Presentation on theme: "ENTREPRENEURS IN A MARKET ECONOMY"— Presentation transcript:
1 ENTREPRENEURS IN A MARKET ECONOMY Entrepreneurship4/23/2017Chapter 3ENTREPRENEURS IN A MARKET ECONOMY3.1 What Is an Economy?3.2 The Concept of Cost3.3 Government in a Market EconomyChapter 3
2 Lesson 3.1 WHAT IS AN ECONOMY? Chapter 3Lesson 3.1 WHAT IS AN ECONOMY?GOALSDescribe 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 3What Is An Economy?Different countries have different economic systems.These different systems affect:How an item is producedHow it is distributedThe demand for the itemAn economic system even determines whether an item is available at all.
4 Market and Command Economies Chapter 3Market and Command EconomiesAll economies produce goods and servicesExamples of goods are:Television setsFlash drivesGreeting cardsExamples of services are:Theme parksRestaurantsRepair Shops
5 Chapter 3SCARCITYIn every economy, there are limited resources to produce goods and services.However, individuals have unlimited needs and wantsThis produces the basic economic problem of scarcity
6 Chapter 3SCARCITYScarcity 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 3COMMAND ECONOMYIn 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 availableThe government sees no reason to have more than one type of the same itemPeople may not be able to obtain exactly what they want
8 MARKET ECONOMY Market economies are about personal choice Chapter 3MARKET ECONOMYMarket economies are about personal choiceIn 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 similarProducts and services are always available to everyone who has the means to pay for them.
9 PRODUCTIVITYChapter 3The 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 3Exit QuestionHow does a market economy differ from a command economy?
11 Chapter 3SUPPLYSupply 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$5040302010PriceQuantity
12 Chapter 3DEMANDDemand 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$5040302010PriceQuantity
13 WHEN SUPPLY AND DEMAND MEET Chapter 3WHEN SUPPLY AND DEMAND MEETSupply and Demand CurvesThe 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$5040302010PriceQuantity
14 EquilibriumChapter 3Above the equilibrium price, fewer people are interested in buying than in sellingSuppliers 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 demandOnly at equilibrium price does the amount consumers want to buy exactly equal the amount producers want to supply
15 Chapter 3Exit QuestionHow is price determined in a market economy?
16 MARKET STRUCTURE AND PRICES Chapter 3In a competitive market, many suppliers compete for business, and buyers shop around for the best deal they can find.Prices are determined competitivelyWhen 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
18 BUSINESS ACTIVITIES IN A MARKET ECONOMY Chapter 3BUSINESS ACTIVITIES IN A MARKET ECONOMYA knowledge of business activities will help entrepreneurs satisfy customers and make a profit.These activities or functions of business include:ProductionMarketingManagementFinanceEach of these functions is dependent on the others in order for the business to be effective
19 Business Activities In A Market Economy Chapter 3ProductionThis function creates or obtains products or services for sale.MarketingActivities that make entrepreneurs products or services available to consumers.These activities are called the marketing mixProductPlacePricePromotionThe 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 3ManagementSetting 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.FinanceThis 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 3Exit QuestionWhat are the functions of business?
22 3.1 Critical Thinking Questions Chapter 3Have 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 3Lesson 3.2 THE CONCEPT OF COSTGOALSIdentify various types of costs.Discover how different types of costs affect the prices entrepreneurs charge.
24 Chapter 3The 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.
25 FIXED AND VARIABLE COSTS Chapter 3Every 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 costsfixed costs will be incurred regardless of sales
26 Chapter 3Total Cost Per UnitYour 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 3Calculating Total Cost Per UnitSales: 300 units x $15 per unit = $4,500Total COGS $600Commissions ($1 per unit) $300Shipping ($1 per unit) $300Total Other Variable Costs $600Total Variable Costs $1,200Gross Profit (Sales – Total Variable Costs): $3,000
28 Total Cost Per Unit Calculating Total Cost Per Unit Chapter 3Calculating Total Cost Per UnitTotal Variable Costs (COGS + Other Variable Costs = $1,200Fixed Costs: Utilities $50Salaries $100Advertising $50Insurance $50Interest $50Rent $100Depreciation $50Total Fixed Costs $450Total Costs (Fixed + Variable) $1,650Total Costs per Unit ($1,650 ÷ 300 units) = $5.50 per unit
29 Break Even Point Break Even Analysis Chapter 3Break Even PointBreak Even AnalysisDetermines how many units of a product must be made and sold to cover production expensesTo calculate, you must know the total fixed costs, the variable costs, and the selling price per unit.Break Even Point in Units =Total Fixed Costsselling price per unit – variable costs per unit
30 Chapter 3Exit QuestionWhat is the difference between a fixed and a variable cost?
31 MARGINAL BENEFIT AND MARGINAL COST Chapter 3Entrepreneurs 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 3Exit QuestionHow do entrepreneurs use the concepts of marginal benefit and marginal cost?
33 Chapter 3OPPORTUNITY COSTOpportunity cost is the cost of choosing one opportunity or investment over another.Entrepreneurs use this concept to make important business decisions
34 Chapter 3Exit QuestionExplain the concept of opportunity cost.
35 3.2 Critical Thinking Questions Chapter 3Opportunity 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 3Lesson 3.3 GOVERNMENT IN A MARKET ECONOMYGOALSExplain 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 3GOVERNMENT’S EFFECT ON WHAT IS PRODUCEDAlthough the U.S. economy is made up of private companies, the government has an effect on what is produced in three important waysPurchasesTaxesSubsidies
38 GOVERNMENT’S EFFECT ON WHAT IS PRODUCED Chapter 3Slide 38GOVERNMENT’S EFFECT ON WHAT IS PRODUCEDPurchasesThe 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 TaxesThe government taxes certain goods and services.States charge sales tax on retail salesMost 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 3ROLES OF THE GOVERNMENTIn a market economy, the government may serve as aRegulatorInspectionLicensesProvider of public goodProvider of social programsRedistributors of income
41 The Government As a Regulator Chapter 3The Government As a RegulatorSometime the desire to earn profits motivates business owners to engage in practices that put consumers in danger.InspectionTo protect consumers, the government regulates certain businesses through inspectionsLicensesThe government also regulates by requiring some businesses to obtain licenses.
42 Chapter 3Exit QuestionHow does the government ensure that products are safe for consumers?
43 The Government As A Provider of Public Good Chapter 3The Government As A Provider of Public GoodPublic GoodA good from which everyone receives benefits, not just the individual consuming the good.VaccinationsCountry’s armed forces
44 The Government As A Provider of Social Programs Chapter 3The Government As A Provider of Social ProgramsThe government provides a number of social programs for people.Social securityWelfareMedical researchAid for dependent childrenThe cost of providing these programs is spread among millions of taxpayersGreatly reduces costs to any one person
45 The Government As A Redistributor of Income Chapter 3The Government As A Redistributor of IncomePeople 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.