Entrepreneurs in a Market Economy

1. 2 Entrepreneurs in a Market Economy 2.1 Entrepreneurs Satisfy Needs & Wants 2.2 How Economic Decisions are Made 2.3 What Affects Price?

2. Lesson 2.1Entrepreneurs Satisfy Needs and Wants Goals • Distinguish between needs and wants. • Describe the types of economic resources. • Describe the role of entrepreneurs in the U.S. economy. Chapter 2

3. Is It a Need or a Want? • needs • things that are necessary for survival • food, basic clothing, shelter • wants • things you think you must have in order to be satisfied • add comfort and pleasure to your life • The role of business is to produce and distribute goods and services that people need and want. Chapter 2

4. Needs • Maslow’s hierarchy of needs states that: • People’s basic psychological needs must be satisfied before they can focus on higher level needs. • needs • vary from individual to individual • vary by situation Chapter 2

5. 2.1 Chapter 2

6. Wants • economic wants • a desire for material goods and services • are the basis of an economy • clothing, housing, cars, hairstyling, medical services • noneconomic wants • a desire for nonmaterial things • sunshine, fresh air, exercise, friendship, happiness Chapter 2

7. Needs and Wants are Unlimited • Needs and wants are infinite. • Satisfying one need or want often leads to a new need or want. • You are only limited by what your mind can think of and what businesses make available for sale. Chapter 2

8. 2.1 What is the difference between needs and wants? What are your needs? What are your wants? Chapter 2

9. Economic Resources • economic resources • the means through which goods and services are produced • goods • products you can see and touch; purchased • services • activities that are consumed as they are produced; must be provided for consumers Chapter 2

10. Factors of Production • Natural Resources • raw materials supplied by nature • oil, minerals, rivers, lakes, oceans • Human Resources • the people who create goods and services • Capital Resources • assets invested in production of goods/services • buildings, equipment, supplies, money needed to build factory, buy equipment, pay employees Chapter 2

11. Limited Resources • Economic resources are limited. • Individuals, businesses, and countries compete for resources. • High demand for a limited resource drives up the price for the resource. Chapter 2

12. List the three types of economic resources and give an example of each. Chapter 2

13. Role of Entrepreneurs in the U.S. Economy • Entrepreneurs are the backbone of the U.S. economy. • The development of small businesses helps to ensure a strong economic future. Chapter 2

14. Supply and Demand • Entrepreneurs look for unmet needs to satisfy consumer needs and wants. Capital Investment and Job Creation • Entrepreneurs contribute to their local communities through: • investments • job creation Chapter 2

15. Change Agents • The creation of new products can: • change the way people live • alter the way people conduct business • As entrepreneurs create more goods and services, the needs and wants of consumers increase. Chapter 2

16. What are some things entrepreneurs contribute to the U.S. economy? Chapter 2

17. Lesson 2.2How Economic Decisions are Made Goals • Compare/Contrast different types of economic systems. • Describe the characteristics of the U.S. economy. • Explain how scarcity affects economic decisions. • Explain how business functions are used to satisfy consumers. Chapter 2

18. Economic Systems • Each economy must answer three basic questions regarding goods and services: • Which ones will be produced? • How will they be produced? • What needs and wants will they satisfy? Chapter 2

19. 2.2 4 Types of Economic Systems • Command Economy • Production decisions are made by the government. • No reason to have more than one type of product. • Few choices for consumers exist in the marketplace. • Market Economy • Production decisions made by individuals/businesses. • Many choices exist in the marketplace. • Entrepreneurship thrives in a market economy. • U.S. Economy = Market Economy Chapter 2

20. 4 Types of Economic Systems • Traditional Economy • Production occurs the way it has always occurred. • Most production is consumed. Leftovers sold/traded. • Less developed; not participating in the global economy. • Lack the formal structure; Limited capital resources. • Mixed Economy • Contain elements of command and market economies. • Occur when country is shifting from either a command or traditional economy toward a market economy. Chapter 2

21. How does the type of economy affect the way the basic economic questions are answered? Chapter 2

22. The U.S. Economic System • U.S. System described as market economy. • Capitalism: the private ownership of resources by individuals rather than by the government • individual businesses and consumers make the majority of production decisions • Also called - Free Enterprise - due to the freedom of businesses and individuals to make production and consumption decisions. Chapter 2

23. 2.2 U.S. Economic System4 Economic Principles • Private Property • You may own whatever you want as long as you operate within the law. • Consumers have control of private property. • Freedom of Choice • Consumers decide what to purchase and businesses decide what to produce. • Government intervention occurs only when individual decisions will bring harm to others. Chapter 2

24. U.S. Economic System4 Economic Principles • Profit • the difference between the revenues taken in by a business and the costs of operating the business • the opportunity to earn a profit is at the heart of the free-enterprise system. • Competition • rivalry among businesses to sell their goods/services. • competition encouraged to keep businesses working to improve their products/services. Chapter 2

25. Describe the four basic principles of the U.S. economic system. Chapter 2

26. Economic Choices • economic decision making • the process of choosing which needs and wants, among several, you will satisfy using the resources you have Chapter 2

27. 2 Economic Factors • Scarcity • Occurs when there are limited resources available to meet the unlimited needs and wants of consumers • Forces you to make decisions about tradeoffs. • Opportunity Cost • the value of the next-best alternative (the one you pass up) • Decision making which forces you to explore all of your alternatives and put value to those alternatives. Chapter 2

28. What factors affect economic choices? Chapter 2

29. Functions of Business • Market Economy – entrepreneurs are free to produce and offer to consumers any legal product/service. • Four Functions of Business • Production, Marketing, Management, Finance • Each function is dependent on the others in order for the business to be effective. Chapter 2

30. 4 Functions of Business • Production • A profit is earned by selling products or services to consumers. • The production function creates or obtains products or services for sale. Chapter 2

31. 4 Functions of Business • Marketing • Businesses in market economies need to complete marketing activities in order to make products available. • These activities are known as the Marketing Mix: • 4 P’s of Marketing: product, distribution (place), price, promotion • The goal of marketing is to attract as many consumers as possible so the product succeeds. Chapter 2

32. 4 Functions of Business • Management • In a Market Economy - businesses spend a lot of time developing, implementing, and evaluating plans and activities. • The duties of management include: • setting goals • deciding on responses to competition • solving problems • managing employees • evaluating business activities Chapter 2

33. 4 Functions of Business • Finance • Financial duties include: • determining amount of capital needed • determining how to obtain capital resources • planning and managing all of the financial aspects of the business Chapter 2

34. What are the functions of business? Chapter 2

35. Lesson 2.3What Affects Price? Goals • Explain how supply and demand interact to determine price. • Describe how costs of doing business affect the price of a good or service. • Explain the effect of different market structures on price. Chapter 2

36. 2.3 How Much Is Enough? • supply • how much of a good/service a producer is willing to produce at different prices • Suppliers are willing to supply more of a product/service at a higher price. • demand • an individual’s need or desire for a product or service at a given price • individuals are willing to consume more of a product/service at a lower price. Chapter 2

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40. When Supply & Demand Meet • equilibrium price and quantity: • the price at which supply equals demand • Above equilibrium price: • fewer people are interested in buying goods and services. • Suppliers not able to sell as much, priced too high. • Below equilibrium price: • the price is too low for producer. • Consumers willing to buy; Suppliers not willing to produce. Chapter 2

41. Demand Elasticity • when demand of a product is affected by its price • elastic demand • when change is price creates change in demand • inelastic demand • when a change in price creates very little change in demand Chapter 2

42. Inelastic Demand • Demand is usually inelastic when: • There are no acceptable substitutions for a product that consumers need. • The change in price is small in relation to the income of consumers, so consumers will continue to buy the product if they want it. • The product is a basic need for consumers, rather than just a want. Chapter 2

43. What effect do supply and demand have on the price of a good or service? Chapter 2

44. Costs of Doing Business • Entrepreneurs must know how much it costs to produce their goods/services. • They must consider all the resources that go into producing the good/service to determine what price they should charge. • Fixed and Variable Costs • Marginal Benefit and Marginal Cost Chapter 2

45. Costs of Doing Business Every business has: • fixed costs (a.k.a. sunk costs) • costs that must be paid regardless of how much of a good or service is produced • Rent, insurance, loan interest • variable costs • costs that fluctuate depending on the quantity of the good or service produced • Supplies used to produce goods/services Chapter 2

46. Costs of Doing Business • Fixed costs will be incurred regardless of the level of sales. • Variable costs will adjust with the level of sales the business has each month. • Businesses with many fixed costs have a higher risk than businesses with mostly variable costs. Chapter 2

47. Costs of Doing Business • Entrepreneur make decisions based on: • marginal benefit • measures the advantages of producing one additional unit of a good or service • marginal cost • measures the disadvantages of producing one additional unit of a good or service • Marginal benefit must outweigh marginal cost. • Bakery Example – Book Page 52 Chapter 2

48. How do the costs of doing business affect prices? Chapter 2

49. Market Structure and Prices • Market structure is determined by competition among businesses in the same industry. • Criteria to distinguish different market structures: • number/size of sellers and buyers in the market • type of goods/services being traded • barriers to entry into the market for sellers. • Four Major Market Structure: • Perfect Competition • Monopolistic Competition • Oligopoly • Monopoly Chapter 2

50. Market Structure and Prices • Perfect Competition • Characteristics of perfect competition include: • a very large number of businesses • nearly identical products • many well-informed buyers • difficult to raise prices • consumers have more control over the market • businesses can leave or enter the market easily Chapter 2