Entrepreneurs in a Market Economy Unit 2 Needs

Entrepreneurs in a Market Economy Unit 2

Needs vs Wants • Do you sometimes have a difficult time telling the difference between a need and a want? • Do you think that peer pressure makes it more difficult to distinguish between a need and a want?

Needs vs. Wants • Economics is all about making choices and satisfying the wants and needs of consumers • Your needs are things that you MUST have in order to survive ▫ Good, basic clothing, a place to live • Your wants are things that you THINK you must have in order to be satisfied ▫ Add comfort and pleasure to your life

Needs • People have many needs (basic or higher-level) • Maslow’s hierarchy of needs illustrates the progression people follow in satisfying needs

Wants • Two different types of wants: ▫ Economic Wants: involve a desire for material goods and services �The basis of an economy �Goods such as clothing, housing, and cars �Services such as hair styling and medical care ▫ Non-Economic Wants: the desire for nonmaterial things �Such things as sunshine, fresh air, exercise, friendship, and happiness

Basic Economic Problem • Scarcity: ▫ Your needs and wants never end ▫ You are limited only by what your mind can think of and what business make available for sale ▫ Limited resources for unlimited wants and needs

Economic Resources • The means through which goods and services are produced • Three types: ▫ Natural Resources: raw materials supplied by nature. �Oil, minerals, rivers, lakes, oceans, etc. ▫ Human Resources: the people who create goods and services ▫ Capital Resources: the assets used in the production of goods and services �Buildings, equipment, supplies, money, etc.

Law of Diminishing Returns • States that one factor of production is increased while others stay the same, the resulting increase in output will level off after some time and then will decrease. ▫ Extra workers, extra capital, extra machinery, or land may not necessarily raise output as expected

Economic Systems • All economic systems must answer 3 basic ? s: 1. What goods and services will be produced? 2. How will the goods and services be produced? 3. For whom will the goods and services be produced? • The type of economic system will determine how these three questions are answered ▫ Command, Market, Traditional, Mixed

Economic Systems • Command Economy ▫ The gov’t determines what, how, and for whom goods/services are produced ▫ There is little choice for consumers in what is available • Market Economy ▫ Individuals and businesses decide ▫ Individual choice creates the market �Many items available that are very similar �Products/services are always available to everyone who has the means to pay for them

Economic Systems • Traditional Economy ▫ Goods/services are produced the way they have always been produced ▫ Used in countries that are less developed �Not participating in the global economy • Mixed Economy ▫ Elements of the command market economies are combined ▫ Individuals, businesses, and the gov’t are involved in making decisions in the marketplace

Economic Choices • Scarcity ▫ Decisions based on scarcity affect everyone ▫ Forces you to make choices or decisions �Trade-offs • Opportunity Cost ▫ The value of the next-best alternative—the one you pass up �Example: $300 graduation money

Activity

The Shipwreck • One day 20 people, including the paying customers and crew, set sail on a fishing expedition. After a few hours of peaceful sailing, the ship encountered a terrible storm. • As a result of the storm, the fishing boat sank. Luckily, all 20 people survived, making their way to a small deserted island. • Unfortunately, all the communication equipment went down with the ship so there is no way to signal for help.

The Shipwreck • Once settled on the island, the captain of the fishing boat called the survivors together and said the following. • Here are the facts about our situation as I see them: ▫ For better or for worse, the 20 of us will be spending days, weeks, or maybe years together ▫ We all have different needs and wants ▫ In order to survive, we have to depend on each other, even though some of us are smarter, some have more money, & some are more skilled

The Shipwreck • Finally, and most important, there are three fundamental questions we have to answer to determine how we will meet the various needs and wants each of us have: 1. What goods/services should we produce? 2. How should they be produced? 3. Who should receive the goods/services produced?

Activity • If you were the president of a newly independent nation, ▫ what is one element of traditional economies, ▫ one element of capitalistic economies, and ▫ one element of command economies that you would like to bring to your nation?

What Affects Price? • Consumers and produces determine quantities and prices of goods/services produced • Two important forces: ▫ Supply: the quantity of a good/service a producer is willing to produce at different prices ▫ Demand: the quantity of a good/service that consumers are willing to buy at a given price

Supply and Demand Curves

Demand Elasticity • Demand Elasticity: When the demand for a product is affected by its price �When a change in price creates a change in demand, you have elastic demand �When a change in price creates very little change in demand, you have inelastic demand • Demand is usually inelastic when: ▫ There are no acceptable substitutes ▫ The change in price is small in relation to the income of the consumer ▫ The product is a basic need for consumers (not a want)

When Supply and Demand Meet

Costs of Doing Business • To determine how much profit you are earning, you need to know how much it costs to produce • You must consider ALL the resources that go into producing the good/service • Fixed Costs: must be paid regardless of how much of a good/service is produced ▫ Also called sunk costs • Variable Costs: costs that go up and down depending on the quantity being produced

Marginal Benefit and Marginal Cost • Marginal Benefit: measures the advantages of producing one additional unit of a good/service • Marginal Costs: measures the disadvantages of producing one additional unit of a good/service ▫ Example staying open late to sell more

Economies of Scale • When a business owner decides to grow the business, s/he needs to consider the economies of scale ▫ The cost advantages obtained due to expansion • Economies of scale represent an increase in efficiency of production as the number of units of goods produced increases ▫ A business that achieves economies of scale lowers the average cost per unit through increase production

Market Structure • Determined by the nature and degree of competition among businesses in the same industry • Main criteria: ▫ Number and size of sellers and buyers in the market ▫ The type of goods/services being traded ▫ The barriers to enter into the market for sellers

Comparing Market Types Type of Market # of Kind of Producers Competition Barriers to Entry Special Traits One No entry possible Only one firm A few Primarily nonprice competition Medium barriers (difficult entry) Firms can collude and behave as a monopolist Monopolistic Competition Many Non-price competition; price competition Low barriers (easy entry Product differentiation and branding Perfect Competition A great many Price competition No barriers (free entry) Perfectly elastic demand Monopoly Oligopoly

Assingment • Complete the Vocabulary Builder and the Review Your Knowledge section at the end of Chapter 2 ▫ Page 59 -60 of the book, page 24 -25 on the PDF • Complete Question #23 in the Apply What you Learned section ▫ Page 60 of the book, page 25 on the PDF • Type all in one Google. Docs and send to me when done.