ENTREPRENEURS IN A

MARKET ECONOMYChapter 2

EntrepreneurshipMr. Ulmer

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

Needs People have many needs where some

are basic needs, while others are higher-level needs.

Abraham Maslow’s theory on the Hierarchy of NeedsBasic needs satisfied first; higher-level

needs will follow

Maslow’s Hierarchy of Needs

(food, sleep, water, shelter, air, warmth)

(physical safety & economic security)

(friends, love, belonging)

(respect and recognition)

(to realize your potential)

Wants Two different types of wants:

1) Economic wants2) 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.

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.

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 resourcesHuman resourcesCapital resources

Natural Resources Natural Resources – raw materials

supplied by nature.

Oil, minerals, nutrients, rivers, lakes, and oceans

The supply of many natural resources is limited.

Human Resources Human Resources – the people who create

goods and services.

People may work in the following areas:AgricultureManufacturingDistributionRetail businesses

Entrepreneurs are a human resource!

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.

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.

Role of Entrepreneurs in the U.S. Economy Supply and Demand

Supply goods and services to meet the demands of customers.

Capital Investment & Job CreationNeed money to finance their businessContributing to the local economy and

providing jobs Change Agents

Products and services that change the way people live and conduct business.

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

How are Economic Decisions Made? All economies must answer 3 basic

questions…

1. What goods and services will be produced?

2. How will the goods and services be produced?

3. What needs and wants will be satisfied with the goods and services produced?

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 producedwhich needs are satisfiedhow many resources are used to satisfy needs

4 Economic Systems

Command Economy

Market Economy

Traditional Economy

Mixed Economy

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)

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

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

Mixed Economy Exists when elements of the command and

market economies are combined.

Shifts away from command; heads toward marketSoviet Union (communism) over 70 years

Early 1990’s became 15 independent states, resulting in a move toward market economies

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.

4 Basic Principles Private Property

You can own, use, or dispose of things of valueDo anything you want and decide what to do as

long as you operate within the law

Freedom of ChoiceMake decisions independently and accept

consequences of those decisionsBusinesses and consumers have freedom of

choice

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.

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

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.

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?

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

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

buyBusinesses make decisions about what to

produce

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.

Supply Curve

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.

Demand Curve

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

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.

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 interestedBelow eq. price = more people interested

Equilibrium Price & Quantity

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.

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

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?

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…

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 sellersType of goods and services tradedBarriers to entry into the market for sellers

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

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

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

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

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