Download Unit 2 Study Guide - Entrepreneurs in a Market Economy

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Entrepreneurship – Study guide for Unit 2 (Economics)
2.1 Needs and Wants
Needs - things that are necessary for survival
Wants - things you think you must have in order to be satisfied. They add comfort and pleasure to your life
The role of businesses is to produce and distribute goods and services that people need and want.
Maslow’s hierarchy of needs states that: People’s basic physiological needs must be satisfied before they can
focus on higher level needs.
Needs are different for each person and vary by situation.
Economic wants
a desire for material goods and services
are the basis of an economy
1. clothing
2. housing
3. cars
Noneconomic wants
nonmaterial things
1. sunshine
2. happiness
Needs and wants are unlimited. They never end. One purchase often leads to another.
Economic Resources (aka Factors of Production) - the means through which goods and services are produced
Goods - products you can see and touch
Services - activities that are consumed as they are produced
Entrepreneurs use economic resources to create the goods and services consumers use.
1. natural resources - raw materials supplied by nature
2. human resources - the people who create goods and services
specialization - when individual workers focus on single tasks. Each worker becomes more efficient and
division of labor - divides the production process into separate tasks Workers specialize in specific tasks . The
group as a whole becomes more productive.
3. Capital resources - the assets used in the production of goods and services
Law of Diminishing Returns - If one factor of production is increased while others stay the same, the resulting
increase in output (product produced) will level off after some time and then will decline.
2.2 How economic decisions are made
Economic Systems
Each economy must answer three basic questions regarding goods and services:
1. What goods and services will be produced?
2. How will the goods and services be produced ?
3. Whose needs and wants will they satisfy?
Command Economy
Production decisions are made by the government.
Few choices exist in the marketplace.
Market Economy
Production decisions are made by individuals and businesses.
Entrepreneurship thrives in a market economy.
Many choices exist in the marketplace.
Traditional Economy
Production occurs the way it has always occurred.
Most production is consumed.
Left over production is sold or traded.
Mixed Economy
These economies contain elements of command and market economies. The government is still
involved in the marketplace.
The U.S. Economic System (Capitalism)
the private ownership of resources by individuals rather than by the government
individual businesses and consumers make production decisions
also called free enterprise
The U.S. economic system of capitalism is based on four basic principles.
Private Property - You may own whatever you want as long as you operate within the law.
Freedom of Choice - Government intervention occurs only when individual decisions will bring harm to
Profit - the difference between the revenues earned by a business and the costs of operating the
business. The opportunity to earn a profit is at the heart of the free-enterprise system.
Competition - the rivalry among businesses to sell their goods and services.
Economic Choices
economic decision making - the process of choosing which needs and wants, among several, you will
satisfy using the resources you have
scarcity - occurs when there are limited resources available to meet the unlimited needs and wants of
consumers. Scarcity forces you to make decisions about tradeoffs.
opportunity cost - the value of the next-best alternative make you make a tradeoff (the one you pass
Functions of a Business
1. Production - The production function creates or obtains products or services for sale.
2. Marketing - The goal of marketing is to attract as many consumers as possible.
The marketing mix includes: Product, distribution, price and promotion
3. Management - The duties of management include:
 setting goals
 deciding on responses to competition
 solving problems
 overseeing employees
 evaluating business activities
4. Finance - Financial duties include:
 determining the amount of capital needed
 determining how capital will be obtained
 managing the financial records of the business
2.3 What Affects Price?
Supply - how much of a good or service a producer is willing to produce at different prices
Demand - the quantity of a good or service that consumers are willing to buy at a given price
Elasticity of Demand - How much the demand for a product is affected by its price
elastic demand - when a change is price creates a change in demand
inelastic demand - when a change in price creates very little change in demand
equilibrium (aka market) price and quantity - the point at which the supply and demand curves meet
Cost of Doing Business
fixed costs - costs that must be paid regardless of how much of a good or service is produced. Fixed costs will be
incurred regardless of the level of sales.
variable costs - costs that fluctuate depending on the quantity of the good or service produced.
marginal benefit - measures the advantages of producing one additional unit of a good or service
marginal cost - measures the disadvantages of producing one additional unit of a good or service
Economies of Scale - the cost advantages obtained due to expansion
A lower average cost per unit is achieved through increased production because costs can be spread
over an increased number of units.