Get the answer of: Is Organisation a Separate Factor of Production?
The factor called enterprise is provided by the entrepreneur. The entrepreneur performs two main functions: organising the other factors into a productive relationship and bearing risks involved in so doing. The entrepreneur has to make a number of decisions – what to produce how much to produce, where to produce, how to produce, i.e., what combination of labour and capital, etc.
Having made these decisions, he then hopes the product will sell in sufficient quantities to make the venture profitable. This is where the risk element comes in. The production must take place before it is known whether he will recover this money from the sale of the product. If there is little or no demand for the product, he will find that he has made a loss.
The risk of business arises because changes are continually taking place in market conditions. When the entrepreneur decides to undertake production of a particular commodity, he would do so at time when there is ample demand for that commodity.
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But, by the time his product had been produced and is ready for sale, an alternative product may have come on to the market and demand may have switched to this alternative, so that the original product is no longer bought in large quantities.
Again, it may be that after the entrepreneur has started production using existing technology, his rivals came up with an improved machine which cuts their costs greatly and makes their product much more competitive.
Thus, changes in demand and/or supply conditions are continually taking place in the economy and so the element of risk is ever present. Because of this, the entrepreneur has an important Part to play in the process of production.
Some economists feel that the above entrepreneurial functions are no different from those of a particular and specialised form of labour They point out that risk-bearing is not something peculiar to the entrepreneur Many types of labour have to take risk.
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For example, the miner or the airhostess runs the risk of personal injury and life and most forms of labour run the risk of unemployment. But, enterprise is a separate factor because the first three factors are substitutable to some extent, but the fourth factor is a specific factor and cannot be substituted by any other factor.
The entrepreneur:
(1) Collects and organises the hired inputs into a production process;
(2) Innovates in terms of output and the production process;
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(3) Carries out the day-to-day operation of the firm; and,
(4) As the residual claimant (i.e., earner of surplus income in the forms of profits after paying other factors) bears the risk associated with the firm.
Without the entrepreneur to collect and organise the hired inputs, production would be impossible. The workings of the corporate form of organisation have the effect of spreading the functions of the entrepreneur to several inputs making the identification of entrepreneurial ability as a specific factor of production almost impossible.