Lesson 2 2 How Economic Decisions are Made

Lesson 2. 2 How Economic Decisions are Made Goals n Compare and contrast different types of economic systems. n Describe the characteristics of the U. S. economy. Chapter 2 1 Entrepreneurship: Ideas in Action © Cengage Learning/South-Western

n Explain how scarcity affects economic decisions. n Explain how business functions are used to satisfy consumers. Chapter 2 2 Entrepreneurship: Ideas in Action © Cengage Learning/South-Western

Terms n capitalism n profit n economic decision making n scarcity n opportunity cost Chapter 2 3 Entrepreneurship: Ideas in Action © Cengage Learning/South-Western

Economic Systems n Each economy must answer three basic questions regarding goods and services: n Which ones will be produced? n How will they be produced? n What needs and wants will they satisfy? Chapter 2 4 Entrepreneurship: Ideas in Action © Cengage Learning/South-Western

n A variety of economic systems exist. n Command Economy n Production decisions are made by the government. n Few choices exist in the marketplace. n Market Economy n Production decisions are made by individuals and businesses. n Ample choices exist in the marketplace. n Entrepreneurship thrives in a market economy. Chapter 2 5 Entrepreneurship: Ideas in Action © Cengage Learning/South-Western

n Traditional Economy n n Production occurs the way it has always occurred. Most production is consumed. Left over production is sold or traded. Countries with traditional economies are not participating in the global economy. n Mixed Economy n These economies contain elements of command market economies. n Sometimes these economies occur because a country is shifting from either a command or traditional economy toward a market economy. Chapter 2 6 Entrepreneurship: Ideas in Action © Cengage Learning/South-Western

n communism n a command economic system n government-led plans direct resources toward economic growth Chapter 2 7 Entrepreneurship: Ideas in Action © Cengage Learning/South-Western

How does the type of economy affect the way the basic economic questions are answered? Chapter 2 8 Entrepreneurship: Ideas in Action © Cengage Learning/South-Western

The U. S. Economic System n capitalism n the private ownership of resources by individuals rather than by the government n individual businesses and consumers make the majority of production decisions n also called free enterprise Chapter 2 9 Entrepreneurship: Ideas in Action © Cengage Learning/South-Western

n The U. S. economic system of capitalism is based on four economic principles. n Private Property n You may own whatever you want as long as you operate within the law. n Freedom of Choice n Government intervention occurs only when individual decisions will bring harm to others. Chapter 2 10 Entrepreneurship: Ideas in Action © Cengage Learning/South-Western

n Profit n the difference between the revenues taken in by a business and the costs of operating the business n The opportunity to earn a profit is at the heart of the free-enterprise system. n Competition n the rivalry among businesses to sell their goods and services Chapter 2 11 Entrepreneurship: Ideas in Action © Cengage Learning/South-Western

Describe the four basic principles of the U. S. economic system. Chapter 2 12 Entrepreneurship: Ideas in Action © Cengage Learning/South-Western

Economic Choices n economic decision making n the process of choosing which needs and wants, among several, you will satisfy using the resources you have Chapter 2 13 Entrepreneurship: Ideas in Action © Cengage Learning/South-Western

n Scarcity n occurs when there are limited resources available to meet the unlimited needs and wants of consumers n Scarcity forces you to make decisions about tradeoffs. n Opportunity Cost n the value of the next-best alternative (the one you pass up) Chapter 2 14 Entrepreneurship: Ideas in Action © Cengage Learning/South-Western

What factors affect economic choices? Chapter 2 15 Entrepreneurship: Ideas in Action © Cengage Learning/South-Western

Functions of Business n Production n A profit is earned by selling products or services to consumers. n The production function creates or obtains products or services. Chapter 2 16 Entrepreneurship: Ideas in Action © Cengage Learning/South-Western

n Marketing n The goal of marketing is to attract as many consumers as possible. n The marketing mix includes: n n Chapter 2 17 product distribution price promotion Entrepreneurship: Ideas in Action © Cengage Learning/South-Western

n Management n The duties of management include: n n n Chapter 2 18 setting goals deciding on responses to competition solving problems managing employees evaluating business activities Entrepreneurship: Ideas in Action © Cengage Learning/South-Western

n Finance n Financial duties include: n determining capital requirements n determining capital resources n managing the financial aspects of the business Chapter 2 19 Entrepreneurship: Ideas in Action © Cengage Learning/South-Western

What are the functions of business? Chapter 2 20 Entrepreneurship: Ideas in Action © Cengage Learning/South-Western