Leaving Cert Economics (Old Course) FACTORS OF PRODUCTION - Enterprise: State and explain two economic c

State and explain two economic characteristics of enterprise as a factor of production - Leaving Cert Economics - Question 4 - 2015

Question 4

State and explain two economic characteristics of enterprise as a factor of production. Explain the importance of profits in a market economy.

Worked Solution & Example Answer:State and explain two economic characteristics of enterprise as a factor of production - Leaving Cert Economics - Question 4 - 2015

Step 1

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Enterprise can earn a loss: This characteristic highlights that in the realm of business, unlike other factors of production, the enterprise is unique because it can incur losses. Such losses can arise due to fluctuations in demand or unexpected increases in production costs, illustrating the inherent risks associated with entrepreneurial activities.
Returns can vary: This facet emphasizes that the returns from enterprise can differ significantly. Entrepreneurs may experience varying levels of profits under different circumstances, as they are reliant on the market conditions and competitive factors. Unlike other factors of production that provide more predictable returns, enterprises can yield supernormal profits or even losses based on the overall business environment.

Step 2

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Encourages risk taking and entrepreneurship: Profits act as a motivator for entrepreneurs to take risks. They are essential for engaging in business activities. Without the promise of profit, individuals may be disinclined to supply goods or services.
Indicates the best use of resources/consumer demand: Profits signal to entrepreneurs whether they are meeting consumer needs effectively. A rise in profits indicates high consumer demand, guiding entrepreneurs in resource allocation towards the most favorable goods and services.
Encourages investment: The potential for profits often leads to increased investments within the market, encouraging innovation and the creation of new businesses, thereby fostering economic growth.
Provide funds for expansion: Profits enable entrepreneurs to reinvest in their businesses. This allows for diversification of production and strengthening of their market position, contributing further to the economy.
Profits reward innovation: Profits generated from successful new products or ideas incentivize entrepreneurs to continue innovating and improving efficiency, which benefits consumers and the economy as a whole.
Source of revenue for the government: Profits are taxed, thus providing a significant source of revenue for government operations, which can then be used to enhance public services.