LESSONSLESSONS

Chapter 3Chapter 3ENTREPRENEURS IN A MARKET ECONOMY

3.13.1 What is an Economy

3.23.2 The Concept of Cost

3.33.3 Government in a Market Economy

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Slide 2

Lesson 3.1What is an Economy?

Describe market and command economies.

Define the concept of supply and demand.

Describe the functions of business in a market economy.

GOALSGOALS

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What is Economy?Different countries have different economic

systems.

These different systems affect how an item is produced, how it is distributed, and the demand for the item.

An economic system even determines whether an item is available at all.

You must always consider market structure, including supply, demand, and price, when starting a business in order to succeed.

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Slide 4Market and Command Economies

All economies produce goods and services. Goods are products, such as television sets,

compact discs, or greeting cards. Service businesses include them parks,

restaurants, and repair shops.

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SCARCTIY In every economy, there are limited

resources to produce goods and services. However, individuals have unlimited needs and wants. Scarcity is the basic economic problem that

individuals have unlimited needs and wants but there are limited resources.

The differences between economic systems is the way the economy chooses to allocate the goods and services available to the people who need or want them.

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Slide 6COMMAND ECONOMY

Command Economy The government determines what, how and

for whom products and services are produced. (There is little choice in goods and services)

Market EconomyIndividuals decide what, how, and for

whom goods and services are produced.There are many items available and that goods

remain on the market only as long as individuals buy them.

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ProductivityThe level of output that an industry or

company gets from each worker or each unit of input into its products and services.Consumers benefit from competition

between companies because they will get better products at cheaper prices.

COMMAND ECONOMY

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Slide 8

SUPPLY AND DEMANDIf a market is based on personal choice,

why does there always seem to be just enough of everything?In a market economy, individual

consumers make decisions about what to buy, and businesses make decisions about what to produce.Consumers are motivated to buy goods and

services that they need or want.Business owners are driven by the desire to

earn profits.

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Slide 9SUPPLY AND DEMANDTo understand how this works, you

need to understand two important forces:Supply – is how much of a good or service

a producer is willing to produce at different prices.

Supply Curve – suppliers are willing to supply more of a product or service at a higher price.

Demand – is an individual’s need or desire for a product or service at a given price.

Demand Curve – individuals are willing to consume more of a product or service at a lower price.

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Slide 10When Supply and Demand Meet How do the forces of supply and demand work

together to determine price in a market economy? The point at which the supply and demand curves

meet is what is known as the equilibrium price and quantity. This is the price at which supply equals demand.Supply and demand curves – the point at which the supply

and demand curves intersect indicates the equilibrium price and quantity.

Consumers are willing to buy more of a good or service at lower prices.

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Slide 11Market Structure and Prices In a competitive market, many suppliers

compete for business and buyers shop around for the best deal they can find. In this kind of market, prices are said to be

determined competitively. Not all markets are fully competitive.

In some sectors of the economy, there is little or no competition.AMTRAK is the only train line serving certain routes in

the United States.When a company controls all of the market, it has a

monopoly. The company is able to charge more than a company that has to compete with other companies.

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Slide 12Business Activities in a market Economy In a market economy, a business is free to produce and

offer to consumers any legal product or service. A knowledge of business activities will help entrepreneurs

satisfy customers and make a profit. These activities or functions of business include the following:

Production – function creates or obtains products or services for sale.

Marketing – to attract as many customers as possible so that the product succeeds in the market place. Marketing Mix include: Product, Distribution, Price and Promotion.

Management – great deal of time to be spent developing, implementing, and evaluating plans and activities. Setting goals, determining how goals can be met, and how to respond to the actions of competitors.

Finance – plans and manages financial records and information related to businesses’ finances.

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Slide 13

Lesson 3.2The Concept of Cost

Identify various types of costs.

Discover how different types of costs affect the prices entrepreneurs charge.

GOALSGOALS

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The Concept of CostTo determine how much profit they

are earning, entrepreneurs need to know how much it costs to produce their goods or services. To do so they must consider all the resources that

go into producing the good or service to determine a price to charge.

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Slide 15

Fixed and Variable Costs Fixed Costs

Costs that must be paid regardless of how much of a good or service is produced. Fixed costs are also called sunk costs. (a business with many fixed costs is a higher risk because the costs must be paid even when there are no sales)

Examples Monthly Rent Insurance Fees Interest on the loans

Variable Costs Costs that go up and down depending on the quantity of the good

or service produced. Examples:

Supplies Utilities Employees (if not salaried)

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Slide 16Marginal Benefit and Marginal CostEntrepreneurs make business decisions

based on the concepts of marginal benefit and marginal cost. Marginal benefit

Measures the advantages of producing one additional unit of a good or service. (keeping the store open an extra two hours is the additional unit).

Marginal costMeasures the disadvantages of producing one

additional unit of a good or service. ($100 sold in those two hours is the marginal benefit).

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Slide 17

Opportunity Cost Another type of cost you should think about is

opportunity cost. Opportunity cost

Is the cost of choosing one opportunity or investment over another.

Example: You want to start your own business. But you have

been offered a job that pays $28,000 a year. In addition to the salary, you will receive two weeks’ paid vacation, and your company will pay your medical insurance. If you add in these benefits, which you estimate are worth $3,000 a year, the total of $31,000 represents the opportunity cost of starting your own business. It is the amount you could have earned by choosing a different path.

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Lesson 3.3Government In A Market Economy

Explain the government’s effect on what is produced.

Recognize the different roles the government plays in a market economy.

GOALSGOALS

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Slide 19Government’s Effect on What is ProducedAlthough producers and consumers

make decisions about production and consumption in a market economy, the government is also often involved.

The government affects production in three ways:Purchases TaxesSubsidies

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Slide 20Government’s Effect on What is ProducedPURCHASES

The government purchases huge amounts as a consumer and is the dominant consumer in some industries, such as aerospace, and therefore affects supply and demand.

TAXES The government taxes some goods and services, which

sometimes raises prices enough to reduce demand and producers’ revenues.

SUBSIDIES The government subsidies support supply and demand in

some industries and may benefit businesses in those areas.

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Slide 21The Government as a RegulatorIn a market economy the government

plays different roles. The government may serve as a regulator, as a provider of public good, as a provider of social programs, and as a re-distributor of income.

Inspection – To protect consumers, the government regulates certain businesses.

Licenses – The government also regulates by requiring some businesses to obtain licenses. (examples: barbers, beauticians)

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Slide 22The Government as a Provider of Public GoodPublic Good

Is a good from which everyone receives benefits, not just the individual consuming the good.Vaccinations against communicable

diseasesThe country’s armed forces

Many entrepreneurs benefit from the fact that the government provides public goods.

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Slide 23The Government as a provider of Social ProgramsThe government provides a number of

social programs for people. Social SecurityWelfareMedical ResearchAid for dependent children

The government further affects the economy by redistributing income.

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Slide 24

AssignmentPage 73 – 75

Vocabulary Builder#1-12 – Write the word and the definition

Review your knowledge#13-22 – Answer in complete sentences. If

these are not answered in complete sentences you will receive no credit.