Entrepreneurship (second half of pv lesson)

Entrepreneurship

Early in the course, you learned about the four factors of production: natural resources, human resources, capital resources, and entrepreneurship. The last of these factors, entrepreneurship, is crucial for creating economic growth in market economies. Remember that entrepreneurs are individuals who take risks to bring natural, human, and capital resources together in order to develop new products and start new businesses. In market economies, entrepreneurs have an incentive to combine the other three factors of production in new ways. By doing this, they can develop new products or learn how to make current products more efficiently. This is a risk; it doesn't always work out. In fact, the majority of businesses in America fail. Entrepreneurs take these risks because, when they do succeed, they are amply rewarded.

Incentives for Entrepreneurs

Becoming an entrepreneur requires working hard and taking on a lot of risk. You might have to work sixty to eighty hours a week in the early stages of starting your business, and there's a decent chance you'll lose all the time and money you poured into it. So why does anyone become an entrepreneur? Four main incentives encourage people to start businesses and become entrepreneurs: profit, independence, the ability to pursue their passion, and the ability to help others.

Profit

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Entrepreneurs earn a profit when they're able to sell their goods for more money than it cost them to produce those goods. If their production costs are higher than the prices they sell their products for, they will incur a loss. Starting a business is always a risk because there's no guarantee that entrepreneurs will be able to sell the products they make at a high enough price to make a profit. This is why high tax rates can discourage the creation of new businesses. If entrepreneurs have to pay a large percentage of their profits to the government, they might start to question whether it's worth the risk to start the business in the first place.

Independence

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In the video, the owner of Clean & Mean explained that she was able to craft her work schedule in a way that allowed her to go to the mall with her mom on Friday mornings. This level of independence is rare when you're working for someone else. As an entrepreneur, you have much greater control over when you work and how you work. You have the freedom to operate your business when and how you want.

Pursuing a Passion

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Becoming an entrepreneur also allows you to choose what you work on. You can pursue what you're passionate about, utilizing your skills and expertise—your human capital—to build a business that reflects who you are and what you enjoy. You can develop the human capital that you want to develop, instead of being forced to receive the training that your employer wants you to receive.

Helping Others

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Another incentive for entrepreneurs is the ability to help others. Starting a successful business provides people with employment and creates products that improve customers' lives. Furthermore, being a business owner provides you with a great opportunity to be a witness for Christ, and you can use your business's profits to help people in need.

Challenges for Entrepreneurs

While there are many benefits to entrepreneurship, there are also challenges. These challenges include risk and uncertainty, the time and financial commitment involved, and potentially high levels of stress.

Risk

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We've mentioned several times already that entrepreneurship is inherently risky. The statistics support this: in the United States, one in five small businesses fail within the first year, half fail within the first five years, and two in three fail within ten years. Many of these businesses never become profitable during their lifetimes. As an entrepreneur, you're risking your time and money on a venture that has a chance of never being successful. And even if the business does succeed, that success could be short-lived.

A byproduct of this risk is a great deal of uncertainty. You won't have complete control over your company's success. Macroeconomic factors, such as whether the economy experiences a recession, will play a large role in whether or not your business succeeds. You can work harder than anyone else and have a better business plan than anyone else and still end up failing because of something outside of your control.

Time Commitment

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Starting a new business usually requires an enormous time commitment, especially in the early stages. It's not uncommon for new entrepreneurs to work sixty to eighty hours a week. This means they won't have much time left for other important things in life, such as their family, church, and friends.

Financial Commitment

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The adage that it takes money to make money is usually true for entrepreneurship. To run a business, you'll have to purchase capital resources (equipment, vehicles, tools, etc.), and you may also have to purchase human resources (hire employees). Most of the time, entrepreneurs will have to purchase these resources while they're starting up their business, before they've made any profit. In other words, they'll have to make a financial commitment upfront. If the business fails, they'll lose that money.

Stress

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The high level of risk involved with entrepreneurship, combined with the time and financial commitment required, can create a lot of stress. These stress levels can negatively affect the entrepreneur's health and personal life.

How Entrepreneurs Benefit Society

Entrepreneurship is the factor of production that makes market economies tick. Entrepreneurs benefit society by increasing competition, developing new products, improving existing products, fostering technological advancements, and generating economic growth.

Increasing Competition

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Competition is a key characteristic of market economies because it keeps prices low and increases the quality of goods and services. Monopolies destroy competition, which results in higher prices and lower quality. Entrepreneurs have the opposite effect; they increase competition because they create more businesses. More businesses equals more competition, which means consumers have access to better products at lower prices.

Developing New Products

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Innovation is a key aspect of entrepreneurship. To succeed, entrepreneurs have to provide consumers with something different. This leads to the development of numerous new products that improve consumers' lives. Most of the products you buy were, at some point, developed by an entrepreneur.

Improving Existing Products

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If entrepreneurs can't develop a new product, they might be able to succeed by improving an existing product. Cell phones used to be large brick-like devices that did nothing but make phone calls. Entrepreneurs made steady improvements to that product, eventually resulting in the smartphones we have today.

Fostering Technological Advancements

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Developing and improving products often leads to advancements in technology. The smartphone is a prime example of this. In addition to the smartphones themselves, there have been steady advancements in wireless technology (3G, 4G, and now 5G), as well as in the programming of the apps that are on the phones.

Generating Economic Growth

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Developing and improving products leads to economic growth, as entrepreneurs discover better methods of production that improve efficiency. Entrepreneurs have a strong incentive to improve efficiency because it reduces production costs and allows them to make higher profits. This means that, as a whole, the nation's entrepreneurs are constantly working to increase productivity, which grows the national economy and increases the standard of living.

Entrepreneurship has many incentives, but it comes with many challenges. When those incentives are reduced (e.g., through high taxation), those challenges eventually outweigh the incentives. When this happens, fewer people become entrepreneurs, and society loses the crucial benefits that they create.