Chapter 2

Importance of Entrepreneurship in the Economy

What is an Economic System?

Economics – a social science concerned with how people satisfy their demand when the supply of the following is limited: Goods (things you can buy) Services (things people do for a fee)

What is an Economic System?

Economics is about the flow of goods and services between people.

Even though it is about mathematics, it is a social science because people play a central role in it.

What is an Economic System

People play a central role by purchasing their needs (essential items) and wants (items not necessary to survive).

When there are not enough goods to meet those needs there is an economic situation called scarcity

What is an Economic System?

An Economic System is a method used by a society to allocate goods and services among its people and to cope with scarcity.

Factors that affect what kinds of economic systems: Politics Moral Issues Cultural Differences

What is an Economic System?

Every economic system answers four basic questions which are the fundamentals of economics: What goods and services are produced? What quantity of goods and services are

produced? How are goods and services produced? For whom are goods and services produced?

Types of Economic Systems

Command Economy The government controls the production, allocation,

and prices of goods and services. Market Economy

Suppliers and consumers control the production, allocation, and prices of goods and services.

United States, Canada, Australia, Hong Kong.

Mixed Economy Blend of a Command Economy and Market Economy. All modern countries are mixed, but lean heavily

towards one or the other.

Types of Economic Systems

Command Economy Control what suppliers produce How much is produced How it is produced How goods are distributed throughout the

country and the prices people pay for them.

Types of Economic Systems

• Socialism and Communism are strongly associated.

• Although no country has a strict command economy, there are several that are close: China Russia Syria Iran Korea Vietnam

Types of Economic Systems

Suppliers produce whatever goods and services they wish and set prices on what consumers are willing to pay.

Prices are responsive to consumer demand. Characterized by Voluntary Exchange (a

transaction where both parties feel that they benefit)

Types of Economic Systems

Key Terms: Free Enterprise System – another name for

a market economy.

Capital – another name for cash and goods a business owns.

Supply & Demand

Supply – the quantity of goods and services a business is willing to sell at a specific price.

Demand – is the quantity of goods and services consumers are willing to buy

Timing is key and important when figuring out the economy.

Supply Curves

A supply curve on a graph shows the quantity of a product or service a supplier is willing to sell across a range of prices.

Quantity is on X Axis, while Price is on Y Axis

Demand Curves

A demand curve on a graph shows the quantity or service consumers are willing to buy.

Axis on the demand graph are same as supply.

Supply & Demand Curves

When you place both curves on the same graph you can identify the equilibrium price, which is the desired spot of supply and demand in an economy.

Competition in a Market Economy

Competition Between Suppliers:

If a supplier lowers prices, consumers typically buy from that supplier.

This initiates an incentive for buyers.

The other benefit of competition is that it forces companies to be innovative and create variety.

Competition in a Market Economy

Competition Among Consumers:

When consumers compete for products, it has a different effect. It pushes prices upward.

Examples would be flowers at Valentine’s Day and toys at Christmas.

What Drives Entrepreneurs?

Profit Motive: Is an incentive that encourages entrepreneurs to

take business risks in the hopes of making a profit.

Different Type of Profit: Non-Profit Organization:

Operate solely to serve the good of society. Money comes into the non-profit through donation,

government grants, or the sale of goods. Money is then put back into the cause which started the

organization. (Red Cross)

The Global Economy

The global economy is the flow of goods and services around the whole world .

No nation’s economic flow is confined within its own borders.

Even though scarcity effects what is produced and how much, globally nations are forced to specialize in goods and services.

Exporting & Importing

Exporting Is the business activity in which goods and

services are sent from a county and sold to foreign consumers.

Importing The business activity in which goods and

services are brought into a country from foreign suppliers.

Importing & Exporting

Goods are physical objects that can be shipped by plane, train, or ship.

Services are different, they must physically move people across borders to perform their specialty.

Technology & The Global Economy

Advancements in telecommunications – phone, fax, email, and Internet have made the global trading market much easier than in the past.

Entrepreneurs & International Trade

Entrepreneurs can benefit from international trade both by importing and exporting goods.

Risks in International Trade: Must learn about economic and monetary

systems. Learn about government regulations Learn about cultural factors involved.

Trade Barriers

Governments are more protective of their natural resources within their borders so they put restrictions on trade: Nations want to help their own businesses

before foreign. Governments want to protect their consumers

from unsafe or poor quality goods.

Trade Barriers

Trade Barrier Governmental restriction placed on

international trade. Tariff

A fee, similar to a tax, that importers must pay on the goods they import.

Quota Is a limit on the quantity of a product that can

be imported into a country.

Foreign Exchange Rates

Many types of money are in use around the world, but not all amounts of money are equal in each country. United States – Dollar Japan – Yen China – Yuan Canada – Canadian Dollar UK – Pound Mexico – Peso

Foreign Exchange Rates

International sellers and buyers must be able to calculate a foreign exchange rate to be able to sell their goods properly.

Fair Trade

Fair Trade A policy of ensuring that small producers in

developing nations earn sufficient profit on their exported goods.

Respecting Other Cultures Entrepreneurs who wish to engage in

international trade need to respect: beliefs, language, beliefs, attitudes, customs, manners and habits.

Local Economy

Local Economy: Covers a limited area, such as a community or

town.

Entrepreneurs Benefit Local Economies By: Purchasing materials and supplies from local

merchants. Opening an account at a local bank.

Local Economy

Entrepreneurs Benefit Local Economies By: Joining a local business association. Paying local taxes that benefit schools and

public services. Investing in local businesses. Donating money or time to local charities. Hiring local employees. Supplying goods and services to local

consumers.

Importance of Sustainability

It is important that economic development doesn’t harm the environment but ensures that human and natural resources are there for future generations.

This is called sustainable economic development, or sustainability. Goal to maintain and improve human life for

generations.