1. ENTREPRENEURS IN A MARKET ECONOMY
Entrepreneurship
4/23/2017
Chapter 3
ENTREPRENEURS IN A MARKET ECONOMY
3.1 What Is an Economy?
3.2 The Concept of Cost
3.3 Government in a Market Economy
Chapter 3

2. Lesson 3.1 WHAT IS AN ECONOMY?
Chapter 3
Lesson 3.1 WHAT IS AN ECONOMY?
GOALS
Describe market and command economies.
Define the concept of supply and demand.
Explain the effects of market structure on price.
Describe the functions of business in a market economy.

3. Chapter 3
What Is An Economy?
Different countries have different economic systems.
These different systems affect:
How an item is produced
How it is distributed
The demand for the item
An economic system even determines whether an item is available at all.

4. Market and Command Economies
Chapter 3
Market and Command Economies
All economies produce goods and services
Examples of goods are:
Television sets
Flash drives
Greeting cards
Examples of services are:
Theme parks
Restaurants
Repair Shops

5. Chapter 3
SCARCITY
In every economy, there are limited resources to produce goods and services.
However, individuals have unlimited needs and wants
This produces the basic economic problem of scarcity

6. Chapter 3
SCARCITY
Scarcity occurs when people’s needs and wants are unlimited and the resources to produce the goods and services to meet those needs and wants are limited.
Scarcity occurs in every economy.
Economies must choose a way to allocate, or distribute, the goods and services that are available to the people who need or want them.
These different allocation processes are what create different economies

7. Chapter 3
COMMAND ECONOMY
In a command economy, the government determines what, how, and for whom products and services are produced.
There is very little choice for consumers in what is available
The government sees no reason to have more than one type of the same item
People may not be able to obtain exactly what they want

8. MARKET ECONOMY Market economies are about personal choice
Chapter 3
MARKET ECONOMY
Market economies are about personal choice
In a market economy, individuals decide what, how, and for whom goods and services are produced.
Decisions about production and consumption are made by millions of people, each acting alone.
Individual choice creates the market, so there are many items available that are very similar
Products and services are always available to everyone who has the means to pay for them.

9. PRODUCTIVITY
Chapter 3
The level of output that an industry or company gets from each worker or each unit of input into its products and services is called productivity.
In order for the productivity to increase, a new product must be produced better at a lower cost than the competition.
When production increases, a company makes more profit and can increase wages paid to employees

10. Exit Question How does a market economy differ from a command economy?
Chapter 3
Exit Question
How does a market economy differ from a command economy?

11. Chapter 3
SUPPLY
Supply is how much of a good or service a producer is willing to produce at different prices.
Suppliers are willing to supply more of a product or service at a higher price.
Supply Curve
$50 40 30 20 10
Price
Quantity

12. Chapter 3
DEMAND
Demand is an individual’s need or desire for a product or service at a given price.
Individuals are willing to consume more of a product or service at a lower price.
Demand Curve
$50 40 30 20 10
Price
Quantity

13. WHEN SUPPLY AND DEMAND MEET
Chapter 3
WHEN SUPPLY AND DEMAND MEET
Supply and Demand Curves
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.
Equilibrium Price
$50 40 30 20 10
Price
Quantity

14. Equilibrium
Chapter 3
Above the equilibrium price, fewer people are interested in buying than in selling
Suppliers will not be able to sell as much of their services as they would like because they have priced their services too high.
Below the equilibrium price, the price is too low.
Consumers would be very happy to purchase lots of services at these prices, but suppliers are not willing to produce enough to meet their demand
Only at equilibrium price does the amount consumers want to buy exactly equal the amount producers want to supply

15. Chapter 3
Exit Question
How is price determined in a market economy?

16. MARKET STRUCTURE AND PRICES
Chapter 3
In a competitive market, many suppliers compete for business, and buyers shop around for the best deal they can find.
Prices are determined competitively
When a company controls all of a market, it has a monopoly.
A company that has a monopoly is able to charge more than a company that has to compete with other companies

17. Chapter 3
Exit Question
What is a monopoly?

18. BUSINESS ACTIVITIES IN A MARKET ECONOMY
Chapter 3
BUSINESS ACTIVITIES IN A MARKET ECONOMY
A knowledge of business activities will help entrepreneurs satisfy customers and make a profit.
These activities or functions of business include:
Production
Marketing
Management
Finance
Each of these functions is dependent on the others in order for the business to be effective

19. Business Activities In A Market Economy
Chapter 3
Production
This function creates or obtains products or services for sale.
Marketing
Activities that make entrepreneurs products or services available to consumers.
These activities are called the marketing mix
Product
Place
Price
Promotion
The goal is to attract as many customers as possible so that the product succeeds in the marketplace.

20. Business Activities In A Market Economy
Chapter 3
Management
Setting goals, determining how goals can be met, and how to respond to the actions of competitors is the role of management.
Also solves problems, manages the work of employees, and evaluates the activities of the business.
Finance
This function plans and manages financial records and information related to businesses’ finances.
The first responsibility of finance is to determine the amount of capital needed for the business and where the capital will be obtained.

21. Chapter 3
Exit Question
What are the functions of business?

22. 3.1 Critical Thinking Questions
Chapter 3
Have you ever wanted something, had the money to buy it, but couldn’t find the item? Why couldn’t you find it?
Think of an item you purchase often. If the price is similar at several stores, do you always buy at the same store? Why or why not?
How high would the price have to go for your favorite soft drink in order for you to not buy it anymore? Why?
Why is it important for all the business functions to work together?
Media Store A sells 100 DVDs a day at $16.95 each. Media Store B wants to bring in more revenue a day than Store A does. It also wants to sell at a lower price. How many DVDs will Store B have to sell in a day at $14.95 in order to surpass Store A’s revenue by $99.00?

23. Lesson 3.2 THE CONCEPT OF COST
Chapter 3
Lesson 3.2 THE CONCEPT OF COST
GOALS
Identify various types of costs.
Discover how different types of costs affect the prices entrepreneurs charge.

24. Chapter 3
The Concept of Cost
To 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.

25. FIXED AND VARIABLE COSTS
Chapter 3
Every business has fixed costs and variable costs.
Fixed costs are costs that must be paid regardless of how much of a good or service is produced.
Fixed costs are also called sunk costs.
Variable costs are costs that go up and down depending on the quantity of the good or service produced.
A business with many fixed costs is a higher risk than a business with mostly variable costs
fixed costs will be incurred regardless of sales

26. Chapter 3
Total Cost Per Unit
Your goal as a business owner is to know, whenever you sell a unit, how much of the revenue will be used to cover cost of goods sold and other variable costs.
Whatever is left over is your gross profit.
You will pay your fixed costs out of your gross profit.

27. Total Cost Per Unit Calculating Total Cost Per Unit
Chapter 3
Calculating Total Cost Per Unit
Sales: 300 units x $15 per unit = $4,500
Total COGS $600
Commissions ($1 per unit) $300
Shipping ($1 per unit) $300
Total Other Variable Costs $600
Total Variable Costs $1,200
Gross Profit (Sales – Total Variable Costs): $3,000

28. Total Cost Per Unit Calculating Total Cost Per Unit
Chapter 3
Calculating Total Cost Per Unit
Total Variable Costs (COGS + Other Variable Costs = $1,200
Fixed Costs: Utilities $50
Salaries $100
Advertising $50
Insurance $50
Interest $50
Rent $100
Depreciation $50
Total Fixed Costs $450
Total Costs (Fixed + Variable) $1,650
Total Costs per Unit ($1,650 ÷ 300 units) = $5.50 per unit

29. Break Even Point Break Even Analysis
Chapter 3
Break Even Point
Break Even Analysis
Determines how many units of a product must be made and sold to cover production expenses
To calculate, you must know the total fixed costs, the variable costs, and the selling price per unit.
Break Even Point in Units =
Total Fixed Costs
selling price per unit – variable costs per unit

30. Chapter 3
Exit Question
What is the difference between a fixed and a variable cost?

31. MARGINAL BENEFIT AND MARGINAL COST
Chapter 3
Entrepreneurs make 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.
Marginal cost measures the disadvantages of producing one additional unit of a good or service.

32. Chapter 3
Exit Question
How do entrepreneurs use the concepts of marginal benefit and marginal cost?

33. Chapter 3
OPPORTUNITY COST
Opportunity cost is the cost of choosing one opportunity or investment over another.
Entrepreneurs use this concept to make important business decisions

34. Chapter 3
Exit Question
Explain the concept of opportunity cost.

35. 3.2 Critical Thinking Questions
Chapter 3
Opportunity cost can affect you personally. Name an item you’ve wanted to purchase but haven’t bought because you wanted another item more. Name something you’ve wanted to do, but couldn’t do because you chose to something else instead.
Name three fixed costs in your life. How do you prepare to pay them? Name three variable costs that you have. How can variable costs be like opportunity costs?
A new home based entrepreneur, Laura Perez, subscribed to a cell phone service company that charged $0.36 a minute. Laura is very busy and makes many calls. She was shocked when her first bill showed 454 minutes and a total fee of $ Laura shopped around and found a competing service offering $0.11 a minute. How much would she have saved on her first bill if she had been using the second service?
Suppose you have a home-based business making candles. You currently sell your candles through a local craft shop. However, you are considering opening a shop to sell your candles yourself. Apply the problem solving model learned in Chapter 1 to this situation. What are all the costs involved in opening your own shop?

36. Lesson 3.3 GOVERNMENT IN A MARKET ECONOMY
Chapter 3
Lesson 3.3 GOVERNMENT IN A MARKET ECONOMY
GOALS
Explain the government’s effect on what is produced.
Recognize the different roles the government plays in a market economy.

37. GOVERNMENT’S EFFECT ON WHAT IS PRODUCED
Chapter 3
GOVERNMENT’S EFFECT ON WHAT IS PRODUCED
Although the U.S. economy is made up of private companies, the government has an effect on what is produced in three important ways
Purchases
Taxes
Subsidies

38. GOVERNMENT’S EFFECT ON WHAT IS PRODUCED
Chapter 3
Slide 38
GOVERNMENT’S EFFECT ON WHAT IS PRODUCED
Purchases
The government purchases huge amounts of goods and services.
Example:
Aerospace industry is entirely dependent on government purchases. NASA is the sole purchaser of various devices produced by aerospace companies. Private companies also supply the government with everything from pens to office-cleaning supplies.

39. Government’s Effect On What Is Produced
Taxes
The government taxes certain goods and services.
States charge sales tax on retail sales
Most charge extra taxes on certain items such as cigarettes, gasoline, and alcoholic beverages.
These taxes reduce consumption of these products, reducing producers’ revenue.

40. ROLES OF THE GOVERNMENT
Chapter 3
ROLES OF THE GOVERNMENT
In a market economy, the government may serve as a
Regulator
Inspection
Licenses
Provider of public good
Provider of social programs
Redistributors of income

41. The Government As a Regulator
Chapter 3
The Government As a Regulator
Sometime the desire to earn profits motivates business owners to engage in practices that put consumers in danger.
Inspection
To protect consumers, the government regulates certain businesses through inspections
Licenses
The government also regulates by requiring some businesses to obtain licenses.

42. Chapter 3
Exit Question
How does the government ensure that products are safe for consumers?

43. The Government As A Provider of Public Good
Chapter 3
The Government As A Provider of Public Good
Public Good
A good from which everyone receives benefits, not just the individual consuming the good.
Vaccinations
Country’s armed forces

44. The Government As A Provider of Social Programs
Chapter 3
The Government As A Provider of Social Programs
The government provides a number of social programs for people.
Social security
Welfare
Medical research
Aid for dependent children
The cost of providing these programs is spread among millions of taxpayers
Greatly reduces costs to any one person

45. The Government As A Redistributor of Income
Chapter 3
The Government As A Redistributor of Income
People with higher incomes pay more in taxes than people with lower incomes.
Affects entrepreneurs because the percentage of income that must be paid in taxes increases as earnings increase.