Download Entrepreneurship Ch. 1

What is Entrepreneurship
 Entrepreneur
– Individual who undertakes the
creation, and ownership of an innovative business
with potential for growth


Accepts the risks and responsibilities of business
ownership to earn profits, create wealth, and achieve
personal satisfaction.
Creating and running a business venture (new business
undertaking that involves risk) requires a variety of
skills
 Entrepreneurship
– Process of recognizing or
creating an opportunity, testing it in the
market, and gathering the resources necessary
to go into business
 More than 90% of all businesses are small
businesses with fewer than 100 employees
 62% of those are home-based businesses
 Owning
and operating a business is very
different today than it was in the past
 Customers now demand that business
transactions and communication take place
quickly
 Economics
– Study of how people choose to
allocate scarce resources to fulfill their
unlimited wants
 Economic
System includes a set of laws,
institutions, and activities that guide
economic decision making.
 Answer the following questions:
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
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What goods and services should be produced?
What quantity should be produced?
How should they be produced?
For Whom should they be produced for?
 Traditional
Economic System – Relies on
farming and simple barter
 Pure Market System – Based on supply and
demand with little government control
 Command Economic System – Run by strong
centralized government
 Mixed Economic System – Combination of
market and command systems
 People
have an important right to make
economic choices:
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People can choose what products to buy
People can choose to own private property
People can choose to start a business and compete
with other businesses
 Also
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
called:
Market Economy
Capitalism
 Profit

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
Motive
Making a profit (Money that is kept after all
expenses of running a business have been
deducted from the income) is a primary incentive
The only way to measure success
There is a risk of failure

It encourages the production of quality product that
truly meets the needs of consumers
 Role
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

of Competition
Competition is one of the basic characteristics of
a free enterprise system
Good for consumers because it provides choices,
it forces companies to improve quality and
become more efficient, and it lead to a surplus,
which brings down the prices
Prices, Quality, Service, Reputation
 Market



Structures
Nature and degree of competition among
businesses operating in the same industry
Affect market prices
Four different market structures:
1.
2.
3.
4.
Perfect Competition
Monopolistic Competition
Monopoly
Oligopolies
 Perfect
Competition
 Numerous buyers and sellers and many
products that are very similar so they
can be substituted for consumers
 No difference in quality
 Easy for new companies to enter the
market
 Prices are determined by supply and
demand
 Monopolistic
Competition
 Many sellers produce similar but
differentiated products
 Substitution is not always possible
 Through differentiation, sellers have
some power to control the price of their
product
 By making its product slightly different,
the monopolistic competitor tries to
dominate a small portion of the market
 Monopolies
 Particular
commodity has only one
seller who has control over supply
and can exert nearly total control
over prices
 Discouraged in free market
however they are sometimes in the
publics best interest
 Oligopoly
 Structure
in which there are just a few
competing firms
 Example: Auto industry – several large
companies can sell their automobiles
at a lower price than small
manufacturers
 Goods
and Services
 Products that our economic system
produces to satisfy consumers’ wants
and needs
 Goods – tangible (physical) products
 Services – intangible (Non-physical)
products
 Need – Basic requirements for survival
 Wants – Something that you do not have
to have for survival but would like to
have
 Factors
of Production
 Resources businesses use to produce the
goods and services that people want
 Four Factor or Production
1. Land
2. Labor
3. Capital
4. Entrepreneurship
 Scarcity
 Demand
exceeds supply
 Because resources are in limited
supply, to have one thing may
mean that you have to give up
something else
 Supply
and Demand Theory
 Sellers
want to sell at the highest price
and Buyers want to buy at the lowest
price
 Supply and Demand interact to
determine prices customers are willing
to pay for the number of products
producers are willing to make
 Three
basic tenets of supply and demand
theory
1. If something is in heavy demand but in
short supply, prices will go up. Rise in
price will lower demand.
2. If something is in plentiful supply but
demand is lacking, prices will go down.
Decline in price will expand demand
and contract supply
3. Prices tend to stabilize at the level
where demand equals supply
 Demand
Quantity of goods or services that consumers
are willing and able to buy.
 Demand Elasticity

Degree to which demand for a product affected by
its price
 Elastic Demand
 Situation in which a change in price creates a
change in demand
 Lower-priced substitutes
 Inelastic Demand
 Change in price has very little effect on demand
 No acceptable substitutes, product is a necessity

 Demand
 Diminishing
Marginal Utility
 Price alone does not determine
demand
 Other factors play a role:
 Income – Taste – the amount of
the product already owned
 Supply
 The
amount of a good or service that
producers are willing to provide
 Producers are willing to supply more
when prices are high
 Market prices provide an incentive to
produce goods or service
 As price goes up, the quantity supplied
goes up
 Surplus,
Shortage, Equilibrium
 Surplus – more supplies than needed
 Shortage – fewer supplies than
needed
 Equilibrium – Point at which
consumer buy all of a product that is
supplied
 Neither a shortage or surplus
 Economic
 Statistics
Indicators
published by the federal
government that helps the
entrepreneurs understand the state of
the economy and predict possible
changes
 Economic
Indicators
 Some
examples are: Employment Rate,
consumer confidence, and the GDP

Gross Domestic Product – total market value
of goods and services produced by a nation
during a given period.
 Consists of the consumption of goods and
services, investment, government
expenditures, and net exports to other
countries
 The
Federal Reserve
 Government
agency that controls the
economy and regulates the nations money
supply
 Tells the banks the percentage of their
money it can lend
 Controls interest rates, raising them to
increase the cost of borrowing and reducing
them to decrease the cost of borrowing
 Buys and sells government securities to
increase or decrease the money supply

Head of Federal Reserve is:

Ben S. Bernanke
Expansion
and Contraction
Expansion – Period of growth
and prosperity
Contraction – Slow down in
growth
Inflation
 Growing
to fast
 Unhealthy
jump is prices that
slows consumer and business
spending
 Companies reduce production and
lay off workers
 Higher unemployment
New
companies are the
driving force behind economic
growth
Business start-ups are
beneficial because they
generate employment and
increase the production of
goods and services
Early
years to 1980’s
 Small
businesses were the norm
 Supplied basic needs
 1960 – Huge companies were common
No international competition
 Job security

 1970
– High levels of inflation
Companies were facing competition
 Introduction of microprocessor and
personal computer – Information Age

1980s
to Present
Large companies suffering
 New, smaller companies were responding to the
changing market
 Known as “Decade of Entrepreneurship”
 Entrepreneurs had increasing impact on the
economy and economic growth
 1990s – advent of Internet
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Spurred new entrepreneurial ventures
Recent – Advent of new media technology
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Made it possible to do business anywhere
5
key components
1. The Entrepreneur
2. The Environment
3. The Opportunity
4. Start-up Resources
5. The New Venture Organization
The Entrepreneur
 Driving force of the start-up
process
 Recognizes opportunity and
pulls together the resources
 Creates company to execute
opportunity
 Brings all life experiences and
expertise
 Calculated Risk Taker
The Environment
 Includes variables that affect
the venture but are not
controlled by the entrepreneur
 4 Categories of environmental
variables
The Environment
 4 Categories of environmental variables
1.
2.
3.
4.
The nature of the environment, whether
it is uncertain, fast-changing, stable, or
highly competitive
The availability of resources, such as
skilled labor, start-up capital, and sources
of assistance
Ways to realize value, such as favorable
taxes, good markets, and supportive
government policies
Incentives to create new businesses –
Enterprise Zones – Designated area of the
community that provide tax benefits and
grants for new product development
The Opportunity
 Is an idea that has commercial
potential
Opportunity has value only when
customers are ready and willing to
buy
 Idea + Market = Opportunity
 New businesses are founded on
recognized and created
opportunities

Start-up Resources
 When ready to execute a new
business, creative talent is
needed to pull together the
necessary people and capital.
 Includes – Capital, Skilled
Labor, Equipment, Management
Expertise, Legal and Financial
Advice, facility and customer
New Venture Organization
 Company

Foundation that supports all of
the products, processes, and
services of the new business
More
businesses succeed
than fail
66% of small businesses
survive the first two years.
40% by six years
 Business
Failure – business that has
stopped operating with a loss to
creditors
 Usually files for bankruptcy
 Discontinuance – Business that was
purposely discontinued by an owner
who wanted to start a new one
 Closing planned and caused no
harm