Entrepreneurs in a Market Economy

1. Chapter 2 Entrepreneurship Mr. Ulmer Entrepreneurs in a Market Economy

2. Entrepreneurs Satisfy Needs and Wants • Needs – are things that you must have in order to survive • Wants – are those things that you think you must have in order to be satisfied • Needs and wants are unlimited

3. Needs • People have many needs where some are basic needs, while others are higher-level needs. • Abraham Maslow’s theory on the Hierarchy of Needs • Basic needs satisfied first; higher-level needs will follow

4. Maslow’s Hierarchy of Needs (to realize your potential) (respect and recognition) (friends, love, belonging) (physical safety & economic security) (food, sleep, water, shelter, air, warmth)

5. Wants • Two different types of wants: • Economic wants • Noneconomic wants • Economic wants involve a desire for material goods and services. They are the basis of an economy. • Clothing, housing, cars, electronics = material goods • Hair styling and medical care = services • Noneconomic wants is the desire for nonmaterial things such as sunshine, fresh air, exercise, happiness.

6. Economic Resources • Economic Resources– are the means through which goods and services are produced. • Goods are products you see and touch. • Services are activities that are consumed as they are produced. • Consumers satisfy needs and wants by purchasing and consuming goods and services.

7. Factors of Production • In order to create useful goods and services, an entrepreneur may use 3 types of economic resources. • These resources are called the factors of production: • Natural resources • Human resources • Capital resources

8. Natural Resources • Natural Resources – raw materials supplied by nature. • Oil, minerals, nutrients, rivers, lakes, and oceans • The supply of many natural resources is limited.

9. Human Resources • Human Resources – the people who create goods and services. • People may work in the following areas: • Agriculture • Manufacturing • Distribution • Retail businesses • Entrepreneurs are a human resource!

10. Capital Resources • Capital Resources – The assets invested in the production of goods and services. • Buildings, equipment, machinery, & supplies. • Money is also considered a capital resource.

11. Limited Resources • All economic resources have a limited supply. • Individuals, businesses, and countries compete for access to and ownership of economic resources. • Since there is a limited amount of natural resources, there will be a limit of goods and services to be produced.

12. Role of Entrepreneurs in the U.S. Economy • Supply and Demand • Supply goods and services to meet the demands of customers. • Capital Investment & Job Creation • Need money to finance their business • Contributing to the local economy and providing jobs • Change Agents • Products and services that change the way people live and conduct business.

13. Lesson 2.1 Terms Review • Needs • Wants • Economic Resources • Goods • Services • Factors of Production • Natural Resources • Human Resources • Capital Resources

14. How are Economic Decisions Made? • All economies must answer 3 basic questions… • What goods and services will be produced? • How will the goods and services be produced? • What needs and wants will be satisfied with the goods and services produced?

15. Economic Systems • The type of economic system that a country has will determine how these 3 questions are answered. • Different economies have different ways of choosing: • which goods and services are to be produced • which needs are satisfied • how many resources are used to satisfy needs

16. 4 Economic Systems • Command Economy • Market Economy • Traditional Economy • Mixed Economy

17. Command Economy • The government determines what, how, and for whom products and services are produced. • Very little choice for consumers in what is available due to government making the decisions. • Individuals may not be able to satisfy exactly what they want (example: jeans)

18. Market Economy • Individuals and businesses decide what, how, and for whom goods and services are produced. • About personal choice • Individual choice creates the market and exists in how items are produced. • Entrepreneurship thrives in a market economy

19. Traditional Economy • Goods and services are produced the way they have always been produced. • Used in countries less developed and not yet participating in the global economy. • Lack formal structure • Have limited capital resources to improve their conditions

20. Mixed Economy • Exists when elements of the command and market economies are combined. • Shifts away from command; heads toward market • Soviet Union (communism) over 70 years • Early 1990’s became 15 independent states, resulting in a move toward market economies

21. The U.S. Economic System • What type of economic system does the United States have? • Market economy • Capitalism – the private ownership of resources by individuals rather than by the government. • Free Enterprise – freedom of businesses and individuals to make production and consumption decisions.

22. 4 Basic Principles • Private Property • You can own, use, or dispose of things of value • Do anything you want and decide what to do as long as you operate within the law • Freedom of Choice • Make decisions independently and accept consequences of those decisions • Businesses and consumers have freedom of choice

23. 4 Basic Principles • Profit – the difference between the revenues taken in by a business and the costs of operating the business. • One of the main reason entrepreneurs invest resources and take risks • Competition - The rivalry among businesses to sell their goods and services. • Forces businesses to improve products, keep costs low, provide customer service, search for new ideas.

24. Economic Choices • Economic decision making – is the process of choosing which needs and wants, among several, you will satisfy using the resources you have. • Scarcity and opportunity cost influence economic decision making

25. Scarcity • Occurs when people’s needs and wants are unlimited, and the resources to produce the goods/services to meet those needs and wants are limited. • Examples: coal, oil, steel, money, food, water, and cell phones. • Scarcity forces various economic decisions to be made and to allocate resource efficiently.

26. Opportunity Cost • The value of the next-best alternative; the one you pass up. • Grandparents give you $400 after graduating high school. • Choice 1: Save the money for college* • Choice 2: Purchase the latest iPhone • Which one is the opportunity cost?

27. Lesson 2.2 Terms Review • Command Economy • Market Economy • Traditional Economy • Mixed Economy • Capitalism • Free Enterprise • Profit • Economic decision making • Scarcity • Opportunity cost

28. What Affects Price? • Two groups: Consumers and Producers • Together they determine quantities and prices of goods and services to be produced. • Consumers make decisions about what to buy • Businesses make decisions about what to produce

29. Supply and Demand • Supply – is how much of a good or service a producer is willing to produce at different prices. • Example: Car Detailing Services • Willing to do 8 hrs/week @ $40 per car • Customers willing to pay @ $20 per car • Willing to work more if @ $60 per car • If price rises of the service, suppliers are willing to provide more services.

30. Supply Curve

31. Supply and Demand • Demand – is an individual’s need or desire for a product or service at a given price. • Example: Car Detailing Services • @ $40 you figure it is worth to get done once a month. • If it fell to $20, you might be willing to have your car detailed twice a month • Demand rises as price falls.

32. Demand Curve

33. Elasticity • When a change in price creates a change in demand; elastic demand • When a change in price creates very little change in demand; inelastic demand

34. Factors of Inelasticity • Demand is usually inelastic when • There are no acceptable substitutes for a product consumers need • Change in price is small in relation to the income of the consumer • The product is a basic need for consumers, rather than just a want.

35. Equilibrium Price & Quantity • Equilibrium Price and Quantity– the point at which the supply and demand curves intersect. • This is the price at which supply equals demand. • Above eq. price = fewer people interested • Below eq. price = more people interested

36. Equilibrium Price & Quantity

37. Costs of Doing Business • To determine how much profit they are earning, entrepreneurs need to know how much it costs to produce their goods or services. • Must consider all resources that go into producing the good/service to determine a price to charge.

38. Fixed and Variable Costs • Every business has fixed and variable costs. • Fixed costs– are costs that must be paid regardless of how much of a good or service is produced. • Monthly rent • Insurance fees • Interest on loans • Salaries

39. Fixed and Variable Costs • Variable costs– are costs that go up and go down depending on the quantity of the good or service produced. • Materials • Utilities (electric, water, heat, etc.) • Labor or delivery costs • A business with many fixed costs is a higher risk than a business with mostly variable costs. Why?

40. Marginal Benefit and Cost • 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. • Keeping the store open an extra hour…

41. Market Structure and Prices • Market structure is determined by the nature and degree of competition among businesses that operate in the same industry. • How to distinguish which market structure: • Number and size of buyers and sellers • Type of goods and services traded • Barriers to entry into the market for sellers

42. Perfect Competition • Consists of a very large number of businesses producing nearly identical products and has many buyers • Buyers well-informed of price, quality, and availability. Consumers have many choices. • More consumer control of the market • Gasoline suppliers • Producers of agricultural products; corn/wheat

43. Monopolistic Competition • Has a large number of independent businesses that produce goods and services that are somewhat different • Each business has a very small portion of the market share. Products not identical but similar. • Many suppliers compete for the market; buyers shop around for best deal. • Retail stores • Restaurants

44. Oligopoly • When a market is dominated by a small number of businesses that gain the majority of total sales revenue • Businesses sell goods and services that are close substitutes, and they have influence over the price charged. • Not easy to enter the industry • Automobile industry • Airline industry

45. Monopoly • Where there is only one provider of a product or service. • A company is able to charge whatever price it wants, because consumers have no better options. • Opposite of a competitive market • Local water companies • Electric utility companies

46. Lesson 2.3 Terms Review • Supply • Demand • Equilibrium Price and Quantity • Fixed Costs • Variable Costs • Marginal Benefit • Marginal Cost