What is Entrepreneurship? Chapter 1

Entrepreneurship and the Economy Section 1.1

Becoming an Entrepreneur Entrepreneur – is an individual who undertakes the creation, organization, and ownership of an innovative business with potential for growth. Accepts risk Responsible for business ownership to earn profit Create wealth Achieve personal satisfaction Venture – is a new business undertaking that involves risk.

Small Business and Entrepreneurship Entrepreneurship – the process of recognizing or creating an opportunity, testing it in the market, and gathering the resources necessary to go into business. Entrepreneurial – acting like an entrepreneur or having an entrepreneurial mindset- a way of thinking

Entrepreneurship Today Global Marketing and the Internet have brought new resources, opportunities, markets, competitors, and ideas Instant communication Collaborate from a distance Keep records more efficiently Customers demand for transactions and communication to take place quickly Expect innovative products to come out often

Entrepreneurship Today Businesses are pressured to provide better service Make more options available Understand how entrepreneurs interact with customers - began with economic systems Economics – study of how people choose to allocate scarce resources to fulfill their unlimited wants.

Economic Systems Economic Systems – set of laws, institutions, and activities that guide economic decision making. They attempt to answer What goods & services should be produced? What quantity of goods and services should be produced? How should goods and services be produced? For whom should goods and services be produced?

Economic Systems Traditional E.S. – relies on farming and simple barter trade Pure Market S. – based on supply and demand with little government control Command E.S. – run by a strong centralized government Focused on industrial goods

Economic Systems Mixed E.S. – combines the principles of market and command economies. United States European Union

The Free Enterprise System People have an important right to make economic choices: What products to buy Own private property Start a business and compete with other businesses. AKA Capitalism AKA Market Economy Primary incentive is profit Revenue –Expenses = Profit Also risk involved

The Free Enterprise System Risk of failure serves as a positive Encourages the production of quality products that truly meet the needs of consumers Market Risk – lack of demand, changing customer needs Product Risk – loss of customer interest, warranty problems Financial Risk – lack of funding, rising costs

The role of competitioin Basic characteristic of free enterprise system Good for consumers because: Provides choices Forces companies to improve quality and become more efficient Leads to surplus, which brings prices down

Market Structures Refers to the nature and degree of competition among businesses operating in the same industry. Affects market price Perfect Competition – there are numerous buyers and sellers and many products that are very similar so they can be substitutes for consumers Monopolistic – many sellers produce similar but differentiated products. Substitution is not always possible Sellers have some power to control price

Market Structures Monopoly – one in which a particular commodity has only one seller who has control over supply and can exert nearly total control over prices. Oligopoly – there are just a few competing firms

Supply & Demand Interact to determine the price customers are willing to pay for the number of products producers are willing to make. Heavy demand, but short supply, the price will go up. The rise in price will reduce demand and expand supply. Plentiful supply, but demand is lacking, prices will go down. The decline in price will expand demand and contract supply Prices stabilize when demand and supply are equal

Demand The quantity of goods or services that consumers are willing and able to buy. As price goes up, the quantity demanded goes down. Elastic demand – refers to situations in which a change in price creates a change in demand Inelastic demand – refers to situations in which a change in price has very little effect on demand for milk tends to be inelastic. No acceptable substitute available, and customers need the product Price change small relative to buyer income, customers will buy it if they want it Product is a necessity; customers need it

demand Diminishing Marginal Utility – people will not buy more than they can reasonably use. Establishes that price alone does not determine demand Other Factors: income, taste, amt. of product already owned

Supply Amt. of a good or service that producers are willing to provide Producers are willing to supply products in greater amts. when prices are high Surplus: more supplies than needed Shortage: fewer supplies than needed Equilibrium: the point at which consumers buy all of a product that is supplied

Business Cycles Economic Indicators – statistics that help entrepreneurs understand the state of the economy and predict possible changes. Employment rate Consumer confidence Gross Domestic Product (GDP) – the total market values of goods and services produces by a nation during a given period.

Business Cycles The Federal Reserve – controls the economy and regulates the nation’s money supply Tells banks what percentage of their money the can lend Controls the interest rates Buy and sell government securities to increase or decrease the money supply Evaluate economic conditions Adjust monetary policies

Business Cycles Business Cycle – the periodic random pattern of expansion and contraction that the economy goes through. A period of growth and prosperity (expansion) is usually followed by a contraction or slow down in growth. When the GDP declines by more than 10 percent, it is called a depression Inflation – an unhealthy jump in prices that slows consumer and business spending. Decrease in spending, companies reduce their production levels, workers are laid off

Business Cycles Recession The Fed will move to increase the supply of money Fed will lowering interest rates to encourage people and businesses to borrow money and spend more Avoid a recession when economic growth is too rapid, the Fed raises interest rates

What Entrepreneurs contribute Are the mechanism by which the economy turns demand into supply Create a market for venture capital Venture capital – source of equity financing for small businesses with exceptional growth potential and experienced senior management. Provide jobs Change society Respond to society’s wants and end up changing society