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Making Business Decisions Why It Matters Discuss with students how business affects their lives. Ask students what factors play a part in creating the clothes that they wear. (Possible answers: natural resources, factories, labor, management) Next ask students how they think the government might be involved in the creation of clothes. (Possible answer: The government might regulate the safety of the fabric.) Help students to understand that the decisions made by businesses affect their lives, even if they do not work for or own a business. 1. What are the four factors Business owners must of production? make decisions about their 2. What is the government’s role use of natural resources, in the economy? capital, labor, and entrepreneurship. Business owners are free to make these decisions with little interference from the government. entrepreneurs: come up with business idea and how to make it work 466 Teach the Main Idea Factors of Production Natural Resources Items provided by nature without human intervention that can be used to produce goods and to provide services are called natural resources. Natural resources can be found on or in the Earth or in Earth’s atmosphere. The raw materials needed to produce goods of all kinds come from the oceans, rivers, mines, fields, and forests that help make up the world’s natural resources. Many natural resources in our country are limited, however. A natural resource is considered a factor of production only when some payment is necessary for its use. For example, the air you breathe on the beach is not a factor of production because you do not have to pay to use it. For example, consider the resource of land. Every business needs a place to locate. People starting a business have several key decisions to make when choosing where they will set up shop. They must consider what locations will best benefit their business. Companies that provide services need to be in a location that is convenient for potential customers to reach. Manufacturers want to be in areas with good transportation so they can ship their goods. At Level Making Business Decisions questions to teach this section. 2. Apply Have students create an idea web titled Making Business Decisions. As they read, have students add details to their web. 3. Review Ask students to share their webs with the class. Create a master web on the board, based on students’ webs. CHAPTER 17 ferent factors of production. Use a graphic organizer like this one to take notes on each factor and its significance. CHAPTER 17 1. Teach Ask students the Reading Focus 466 natural resources, p. 466 capital, p. 467 labor, p. 467 entrepreneur, p. 468 You have, at one time or another, had to make a decision about how to spend your money. Sometimes, there may be only one thing that you want. That makes the decision easy. If you want more than one thing—a new game and some new clothes—and your funds are limited, you have to make a choice. Countries make similar choices about production. Every country must ask “What are we going to produce?” “How are we going to produce it?” and “For whom are we producing it?” The answers to these questions help us decide how to use the four factors of production: natural resources, capital, labor, and entrepreneurship. Factors of Production capital: money needed to start business Key Terms Factors of Production Taking Notes As you read, take NOTES notes on the dif- If you decide to go into business for yourself, you will have to make many business decisions. Most of these decisions will be about the four factors of production. For example, suppose that you want to design and market new computer games. You will have to decide where to have your offices and how many people to hire, and that’s just the beginning. You will have to make a business plan that takes into account all of the factors of production. Preteach the following terms: natural resources items provided by nature without human intervention that can be used to produce goods and provide services (p. 466) capital manufactured goods used to make other goods and services (p. 467) labor human effort, skills, and abilities used to produce goods and services (p. 467) entrepreneur person who organizes, manages, and assumes the risks of a business (p. 468) Vocabulary Activities: Chapter 17 labor: workers produce goods and services Reading Focus The Main Idea Key Terms natural resources: items in nature used to make goods and services; a factor when scarce TAKING BEFORE YOU READ 4. Practice/Homework Have students design a DVD cover for an instructional film entitled Making Business Decisions. The cover should include a summary of the film. Encourage students to add comments from “reviewers” as well. Cost also plays a role when choosing a location. Crowded downtown areas are often more expensive to build or rent office space in than places on the edge of town. Yet their access to customers may be worth the higher price. Business owners must also decide whether to build or rent their facilities. Rent is money paid to use property owned by someone else. Building may be more expensive up front but less expensive than renting in the long run. As you can see, business owners have to consider many such issues when deciding where to locate. Capital Suppose you have opened a bakery. In addition to land, you will also need equipment such as mixers and ovens. This equipment is called capital. Capital is the manufactured goods used to make other goods and services. Capital includes tools, trucks, machines of all sorts, and office equipment, such as computers. These tools, machines, and other items are often called capital goods Factors of to distinguish them from financial capital. Financial capital is the money that is used to buy the tools and equipment—the capital goods—used in production. Where will you get financial capital? If you have a good business plan and you have good credit, you might take out a loan from a bank. You might also apply for a loan from the Small Business Administration (SBA). The SBA is an agency of the federal government whose mission is to provide a variety of assistance programs for small businesses. Perhaps you will decide instead to seek one or more other people who are willing to invest in your bakery business. You also may decide to set up your business as a corporation and sell stock to raise capital. As you make these decisions, you must weigh the opportunity costs and analyze costs and benefits of each plan. Reading Focus What are the four factors of production? Factors of Production Identify Name examples of capital goods that businesses might use. Possible answers: tools, trucks, machines, office equipment, computers Make Inferences Why do you think that renting costs for businesses are higher in densely populated areas? Possible answer: because these areas have the most customers and are the most desirable, so businesses may make more sales Labor All human effort, skills, and abilities used to produce goods and services are called labor. Simulations and Case Studies: Lesson 15: Our Puzzling Economy Community Service and Participation Handbook: Chapter 17 Production The four factors of production—natural resources, capital, labor, and entrepreneurship—are the basis of most business decisions. Why do you think entrepreneurship is an essential factor of production? Linking to Today Labor Natural Resources Capital Entrepreneurship THE ECONOMIC SYSTEM Differentiating Instruction 467 Johnson Publishing Company One example of a company that successfully used the four factors of production is the Johnson Publishing Company. While managing an insurance company’s employee publication that reported news of the African American community, John Johnson (1918–2005) decided to start a magazine devoted to African American news and information. Since 1942 Johnson worked to build the Johnson Publishing Company into the publishing empire it is today. In 2000, the company reported sales of $400 million and employed 2,614 people in its labor force. Level Level Tag Above Advanced Learners/GATE Write a Study for a Business 1. Ask students to think about how their community or region might be uniquely suited to provide one or more of the four factors of production. For example, a seaside community might be suited for shipping and fishing businesses because of its natural resources. 2. Have students select a business that they believe would thrive in their community. 3. Have students write a study of how one or more of the four factors of production is suited to the business they have selected. Verbal/Linguistic Alternative Assessment Handbook: Rubric 37: Writing Assignments Answers (photo) Possible answer: because entrepreneurs play an important role in starting businesses and creating jobs 467 American Civil Liberties Our Career Choices Reading Focus What is the government’s role in the economy? The Government’s Role Identify Name a government agency that helps small businesses. the Small Business Administration Analyze Why do you think the government provides loans to businesses? Possible answer: Some business owners may not have the money or be able to get a large enough loan through a bank. Helping businesses be successful helps keep the economy strong, which also benefits the government. There is an old saying that in the United States anyone can grow up to be president. In fact, anyone can grow up to be anything—there are no rules that require you to take a certain job or that keep you from your chosen career. In 1897 New York State tried to limit bakery employees to working a maximum of 10 hours a day. In Lochner v. New York (1905), the U.S. Supreme Court overturned this state law, ruling that the Fourteenth Amendment gives citizens the freedom to choose where, when, and how long they work. Lochner is no longer the law today. State governments often do pass 1. Who do you think would have argued against enforcement of New York’s 10-hour workday— employees or employers? 2. Why do you think state governments pass laws to regulate working conditions and the amount of hours people can work? However, the word labor is often used to refer specifically to workers as opposed to owners and people who manage companies. Workers in businesses, industries, and on farms sell their labor in exchange for money. Some workers are paid hourly wages for their labor. Other workers, particularly those who manage companies or have a great deal of responsibility, are paid salaries. Salaries are fixed earnings , rather than hourly wages. Imagine you owned a bakery. If you performed your own labor, the amount of baked goods you could produce would be limited. If you hired more labor, your production would increase but you would have to pay higher labor costs. The money you received for selling the additional goods needs to be at least enough to cover all your costs. If it is more than enough, you will increase your profits. If it is not enough to pay the workers, you will have to lay them off, or lower their pay. However, you might be able to find a way to increase productivity instead. Productivity is the amount of work produced by a worker per hour. Reading Skill Explain to students that resources such as real estate and construction play an important role in the American economy. According to the Census Bureau, the value of new construction represented 7.8 percent of the nation’s gross domestic product (GDP) in 1998. To predict the impact of such construction on the economy, economists study monthly statistics on housing starts, building permits, new single-family home sales, and manufacturers’ orders. Organize students into groups and assign each group one of these economic indicators. Have each group research its indicator and create a poster explaining what the indicator represents, as well as its significance. Posters should also include a graph tracking this indicator for one year. legislation that protects employees, such as minimum-wage laws, overtime laws, and occupational safety regulations. However, the basic idea that individuals have the right to choose their own jobs and negotiate their own employment agreements is still in effect. 468 Workers often keep track of the hours they work by punching time cards. Entrepreneurship If you start your own business, you may be an entrepreneur. An entrepreneur is a person who organizes, manages, and assumes the risks of a business. Entrepreneurs often come up with an idea for a new product or a new way of doing business. They put up their own labor or capital and take the risks of failure. In return for taking the risks, an entrepreneur hopes to make a substantial profit. In our capitalist system, many people think that the efforts of entrepreneurs—starting businesses and creating jobs—are an important part of creating society’s wealth. For example, Bill Gates and other entrepreneurs in the computer industry have provided people with innovative computer software. Entrepreneurs have also shaped the development of the computer and Internet industries around the world. In doing so they have made important contributions to the nation’s economy. READING CHECK Making Inferences Why is labor considered a factor of production? CHAPTER 17 Differentiating Instruction Level Level Tag Above Special Needs Students Create Factors of Production Flash Cards Answers American Civil Liberties 1. employers and possibly some employees 2. Possible answer: to protect workers from unfair and harmful treatment Reading Check because human effort, skills, and abilities are needed to produce goods and services 468 Materials: Newspapers and magazines, scissors, glue, cards or paper 1. Review with students the factors of production—natural resources, capital, labor, and entrepreneurship—and what each includes. 2. Have students cut pictures out of old newspapers and magazines that represent different factors of production. Have them glue each picture to a separate index card or sheet of paper. On the opposite side of each flash card, have students write the factor of production the picture represents. 3. Have students take turns showing their cards to the class. The class must guess which factor of production each flash card shows. Have students explain the reasoning behind their guesses. Visual/Spatial The Government’s Role Although the U.S. government does not tell business owners what products to make or how much to charge, it does influence business in many ways. For example, government ensures that big corporations do not destroy competition from small businesses. The government also protects a person’s rights to own private property and to buy and sell in a free market. In addition, the federal government taxes business income. Changes in the tax code can affect business plans. Many agencies of the federal government help businesses. For example, the Small Business Administration helps small businesses as they compete in the economy. The government plays many other roles in business. It helps business by providing information that managers can use in planning their production levels, sales, and costs. It sometimes provides loans and other types of assistance to businesses. The government also tries to keep the economy running smoothly. The government protects workers’ health and safety, prevents pollution of the environment, and protects buyers from dis- honest practices and harmful products. The government also ensures that employers cannot discriminate against workers or job applicants. Congress has also established a federal minimum wage law. This law requires a minimum hourly wage for employees who are not exempt. Some people believe that the government has gone too far in doing its job as overseer. For example, tens of thousands of pages are needed to print all the business regulations issued by the federal government. On the one hand, some regulations are necessary. Others, however, are criticized for adding to the cost of doing business without providing much benefit to people. These higher business costs can be passed on to consumers as higher prices. Achieving the correct level of government involvement is difficult. How much regulation is needed is a subject of great debate. As a citizen in a free economy, you will help decide this issue with your vote and your voice. Close Discuss with students the four factors of production and government’s role in the economy. Write students’ observations on the board. Review Online Quiz: Section 3 Quiz Game Vocabulary Activities: Chapter 17 Assess SE Section 3 Assessment Daily Quizzes: Section 3 Reteach Main Idea Activities for Differentiated Instruction: Section 3 READING CHECK Finding the Main Idea Why does the government need to regulate businesses in the United States, and how does it do so? go.hrw.com Online Quiz KEYWORD: SZ7 HP17 SECTION 3 ASSESSMENT Reviewing Ideas and Terms Critical Thinking 1. a. Define Write a brief definition for each of the following terms: natural resources, labor, capital and entrepreneur. b. Analyze Information What are three ways people get capital for their businesses? c. Draw Inferences and Conclusions Why do businesses need labor, and how are they affected by productivity? 2. a. Elaborate What are some of the ways in which the government regulates business? b. Defend a Point of View Do you think the government should regulate business? Why or why not? 3. Summarizing Copy the graphic organizer. Use it and your notes to identify the four factors necessary for a business to be successful. Successful Business Focus on Writing 4. Making Decisions Imagine that you are planning to open a small business in your community. Make a list of the decisions that you must make before you can open your store. THE ECONOMIC SYSTEM 469 Section 3 Assessment Answers 1. a. natural resources, p. 466; labor, p. 467; capital, p. 467; entrepreneur, p. 468 b. from bank or government loans, partners, or stock sales c. to produce goods and services; businesses make more profit with higher productivity and less profit with lower productivity 2. a. Students should list some of the ways the government regulates business given on p. 469. b. Possible answers: Yes—otherwise businesses would not operate in the public’s interest. No—there are too many regulations that cause added costs to consumers. 3. Students should use the graphic organizer to show how natural resources, capital, labor, and entrepreneurship are necessary for a business to be successful. 4. Students’ lists will vary but should determine and address the factors of production. Answers Reading Check to protect workers’ health and safety, prevent pollution of the environment, protect buyers from dishonest practices and harmful products, ensure that employers do not discriminate against workers or job applicants, establish a minimum wage, preserve competition, protect citizens’ property rights, and keep the economy running smoothly; through taxes, laws, and agencies 469