Economic Theory

of
Entrepreneurship
Prepared by Group 1
 Table of Content
🍂Economic Theory of Entrepreneurship

02🍂Classical Theory of Entrepreneurship

03🍂Richard Cantillon (1755)
04🍂Neo-Classical Theory of Entrepreneurship
05🍂Alfred Marshall (1949)
06🍂Frank Knight (1921)
07🍂Austrian Market Process Theory of Entrepreneurship
08🍂Joseph Alois Schumpeter (1934)
Objectives: After Reporting this module, the student
shouldabout
🍂Distinguish the main arguments be able to;
the role of entrepreneurship
from the perspective of classical, neoclassical and Austrian school
of thoughts.
🍂Explain the reason behind the inconsistences between economic theories
and the
role of entrepreneurship in the economy.
🍂Explain the relevance of scientific observation, logic and statistics to
advance the
study of entrepreneurship; and
🍂Appreciate the value of Entrepreneurship in adding value is limited
resources by
demonstrating entrepreneurial traits such as industry, innovative, self
efficacy and
focus on control.
Guess the
picture!
 Entrepreneurship
The activity of setting up business
or businesses taking on financial
risk in the hope of profit.
 Why do we engage in Entrepreneurship?
 What is the main purpose of Entrepreneurship?
 01 Economic Theory of
Entrepreneurship
• The study of entrepreneurship is a maze of theories as they
are written in different approaches to discipline economic,
psychology, sociology and business management.
• The factors that drive them, and source of survival and
success owed to small samples used.
• A systematic and unified economic theory of
entrepreneurship remain undeveloped.
• It is worth nothing that economic theory deals primarily
with the processes.
• The consideration of diverse goals that set off economic
from other disciplines sociology and psychology.
 Classical Theory of
02 Entrepreneurship

● The pre-classical economic through began on

early antiquity and proceed through 18 th century
before Adam Smith.

● Classical Economic restricted the role of

entrepreneur in the production and distribution
of goods in the market place.
● Given that the market is free, competitive and
specializes, Cantillon still emphasized the role of
entrepreneur to bring the demand and supply on

in tag e the market.

V
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 Richard Cantillon
03 (1755)
• 1st to present the theory of entrepreneur.
• “Entrepreneur” a French word which means ability to take
• Cantillon’s Theory suggestcharge.
that without entrepreneurs
taking and overcoming risk of business ventures,
• He categorized people in terms of their economic
economic progress would have slowly stopped a long time
functions.
ago.
• Cantillon distinguished three functions of Entrepreneurs:
>1st, buying and selling products from the villagers to the
cities
>2nd, buying and selling products from the city to the
villagers
>3rd, producing goods and services sold in the villages or
cities
 Richard Cantillon
03 (1755)
• Assumptions implicit in Cantillon’s Theory:
>Ex. Entrepreneurs must avail of the different forms of
utilities in the production and distribution of goods.
>This utilities include:
Time
Form
Place
Service
Possession Utility
• Neoclassical Theory of Entrepreneurs
>Contradicted Classical Model
• Neoclassical economists give importance
to the principle of diminishing marginal
utility that drives entrepreneurial
engagement.
 04
Neoclassical Theory
of
Entrepreneurship

The neoclassical theory of
entrepreneurs contradicted the
classical model based on the
proportion that value of goods
does not solely on the cost of
production (supply side) but
also on the demand side of a
closed economy.
From the neoclassical
perspective, entrepreneurs
must consider the decreasing
satisfaction of consumers as
more units of goods consumed.
Assumptions in Neoclassical
Economics
There are many branches that use
different approaches under neoclassical
economics. All of the approaches are
based on three central assumptions.
01
People are rational between identified
and value- associated outcomes.
02
An individuals purpose is to maximize
utility, as a company's purpose to
maximize profits.
03
People act independently perfect (full
and relevant information.
 Key Concept in Neoclassical
Economics

Equilibrium demand Market

and supply Equilibrium
determine prices as
well as economic
growth.
Total Utility and Marginal
Neoclassical economists give Utility
importance of diminishing
marginal utility that drives
entrepreneurial engagement.
Utility measures the
satisfaction recieved
consuming goods and services.
 Neoclassical Economics vs.
Classical Economics
The classical economics state that the price of a product is
independent of its demand. The production and other factors
that impact the supply of the product are the key drivers.

Neoclassical economics emphasis the choices (demand) of

consumers. Personal preferences, allocation of resources, and
some other factors can influence consumer demand.
 ALFRED MARSHALL
( 1949)
- English economist, who was one
of the most influential economists
of his time.
- Emphasized that demand and
supply determine the price and
output of a good.
- Present a realistic theory of an
entrepreneurship.
- Focuses on sustaining
entrepreneurial innovation bey
product innovation.
 06 Frank Knight (1921)
Frank Hyneman Knight (November 7
1885 - April 15 1972) was an American
economist. He remay famous for his
"Knightian uncertainty." The distinction
between risk and uncertainty and his
work on ethics in economic. An electic
thinker , Knight contributed significantly
to the development of American
economic thought in the twentieth
century and thus directly or indirectly,
was influential in determining the
course of prosperity in human society.
 Frank Knight (1921)
Frank Knight was an idiosyncratic
economist who formalized a distinction
between risk and uncertainty in his
1921 book, RISK , UNCERTAINTY and
PROFIT. As knight saw it, an ever-
changing world brings new
opportunities for business to make
profits, but also means we have
imperfect knowledge of the events.
•RISK - applies to situation where we
do not know accurately measure the
odds
•UNCERTAINTY- applies to situations
where we cannot know all the
information we need in order to set
accurate odds in the first place.
Entrepreneur are strategic decision-
maker who generate profit by their
actions in developing resources to
optimal effects in an uncertain
economic environment.
Entrepreneur make worthy strategic
decision to generate pure profit in long
sum.
Pure profits gains after deduction of all
implicit of opportunity cost borne the
organization, including salaries of
managers and capitalist.
Entrepreneurial income is pure "profit"
and this is not a contractual income
the same way as Manager's salary. In
this respect entrepreneurship entails
an element of monopoly.
 AUSTRIAN MARKET 07
PROCESS THEORY OF
ENTREPRENEURSHIP
•The Austrian school taken as a whole user verbal logic
of prior thinking in contrast to classical and neoclassical
school which make use of data and mathematical
models to objectively prove their point.

•Prices are subjective as an individual preference to

buy or not to buy a particular good.

•Entrepreneurs play a pivotal role in the Austrian view

of the economy.

•Austrian economics argued that entrepreneurs have

the ability to seek and communicate knowledge through
out a market system via price information and are
responsible for innovation.
 THREE MAIN CONCEPTUALIZATIONS
OF KIRZNER (1973)

01 Is an arbitraging market

02 Was alertness to profit making opportunities

03 Conceptualization followed Say's (1803) and Schumpeters (1934)

proposition

According to Knight (1921). The letter does not

require ownership of resources but an idea that adds
value to uncertainty and risk.
 The AMP model is not
without criticism
01 03
Market system are not purely Fraud deception and tax controls also
competitive but can involve contribute to market system activity.
antagonistic cooperation. 04
02 Private and state firms are different but
Resources monopolies can both can be entrepreneurial and the
hinder competition and entrepreneurship can occur in non-
entrepreneurship market social situations without
competition

•Empirical studies by Acs and Audretsch (1988) rejected the

Schumpeterian argument the innovation requires economics
of scale.
08 JOSEPH ALOIS
SCHUMPETER (1934)
•Expanded the idea of risk bearing with
innovation
•Puts heavy emphasis on the supply side via
innovation
•His theory on enterprenuer driven innovation
was properly even more influential.
Chec JOSEPH ALOIS SCHUMPETER
k! CLASSIFIED THE HISTORICAL
PROCESS OF CHANGE INTO FIVE
TYPES:

1. Introducing a new
product or a new kind of an
existing product.
2. Application of new
methods of production or
sales of a product.
3. Opening a new branch of
the industry.
4. Acquiring new resources
of supply of raw materials or
semi-finished goods.
5. New industry structure
such as the creation or
destruction of monopoly
position
 Principal subjects
SCHUMPETER 1943
SCHUMPETER 1934
• He argued that the
•Argued that in a competitive
process change is
environment anyone seeking profits
non-stationary as
must innovative. •The invention phase
"Creative
or the basic innovation has less of an
destruction" is ever-
impact, while the diffusion and
evolving such
imitation process have much greater
capitalism cannot be
influence on the state of economy
a stationary
economy.
SCHUMPETER 1939
•Argued that invention does not lead
SCHUMPETER 1942
automatically to execution.
• Typical
characteristics of
SCHUMPETER 1912
entrepreneur are
•It is the entrepreneur with a strong
intelligence,
character and by his influence leads to
alertness, energy
the implementation.
and determination.
 FOUR
COMPLEMENTARY
FUNCTION

1 3
Error
Invention
2 Connection 4
Risk Taking Administration
 Thank
you for
listening! Members:
Amulod, Joselito
Agbay, Neikey
Gingco, Ivonie
Igot, Marideth
Maglinao, Mary Jane