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Contribution of Enterprise to Aggregate Supply

Explain how the factor of production enterprise contributes to aggregate supply in a modern economy and how it differs from the other factors of production in terms of the reward its services.

[8 marks]

Category:

Macroeconomic Factors and Policies

CIE AS Level November 2020

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Answer



(Step 1 : Define factors of production and enterprise)



Factors of production refer to the inputs required to produce goods and services. Factors of production consist of land(natural resources), labour(human resources), capital(man made aid to production) and enterprise.

Entrepreneurs carry out two functions in a market economy. First, the enterprise factor organises the other three factors of production which are, land, labour and capital. Second, enterprise involves taking the risk of production, which exists in a free enterprise economy. The return for enterprise is the profits that are made.




(Step 2: Explain how enterprise differs from the other factors of production in terms of the reward for its services.)

Enterprise differs from the other factors of production in terms of the reward for its services.

Unlike other factors the role of entrepreneur is that of a decision maker and assumes all the risk involved in the running of a business. Profit is the reward to enterprise for its services. In order to produce goods and services enterprise needs to hire labour which is rewarded with wages , land which is the natural resource rewarded with rent and capital which is rewarded with interest.

The entrepreneur is the driving force behind production. An entrepreneur will innovate and introduce new products, new productive techniques, or new forms of business organization to the market. The entrepreneur risks not only time, effort, and business reputation but his or her invested funds and those of associates or stockholders.



(Step 3: Explain how the factor of production enterprise contributes to aggregate supply in a modern economy)



The factor of production enterprise contributes to aggregate supply in a modern economy in several ways.

👨‍💼(1) Enterprise will utilise the other factors of production to produce goods and services that increase aggregate supply.

An entrepreneur has the power to change the way an economy is moving. He also advocated that an entrepreneur is the person who combines production factors to make the production process efficient. An entrepreneur characteristically innovates, introduces new technologies, increases efficiency, productivity, or generates new products or services. An entrepreneur acts as a catalyst for economic change and research indicates that entrepreneurs are highly creative individuals who imagine new solutions by generating opportunities-for profit or reward.

It is the entrepreneur who decides what to produce, how to produce and where to produce. The decisions made by entrepreneurs of what and how much to produce have a bearing on aggregate supply (AS) of an economy. Aggregate supply is the level of real domestic output which will be produced at each price level. Enterprise will utilise the other factors of production to produce goods and services that increase aggregate supply. Aggregate supply will increase through an increase in productive potential or a fall in unused resources. Higher price levels create an incentive for enterprises to increase output for higher profits.


👨‍💼(2) An entrepreneur brings innovation which eventually leads to an increase in aggregate supply

An entrepreneur is a person who is willing and able to convert a new idea or invention into a successful innovation. Entrepreneurs start the process of creating new product, business model, or other business innovations by replacing the old ones. Thus, new products and technologies developed by entrepreneurs over time make current products and technologies obsolete. An example is the invention of a steam engine, which was used to develop a horseless carriage. Further, the horseless carriage was transformed into a car.

Through innovation, an entrepreneur can introduce new goods and services that can produce a cascading effect or virtuous circle in the economy. Stimulation of related businesses or sectors that support the new venture, can add to further increases in aggregate supply. For example, a new business idea in IT industry can benefit associated industries such as centre operations, network maintenance companies and hardware providers. Education and training institutes could nurture a new class of IT workers offering better, high-paying jobs. Infrastructure development organizations and even real estate companies might capitalize on this growth as workers migrate to employment hubs seeking a higher standard of living.



(Step 4: Conclude)



To conclude, the role of entrepreneur is more dynamic than other factors for as it makes decisions that enable benefits across a broad spectrum of the economy by stimulating business activities.







>MARKING SCHEME<


For knowledge and understanding of the role of enterprise in the
production process in a modern economy:
Enterprise undertakes the organisation of the other factors of production (1
mark) It also bears the risk of production (1 mark)
(2 marks)
For application.
Profit is the reward to enterprise for its services (1 mark) In order to produce
goods and services enterprise needs to hire labour which is rewarded with
wages (1 mark), land which is the natural resource rewarded with rent (1
mark) and capital which is rewarded with interest (1 mark)
Enterprise will utilise the other factors of production to produce goods and
services that increase aggregate supply (1 mark). Aggregate supply will
increase through an increase in productive potential or a fall in unused
resources. (1 mark)
(Up to 6 marks)

>GUIDANCE<

Enterprise takes the risk of production and
organises the other factors. In a modern
economy this often leads to the divorce of
ownership (shareholders) from control
(management). Profit is the reward for
enterprise, but profit is the reward for risk
and in loss making firms there will be no
profit. This contrasts with the rewards to
labour, land and capital.
Aggregate supply, also known as total
output, is the total supply of goods and
services produced within an economy in a
given time period.
In order to contribute to aggregate supply
enterprise organises the other factors of
production and takes the risk that costs
will not exceed revenue leading to
negative profit.

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