Question

Why is the income of an entrepreneur residual in nature? Discuss any three functions of an entrepreneur.

Answer 1

An entrepreneur earns a profit with his innovative ideas, efficiencies and willingness to take risks. However, the income of the entrepreneur is residual in nature. The entrepreneur gains profit or some income only after making payments on these factors.

Three functions of an entrepreneur are:
i. Planning of business activity: Before initiating any business activity, the entrepreneur prepares a full-fledged strategy about the types of products to be produced, the sources from which the raw materials are to be collected, type of technology to be introduced etc.
ii. Organising business activity: Proper coordination among the available supply of labour, land and capital is necessary for the smooth functioning of any production or business activity. An entrepreneur takes the responsibility of employing these factors in an appropriate proportion and maintaining proper co-ordination among them.
iii. Taking risks and uncertainty: The most important function of an entrepreneur is to bear the risk associated with the business activity. There are some kinds of risks which cannot be avoided through insurance. These are called non-insurable risks. Hence, the entrepreneur has to face these risks and an uncertain future.