as better roads, banking, and power supply encourages production hence leading to high supply of entrepreneurship while poorly developed infrastructure such as poor roads discourages production leading to low supply of entrepreneurship.

8.4       FACTOR PRICE

Factor price refers to the monetary payment to factors of production for their contribution towards the production of goods and services during the production process.

The factor prices include:

• Rent for land
• Wage for labour
• Interest for capital
• Profits for entrepreneurship

Supply price/ transfer earnings—refers to the minimum payment necessary to keep a factor of production in its present/ current employment (without transferring to an alternative use).

Economic rent—refers to the excess earning by a factor of production over and above its transfer earnings.

OR refers to the payment to a factor of production in excess of what is necessary to keep it in its present employment.

• Given that a factor of production has a supply price of sh.6000 and the actual earnings are sh.8500. Determine the economic rent.

Economic rent= actual rent –transfer earnings

                          =8500-6000

                          =sh.2500.

• Given that a factor of production receives a transfer earning of sh. 150,000 and its economic rent is twice its transfer earnings. Calculate the factors actual earnings.

Actual earnings= transfer earnings+ economic rent.

                            =150,000 + (150,000 x 2)

                            =150,000 +300,000

       Actual earnings = sh.450, 000

• Given that a piece of land (I hectare) when used for cultivation its cost is sh.10, 000 and when used for building its price is sh.100, 000. Calculate the economic rent for the land.

Economic rent= actual earnings-transfer earnings

                           =100,000-10,000

                           = sh.90, 000.

8.5       Factors that determine / influence the level of economic rent

• The level of demand of a factor of production. High level of demand of a factor makes it receive economic rent while low levels of demand makes a factor receive no economic rent.
• The level of supply of the factor of production. The factor that is adequately supplied does not earn economic rent while that factor in short supply receives economic rent.
• The degree of specificity of a factor. Factors of production that are specific receive no economic rent while those that are flexible receive economic rent. This is because they are able to shift from one job to another / do many jobs at the same time.
• The degree of mobility of a factor. Factors that mobile receive economic rent while those that are immobile do not receive economic rent.
• Elasticity of demand of a factor. A factor whose demand is inelastic receives economic rent while a factor whose demand is elastic does not receive economic rent.
• The degree of substitutability of a factor. Factors that are easily substituted by other factors or machines do not receive economic rent while those not easily substituted receive economic rent.

Quasi rent –refers to the extra earnings by a factor of production over and above the supply price that is earned in the short run due having inelastic supply but elastic supply in the long run.

Or Quasi rent refers to the extra earnings to a factor of production which has inelastic supply in the short run but elastic supply in the long run.

 [It is a type of economic rent that arises in the short run because a factor of production is paid highly in the short run due to its scarcity and low price in the long run when supply increases. For example, in the short run doctors tend to be few and highly paid but in the long run the supply increases and they are paid low wages for their services]

*Commercial rent –refers to the payment to an owner for temporary use of a building or any other asset. Or Refers to the hire price of a durable asset. (it is the cost of renting).

*Differential rent –refers to the extra payment to a factor of production because of putting it in alternative use or location. It is the extra earning/payment to a factor of production above the usual rate because of that specific factor’s quality.

*Ability rent— refers to the high wages paid to scarce forms of labour whose demand is higher than its supply in the short run.

 (Or refers to a type of economic rent earned by labour which is talented in more than one field). [The ability rent disappears in the long run when the supply of that type of labour increases].

*Rent of entrepreneurship—refers to the payment to an entrepreneur which is over and above the supply price and therefore it tends to attract new firms into the industry.

Supply of factors of production—refers to the number of factors of production on the market at a given price in a given period of time.

8.6       Factors determining the supply of factors of production

• The mobility of a factor of production
• Government policy regarding the supply or use of the factor.
• The price of the factor of production
• The level of entrepreneurship in the country.

8.7       Factors that determine the demand for factors of production

• The price of the factor such as rent, interest rates, and level of wages.
• The demand for the product the factors produces.
• The marginal productivity of the factors
• The degree of substitutability of the factors in production process
• Complementarity of the factors of production in production.
• Percentage cost of the factor prices to the total cost of production.
• Government policy by influencing factor prices and their use.

8.8       Basic concepts

1. Physical factors of production—refers to the tangible resources used to produce goods and services such as real capital, money capital, land etc
2. Non-physical factors of production—refers to the intangible resources used to produce goods and services such as skills, special talents etc
3. Specific/fixed factors of production —refer to the factors of production whose use is fixed/ particular such that they cannot be changed to serve other purposes.

          [They are factors of production which cannot be adapted to any other alternative use other than what it was                  meant for].

4. Non-specific factors of production —refer to the factors of production which can serve various purposes / not specialized and therefore mobile between occupations.

         [These are factors of production which can easily be transferred from one use to another].

5. Specificity of a factor of production—refers to the extent to which a factor of production cannot be adapted to alternative use other than what it was meant for.

          (Or   Refers to the degree to which a factor of production cannot be transferred from one use it is meant for to              another).

6. Technical progress/technological progress—refers to improvement in the quality of capital through innovations and inventions and such changes lead to better production. It involves the application of new and superior processes and products in production.
7. Invention—refers to the discovery of new and efficient methods of production. [This is due to scientific research and enlarges the productive capacity].
8. Innovation—refers to the improvement in the existing methods of production (or refers to use of newly invented techniques in production).
9. Capital widening—refers to the process of increasing the use of capital in the production process alongside other factors in the same ratio.
10. Capital deepening—refers to the process of increasing the ratio of capital to labour in the production process. It is the increase in the availability of capital per unit of labour. [The production process becomes more capital intensive].
11. Capital inflow—refers to the net movement of real and financial capital into a country, in form of increased purchases of domestic assets by foreigners or reduced purchasing of foreign assets by domestic residents.
12. Capital outflow—refers to the net movement of real and financial capital out of a country, in form of reduced purchases of domestic assets by foreigners or increased purchases of foreign assets by domestic residents.
13. Labour turn-over –refers to the rate at which a worker changes occupation to occupation or place to place/measure of mobility of labour. A high degree of labour turn-over is inefficient and costly because each time a worker leaves his job and a replacement is needed the employer incurs costs in form of, a fall in output, costs of training a new worker, loss of skilled worker’s output while training the new entrant.
14. Transfer payment—refers to what an individual gets without working for it / without exchange of goods and services.

8.9       Relate specificity of a factor to its mobility

Highly specific factors of production are less mobile occupationally while less specific factors of production are more mobile occupationally.