Identifying the optimum combination of factors of production
The entrepreneur, after having decided to start a new venture, takes up the task of hiring factors of production. Further, he decides in what combinations he should combine these factors so that maximum output is produced at minimum cost.
According to Schumpeter, basically an entrepreneur is an innovator of new markets and new techniques of production. A new market increases the sales volume whereas a new cost cutting production technique will make the product cheaper. This will in turn increase the volume of sales and the profit.
The factors used in production have to be rewarded on the basis of their productivity. Measuring the productivity of the factors and the payment of reward is the crucial function of an entrepreneur.
According to Hawley, a business is nothing but a bundle of risks. Products are produced for future demand. The future is uncertain. The investments are made in the present. This is the serious risk in production. One who is ready to accept the risk becomes a successful entrepreneur. A prudent entrepreneur forecasts the future risks scientifically and take appropriate decision in the present to overcome such risks. According to Knight one of the important functions of entrepreneur is uncertainty-bearing.
The functional relationship between inputs and outputs is known as production function. Inputs refer to the factor services which are used in production i.e. land, labour, capital and enterprise. Output refers to the volume of goods produced. Given technical conditions, the production function shows how a certain amount of inputs will result in the production of a certain amount of output of a commodity. The production function is given as
Q = f (x1, x2, x3 �.xn) in which
Q is the quantity produced during a given period of time and x1, x2, x3 �.xn are the quantities of different factors used in production. The production function explains how the output can be maximised with the help of given inputs.
To understand the different stages of the production functions, it is essential to understand the relationship between (i) Marginal Product and Total Product and (ii) Marginal Product and Average Product