1. The Entrepreneur and the Market Process
CHAPTER 9
The Entrepreneur and
the Market Process
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2. Markets Market system Determines a price for each traded good
Price = opportunity costs
Specialization
No conscious central direction
People – pursue their own objectives
Employ their talents and resources where these resources and talents have the highest value
Pursue their own objectives
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3. Markets Constantly rising standard of living – because of markets
We have the things we desire when we desire them
What we purchase - much better
Able to purchase more of it
Life expectancy – nearly doubled in a century
Diseases - polio, tuberculosis, typhoid, whooping cough - wiped out
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4. Markets Free, unfettered market Specialization - comparative advantage
Nothing interferes with people entering into voluntary transactions
Specialization - comparative advantage
Generate more output than being self-sufficient
Need to trade - requires some form of coordination
Coordination in a market system
By individuals pursuing their self-interests
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5. The Market Process Markets Market process is dynamic
Ensures that resources are allocated to their highest valued uses
Inefficiency of any sort wither away
Assumption: individuals want to make themselves as well off as possible
Market process is dynamic
Because knowledge is not fixed or static
It occurs over time
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6. Dynamics: Market and Entrepreneur
Economic analysis
Static equilibrium
Equilibria are, at best, temporary resting points
Entrepreneur - seeks profits by
Innovating, making decisions under uncertainty, combining assets in new ways
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7. Dynamics: Market and Entrepreneur
Black box firm
Any firm can do what any other firm does
All firms are always on their production possibility frontiers
Firms always make optimal choices of input combinations and output levels
There is no room for entrepreneurship
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8. Figure 9.1
The Black Box
The firm is traditionally treated as a black box into which inputs go and out of which output comes.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

9. Dynamics: Market and Entrepreneur
Efficient and unfettered markets
The black box firm has no reason to exist
Everything could be done by contracts without creating firms
Firms do exist
A role for the entrepreneur: to reduce the “transaction costs”
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10. Dynamics: Market and Entrepreneur
Innovator
Introduces new products, production methods, markets, sources of supply, or industrial combinations
Creative destruction
“Alertness” to profit opportunities
Arbitrage
Someone making decisions under conditions of uncertainty
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11. Dynamics: Market and Entrepreneur
Individuals - income from human capital
Selling labor services on the open market
Entering into employment contracts
Starting a firm
Entrepreneur
Start his own firm
Entrepreneurship - being different
To earn profits
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12. The Search for Profit Entrepreneur
Purchases or rents resources
To organize a firm
Through the firm – creates and sells goods and services
Profit = Total Revenue − Total Cost of Resources
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13. The Search for Profit Total Revenue Total costs
Total number of goods and services sold
Multiplied by the price at which they are sold, P x Q
The dollar value of sales
Total costs
Payments to resources for creating, producing, and selling the goods and services
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14. The Search for Profit Resources Land Land, labor, and capital
Inputs used to produce and sell goods and services
Land
All natural resources, land and sea
Cost: rent
Not the acquisition price
Value of the services provided by that land
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15. The Search for Profit Labor Capital All types of labor services
Skilled and unskilled labor
Cost: wages, salaries, and benefits that must be paid to use labor services
Capital
Structures, equipment, and inventories
Cost: payments that must be made to use the capital
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

16. Figure 9.2 Flow of Resources and Income
Three types of resources are used to produce goods and services: land, labor, and capital. See part (a). The owners of resources are provided income for selling their services. Landowners are paid rent, laborers receive wages, and capital receives interest. See part (b). Part (c) links parts (a) and (b). People use their resources to acquire income with which they purchase the goods they want. Producers use the money received from selling the goods to pay for the use of the resources in making goods. Resources and income flow between certain firms and certain resource owners as people allocate their scarce resources to vest satisfy their wants.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

17. Figure 9.2 Flow of Resources and Income
Three types of resources are used to produce goods and services: land, labor, and capital. See part (a). The owners of resources are provided income for selling their services. Landowners are paid rent, laborers receive wages, and capital receives interest. See part (b). Part (c) links parts (a) and (b). People use their resources to acquire income with which they purchase the goods they want. Producers use the money received from selling the goods to pay for the use of the resources in making goods. Resources and income flow between certain firms and certain resource owners as people allocate their scarce resources to vest satisfy their wants.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

18. Figure 9.2 Flow of Resources and Income
Three types of resources are used to produce goods and services: land, labor, and capital. See part (a). The owners of resources are provided income for selling their services. Landowners are paid rent, laborers receive wages, and capital receives interest. See part (b). Part (c) links parts (a) and (b). People use their resources to acquire income with which they purchase the goods they want. Producers use the money received from selling the goods to pay for the use of the resources in making goods. Resources and income flow between certain firms and certain resource owners as people allocate their scarce resources to vest satisfy their wants.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

19. The Search for Profit Cost of anything or any activity
What you give up to acquire that item or perform that activity
Opportunity cost
Costs of doing business
Opportunity costs of running the business
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20. The Search for Profit Equity Debt Ownership share of the business
Cost of equity – opportunity cost to investors
Implicit part of capital costs
Debt
Borrowing share of the business
Cost of debt - interest rate on the debt
Explicit part of capital costs
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21. The Search for Profit Accounting profit
Ignores the implicit cost of capital
Presented in financial statements
Operating profit or net operating profit
Value of output less the cost of inputs
Not including the opportunity cost of the owner’s capital
Revenue – rent – wages – interest
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22. The Search for Profit Economic profit Includes all opportunity costs
Difference between the value of output and the opportunity cost of all inputs
Land costs, labor costs, and debt and equity costs
= Accounting Profit − Cost of Capital
Can be negative, zero, or positive
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23. Economic Profit Economic profit Positive economic profit
Is the entrepreneur’s signal
Indicates whether the entrepreneur will allocate additional resources to an activity
Or whether existing resources in an activity will be allocated to another use
Positive economic profit
Revenue exceeds all opportunity costs
Attracts rivals and increases supplies
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24. Economic Profit Negative economic profit
Revenue is less than all opportunity costs
Entrepreneurs must look to other markets and activities - reallocate resources
Reduced supply
Exit the market in the long run
Zero economic profit, normal profit
Total revenue = total costs
The competitive norm
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25. Business Insight Creative Destruction—Not Always
Starbucks - stores on every corner
Criticism: effect on mom and pop coffee houses
Local coffee shops
Want a Starbucks put in next to you
57% of the nation’s coffee houses are still mom and pops
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26. Business Insight Creative Destruction—Not Always
Long after Starbucks supposedly obliterated independent cafes
Number of mom and pops coffee houses: grew 40%
From 9,800 to nearly 14,000
Each new Starbucks store
Drew new coffee drinkers - who often turned to the independent shops
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27. Manager Compared to Entrepreneur
Management
Makes routine decisions within known constraints
To meet established objectives
Stewardship of the resources owned or contractually controlled by the firm
Managers - rewarded according to the value of the productive services they provide
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28. Manager Compared to Entrepreneur
Management
Function: calculate and implement the course of action that meets the objectives of the owners of the firm
Searches for incremental improvements in economic efficiency
In response to changes in the economic environment
Carries out the day-to-day activities
Leads to new information
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29. Manager Compared to Entrepreneur
Entrepreneurs
Influenced by the new information
Conjecture new economic arrangements
Innovations - introduced in the context of a prevailing price structure
Alters that price structure
Generates still more new information
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30. Entrepreneurial Strategy
First Mover
The first to enter a market or to create a new market
Not always the best strategy
More important
Understand customers
Manage innovation
Adapt quickly to market changes
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31. Entrepreneurial Strategy
First Mover
Establish a standard
Develop customer loyalty before late movers enter
Drawbacks: cost and risk
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32. The Rent Seeker as Entrepreneur
Rent seeking
Seeking transfers of profits from others
Seeking profits without producing anything
Often leads to the end of the economic activity that created growth
The larger the role of government in an economy, the more opportunities for rent seeking
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.