What is Entrepreneurship Entrepreneurship Ch. 1 What is Entrepreneurship

Becoming an Entrepreneur 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

Becoming an Entrepreneur 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

Becoming an Entrepreneur 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

How Entrepreneurs and Customers Interact Economics – Study of how people choose to allocate scarce resources to fulfill their unlimited wants

Economic System Economic System includes a set of laws, institutions, and activities that guide economic decision making. Answer the following questions: What goods and services should be produced? What quantity should be produced? How should they be produced? For Whom should they be produced for?

Economic Systems 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

Free Enterprise System People have an important right to make economic choices: 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 called: Market Economy Capitalism

Free Enterprise System Profit 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

Free Enterprise System Role 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

Free Enterprise System Market Structures Nature and degree of competition among businesses operating in the same industry Affect market prices Four different market structures: Perfect Competition Monopolistic Competition Monopoly Oligopolies

Free Enterprise system 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

Free Enterprise system 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

Free Enterprise system 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

Free Enterprise system 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

Basic Economic Concept 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

Basic Economic Concept Factors of Production Resources businesses use to produce the goods and services that people want Four Factor or Production Land Labor Capital Entrepreneurship

Basic Economic Concept Scarcity Demand exceeds supply Because resources are in limited supply, to have one thing may mean that you have to give up something else

Basic Economic Concept 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

Basic Economic Concept Three basic tenets of supply and demand theory If something is in heavy demand but in short supply, prices will go up. Rise in price will lower demand. If something is in plentiful supply but demand is lacking, prices will go down. Decline in price will expand demand and contract supply Prices tend to stabilize at the level where demand equals supply

Basic Economic Concept 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

Basic Economic Concept Demand Diminishing Marginal Utility Price alone does not determine demand Other factors play a role: Income – Taste – the amount of the product already owned

Basic Economic Concept 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

Basic Economic Concept 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

Business cycle Economic Indicators Statistics published by the federal government that helps the entrepreneurs understand the state of the economy and predict possible changes

Business cycle 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

Business cycle 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 Business cycle Expansion and Contraction Expansion – Period of growth and prosperity Contraction – Slow down in growth

Inflation Business cycle Growing to fast Unhealthy jump is prices that slows consumer and business spending Companies reduce production and lay off workers Higher unemployment

What Entrepreneurs contribute 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

History of Entrepreneurship 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

History of Entrepreneurship 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 Spurred new entrepreneurial ventures Recent – Advent of new media technology Made it possible to do business anywhere

Entrepreneurial Start-up process 5 key components The Entrepreneur The Environment The Opportunity Start-up Resources The New Venture Organization

Entrepreneurial Start-up process 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

Entrepreneurial Start-up process The Environment Includes variables that affect the venture but are not controlled by the entrepreneur 4 Categories of environmental variables

Entrepreneurial Start-up process The Environment 4 Categories of environmental variables 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

Entrepreneurial Start-up process 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

Entrepreneurial Start-up process 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

Entrepreneurial Start-up process New Venture Organization Company Foundation that supports all of the products, processes, and services of the new business

New Business success and failure More businesses succeed than fail 66% of small businesses survive the first two years. 40% by six years

New Business success and failure 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