Entrepreneurs in a Market Economy

Chapter #3

Objectives◦ 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

What is an Economy

Is the organized way a national provides for the needs and wants of its people.

A nation chooses how to use its resources to produce and distribute goods and services.

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

Economic System

Can each of us have anything and everything we want?

There’s not enough of the stuff we want to go around!

Scarcity Stuff we like to have is limited.

Economics, then, could be defined simply as…

Unlimited wants

Limited resources

versus

The difference between wants and needs and available resource. Scarcity forces nations to make choices.

Different economies have different ways of choosing which needs are satisfied and how many resources are used to satisfy those needs.

Scarcity

Nations answer these questions◦ 1.Which goods and services should be produced?◦ 2. How should the goods and services be

produce?◦ 3. For whom should the goods and services be

produced?

Types of Economies◦ Traditional ◦ Market◦ Command◦ Mixed

How Does an Economy Work?

CommandA system in which a country’s government makes economic decisions and decides what, when, and how much will be produced and distributed.

What? – One person (dictator) or group (government) decides what they produce.

How?- Since the government owns all mean of production is runs all business. It controls all employees opportunities

Whom? – Government decided who will receive what items.

MarketIn a pure Market Economy these is no government involvement in economic decisions. Individuals and companies own the means of production and business compete for consumers.

What? –Consumers decide what should be produced through the purchases that they make.

How? – Businesses in a market economy decide how to produce goods and services.

Whom? – In a market economy the people who have more money are able to buy more goods so they are motivated to work and invest.

Increase production Decrease unemployment Maintain stable prices

When is a Economy Successful?

Productivity – is output per worker hour that is measured over a defined period of time.◦ Ways to increase

New equipment Training of workers Benefits to workers Specialization or workers

When production increases, a company makes more profit and can increase wages paid to employees.

Measurement to use

Supply – is how much of a good or service a producer is willing to product at different prices.

Supply and Demand

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

Supply and Demand

Equilibrium price and quantity – This is the price at which supply equals demand.

◦ Shortages◦ Surpluses

Supply and Demand

The Blake Street Boppers have a supply of autographed baseball hats. They have decided to sell 50 hats at $30, 40 at $25, 30 at $22.50 and 15 at $17. Baseball fans are willing to have the money to buy 15 hats at $30, 20 at $25, 30 at $22.50 and 50 at $12. Build a supply and demand graph to determine the market clearing price and how many hats will be sold.

Supply and Demand

Monopoly – When a company controls all of a market.

Market Structure and Prices

Functions of business◦ Production – create or obtains products or services for

sale.

◦ Marketing – activities in order to make their products and services available to consumers.

◦ Management – Setting goals, determining how goals can be met, and how to respond to the actions of competitors is the role of management.

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

Business Activities in a Market Economy -

Fixed Costs-Costs that must be paid regardless of how much is produced.

Variable Costs – costs that go up or down depending on the quantity or goods or services produced.

Fixed and Variable Costs

Marginal Benefits – measures the advantages of producing on additional unit of a good or service.

Marginal Costs – measures the disadvantage of producing one additional unit of a good or service.

Marginal Benefit & Marginal Costs

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

Opportunity Costs

Government affects what is produced by:◦ Purchases – Huge consumer of goods and

services.◦ Taxes – sales tax and extra taxes on certain items.◦ Subsidies- government helps certain group

(agricultural) Enterprise Zones – Inner city neighborhoods.

Government in a Market Economy

Government as a Regulator Government as a provider of Public Good Government as a provider of Social

Programs Government as a redistributor of income

Roles of the Government

Inspection – Inspect meat and poultry (USDA), Inspects factories and business (OSHA)

Licenses – Requiring license for some business (barbers, teachers, doctors)

Government as a Regulator

Examples ◦ Vaccinations◦ Armed Forces◦ Schools

Government as a Provider of Public Good.

Social Security Welfare Medical Research

Government as a Provider of Social Programs

People with high income pay more taxes-◦ Low income get tax breaks and benefit from social

programsEntrepreneurs pay more taxes as they earn more.

Government as a Redistributor of Income