THEORIES OF

ENTREPRENEURSHIP
MODULE 3
THEORIES OF ENTREPRENEURSHIP

Entrepreneurship in different
Psychology
approaches to discipline:

Sociology
Economics Entrepreneurship

Business
Management
Selected Theories of Entrepreneurship

AUSTRIAN MARKET
CLASSICAL NEOCLASSICAL PROCESS
 CLASSICAL THEORIES OF ENTREPRENEURSHIP

 This include free trade, competition, and specialization,

implying the workings of market demand and supply, they
generally put emphasis on the supply-side of economy
(Bartlett, 2008)
*Cantillon emphasize that the role of entrepreneurs is to
bring the demand and supply side of the market together
(Parker, 2018)
*Classical economists restricted the role of entrepreneurs in
the production of goods in the marketplace.
NEOCLASSICAL THEORY
OF
ENTREPRENEURS
 NEOCLASSICAL THEORY OF
ENTREPRENEURS
 The value of goods does not depend solely on the cost of production
(supply side) but also on the demand side of closed economy.
 Equilibrium demand and supply determine prices as well as economic
growth.
Neoclassical economists give importance to the principle of diminishing
marginal utility that drives entrepreneurial engagement.
Principle of diminishing marginal utility: The law of diminishing marginal
utility says that the marginal utility from each additional unit declines as
consumption increases
 NEOCLASSICAL THEORY OF
ENTREPRENEURS

Alfred Marshall (1949) emphasize that demand and supply

determine the price and output of a good.
- He theorized the interplay of demand and supply to reach
equilibrium however failed to explain how profit occurs at
equilibrium (Bula, 2012)

Frank Knight (1921) was the first to specify entrepreneurship

function under pure uncertainty and extend this uncertainty
within a general equilibrium system.
NEOCLASSICAL THEORY OF
ENTREPRENEURS
Role of Entrepreneurs:

Entrepreneurs have knowledge consumers’

demand before the production of goods takes
place. This knowledge consists of the demand of
the product or service across population segments
or socio-economic-demographic characteristics of
consumers.
Austrian market process
theory of
entrepreneurship (AMP)
 AUSTRIAN MARKET PROCESS THEORY OF
ENTREPRENEURSHIP (AMP)
 Austrian school rejects the universal application of any economic theory.
 Prices are subjective as an individual’s preference to buy or not to buy a particular good
is subjective
 Put emphasis on subjective factors that also determine the costs of production
according to the value of alternative uses of scarce resources.
 Entrepreneurs play a pivotal role in the Austrian view of the economy.
 Entrepreneur is the active agent in the economy who uses the information available
from prices and interest rates exercises judgement of expected future prices, conditions,
make alternative plans and bears the risk of an uncertain future by taking ultimate
responsibility for the success or failure of the chosen plan.
AUSTRIAN MARKET PROCESS THEORY OF
ENTREPRENEURSHIP (AMP)
Role of Entrepreneurs
 Entrepreneur is the active agent in the economy who use the information
available from prices and interest rates exercises judgement of expected future
prices and conditions
 Make alternative economic plans and bears the risk of an uncertain future by
taking ultimate responsibility for the success or failure of the chosen plan.
 They are not just innovators and inventors, but business owners and inventors of
all kinds as well.
 Entrepreneurs find it profitable to use knowledge to generate new economic
value consistent with the three main conceptualizations of Kirzner(1973)
THREE MAIN CONCEPTUALIZATION OF
KIRZNER (1973)
1. Arbitraging market
2. Alertness to profit-making opportunities
3. Ownership (Say 1803 & Schumpeter 1934)
CRITICISM of AMP MODEL
1. Market systems are not purely competitive but can involve antagonistic
cooperation.
2. Resource monopolies can hinder competition and entrepreneurship.
3. Fraud, deception, and tax controls also contribute to market system activity.
4. Private and state firms are different but both can be entrepreneurial
5. Entrepreneurship can occur in non-market social competitions without
competition.