CHAPTER 9
The Entrepreneur and the Market Process
CHAPTER SUMMARY AND TEACHING OBJECTIVES
In many places throughout this text reference is made to the market process. The power of the market,
the importance of its signals, and its dynamic nature are discussed. At the heart of this process is the
entrepreneur. The entrepreneur is seen as the change-agent of in the market process. Entrepreneurs are
more than just managers. They are innovators and are the heart of the creative destruction process. We
also see the power of economic profits as signals motivating entrepreneurs. So, the lesson of the chapter
is the power and importance of the entrepreneur.
IMPORTANT TERMS
Land natural resources, land and sea
Labor skilled and unskilled labor services
Capital structures, equipment, inventories
Equity ownership share of a business
Debt borrowing share of a business
Accounting Profit profit shown on an income statement
Economic Profit profit after accounting for all opportunity costs
TOPICS AND TEACHING SUGGESTIONS
1. Markets
The market system uses prices to create incentives and to allocate limited good, services and
2. The Search for Profit
The entrepreneur organizes resources and technology creates goods and services. If the value of
3. The Manager Compared to the Entrepreneur
An entrepreneur is not necessarily a manager. An entrepreneur is a creator, an innovator.
ANSWERS TO EXERCISES
1. Define entrepreneurship. How does it differ from management? Would you consider each of the
following entrepreneurial or managerial?
2. What is “the market process”? Describe the role of the entrepreneur in the market process.
3. What does it mean to say “Profit opportunities attract firms like sharks to blood…”
4. What is the economist’s interpretation of costs? “… the concept of cost is far richer (pardon
5. In the book, Naked Economics, the author says, “Prices are like giant neon billb oards that
flash important information.” (p.12) Describe the types of information that market prices
provide. What role does the entrepreneur play in this billboard?
6. Creative Destruction – means what? Is it true that capitalism works not because it rewards
winners but crushes losers? How is this reconciled with golf tournaments and professional
team sports?
7. What is an asymmetrical information problem? How does an entrepreneur deal with
asymmetric information?
8. List 3 reasons that firms exist. Do any of the reasons imply that the command and control of
centrally planned economies is the appropriate form? What are the similarities and
differences between firms and centrally planned economies?
9. Is rent seeking the same as corruption? Why does corruption negatively affect economic
growth and standards of living? In what way might corruption be like a tax on doing
business? What institutions exist to minimize corruption?
10. In the chapter rent seeking was associated with entrepreneurs dealing with or in government.
Can rent seeking occur inside a firm? Explain and give an example.
11. Explain why the black rhino has become increasingly endangered. If you substituted
“entrepreneur “for “black rhino” in the previous sentence, what would your answer be?
12. Explain whether the first mover strategy makes sense for an entrepreneur.
13. What does the following statement mean? “Indeed, every decision we make involves some
kind of trade–off.” Under what condition would the statement not be true? Does the
entrepreneur face a tradeoff before choosing to be an entrepreneur? Explain.
14. Compare “equilibrium” strategy (described in Chapters 7 and 8) to entrepreneurial strategy. Is
there a difference? Explain
15. “Entrepreneurial profit is made possible by Schumpeterian entrepreneurs and Austrian
entrepreneurs nibble away at it.” What is a Schumpeterian entrepreneur? What must the
“Austrian entrepreneur” be if he simply “nibbles away at profit”?
16. It has been said that the concept of opportunity cost is central to economics and economic
thinking. Understanding opportunity cost will help an entrepreneur determine the true value
of decisions. What does mean? What is the opportunity cost of going to play A in the
following problem?
17. In the chapter the role of entrepreneurs as “equilibrators” was discussed. What does
“equilibrators” mean?
18. What is the difference between homogeneous capital and heterogeneous capital? Why would a
theory of the entrepreneur make more sense if capital is heterogeneous rather than homogeneous?
19. If capital is heterogeneous and has attributes that are not changeable, how might creative
destruction take place?
20. Explain why first mover is or is not a good strategy for an entrepreneur.