Transcript File - Business

Chapter 3
ENTREPRENEURS IN A
MARKET ECONOMY
LESSONS
3.1 What Is an Economy?
3.2 The Concept of Cost
3.3 Government in a Market Economy
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Chapter 3
Slide 2
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.
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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.
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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
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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
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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
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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
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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.
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PRODUCTIVITY
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
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Exit Question
How does a market economy differ from
a command economy?
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Slide 11
SUPPLY
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Supply Curve
$50
Price
 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.
40
30
20
10
10 20 30 40 50
Quantity
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DEMAND
Demand Curve
$50
Price
 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.
40
30
20
10
10 20 30 40 50
Quantity
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WHEN SUPPLY AND
DEMAND MEET
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Equilibrium Price
$50
Price
 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
40
30
20
10
10 20 30 40 50
Quantity
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Slide 14
Equilibrium
 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
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Exit Question
How is price determined in a market
economy?
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MARKET STRUCTURE AND PRICES
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
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Exit Question
What is a monopoly?
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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
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Business Activities In A Market Economy
 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.
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Business Activities In A Market Economy
 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.
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Exit Question
What are the functions of business?
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3.1 Critical Thinking Questions
Chapter 3
Slide 22
1. Have you ever wanted something, had the money to buy
it, but couldn’t find the item? Why couldn’t you find it?
2. 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?
3. How high would the price have to go for your favorite
soft drink in order for you to not buy it anymore? Why?
4. Why is it important for all the business functions to work
together?
5. 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?
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Lesson 3.2
THE CONCEPT OF COST
GOALS
Identify various types of
costs.
Discover how different types
of costs affect the prices
entrepreneurs charge.
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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.
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FIXED AND VARIABLE COSTS
Chapter 3
Slide 25
 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
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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.
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Total Cost Per Unit
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
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Total Cost Per Unit
Calculating Total Cost Per Unit
Total Variable Costs (COGS + Other Variable Costs = $1,200
Fixed Costs:
Utilities
$50
Salaries
Advertising
Insurance
Interest
Rent
Depreciation
$100
$50
$50
$50
$100
$50
Total Fixed Costs
Total Costs (Fixed + Variable)
$450
$1,650
Total Costs per Unit ($1,650 ÷ 300 units) = $5.50 per unit
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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.
Total Fixed Costs
Break Even Point in Units
=
selling price per unit – variable costs per unit
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Exit Question
What is the difference between a fixed
and a variable cost?
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MARGINAL BENEFIT AND MARGINAL COST
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.
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Exit Question
How do entrepreneurs use the concepts
of marginal benefit and marginal cost?
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OPPORTUNITY COST
Opportunity cost is the cost of
choosing one opportunity or investment
over another.
Entrepreneurs use this concept to make
important business decisions
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Exit Question
Explain the concept of opportunity cost.
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3.2 Critical Thinking Questions
1.
2.
3.
4.
Chapter 3
Slide 35
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 $163.44. 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?
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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.
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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
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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.
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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.
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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
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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.
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Exit Question
How does the government ensure that
products are safe for consumers?
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The Government As A
Provider of Public Good
Chapter 3
Slide 43
Public Good
A good from which everyone receives
benefits, not just the individual consuming
the good.
Vaccinations
Country’s armed forces
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The Government As A
Provider of Social Programs
Chapter 3
Slide 44
 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
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The Government As A
Redistributor of Income
Chapter 3
Slide 45
 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.
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