1. Entrepreneurs in a Market Economy
Unit 2

2. Needs vs Wants
Do you sometimes have a difficult time telling the difference between a need and a want?
Do you think that peer pressure makes it more difficult to distinguish between a need and a want?

3. Needs vs. Wants
Economics is all about making choices and satisfying the wants and needs of consumers
Your needs are things that you MUST have in order to survive
Good, basic clothing, a place to live
Your wants are things that you THINK you must have in order to be satisfied
Add comfort and pleasure to your life

4. Needs People have many needs (basic or higher-level)
Maslow’s hierarchy of needs illustrates the progression people follow in satisfying needs
Abraham Maslow was a psychologist who developed a theory on the hierarchy of needs. Five areas of needs.
The theory suggests that people’s basic physiological needs (food, clothing, shelter) must be satisfied first before they can focus on higher-level needs.
Once basic needs are met, people will try to satisfy their security needs. And so on.
Beyond basic needs, not all people have the same needs. Needs depend on a person’s situation.

5. Wants Two different types of wants:
Economic Wants: involve a desire for material goods and services
The basis of an economy
Goods such as clothing, housing, and cars
Services such as hair styling and medical care
Non-Economic Wants: the desire for nonmaterial things
Such things as sunshine, fresh air, exercise, friendship, and happiness

6. Basic Economic Problem
Scarcity:
Your needs and wants never end
You are limited only by what your mind can think of and what business make available for sale
Limited resources for unlimited wants and needs

7. Economic Resources
The means through which goods and services are produced
Three types:
Natural Resources: raw materials supplied by nature.
Oil, minerals, rivers, lakes, oceans, etc.
Human Resources: the people who create goods and services
Capital Resources: the assets used in the production of goods and services
Buildings, equipment, supplies, money, etc.
Natural resources are limited; conservation practices and production of more efficient products help to preserve and renew resources
Human Resources: may work in agriculture, manufacturing, distribution, retail, or some other type of business.
Capital Resources: the money needed to build a factory, buy a delivery truck, and pay the employees who manufacture and distribute goods/services

8. Law of Diminishing Returns
States that one factor of production is increased while others stay the same, the resulting increase in output will level off after some time and then will decrease.
Extra workers, extra capital, extra machinery, or land may not necessarily raise output as expected

9. Economic Systems All economic systems must answer 3 basic ?s:
What goods and services will be produced?
How will the goods and services be produced?
For whom will the goods and services be produced?
The type of economic system will determine how these three questions are answered
Command, Market, Traditional, Mixed

10. Economic Systems Command Economy Market Economy
The gov’t determines what, how, and for whom goods/services are produced
There is little choice for consumers in what is available
Market Economy
Individuals and businesses decide
Individual choice creates the market
Many items available that are very similar
Products/services are always available to everyone who has the means to pay for them
Command: the gov’t may see no reason to have more than one type of the same item. Individuals may not always be able to obtain exactly what they want
Market: entrepreneurship thrives;

11. Economic Systems Traditional Economy Mixed Economy
Goods/services are produced the way they have always been produced
Used in countries that are less developed
Not participating in the global economy
Mixed Economy
Elements of the command and market economies are combined
Individuals, businesses, and the gov’t are involved in making decisions in the marketplace
Traditional: most of what is produced is consumed, and what is left over is sold or traded; they lack the formal structure found in more advanced economies; usually have limited capital resources to improve conditions

13. Economic Choices Scarcity Opportunity Cost
Decisions based on scarcity affect everyone
Forces you to make choices or decisions
Trade-offs
Opportunity Cost
The value of the next-best alternative—the one you pass up
Example: $300 graduation money

14. Activity

15. The Shipwreck
One day 20 people, including the paying customers and crew, set sail on a fishing expedition. After a few hours of peaceful sailing, the ship encountered a terrible storm.
As a result of the storm, the fishing boat sank. Luckily, all 20 people survived, making their way to a small deserted island.
Unfortunately, all the communication equipment went down with the ship so there is no way to signal for help.

16. The Shipwreck
Once settled on the island, the captain of the fishing boat called the survivors together and said the following.
Here are the facts about our situation as I see them:
For better or for worse, the 20 of us will be spending days, weeks, or maybe years together
We all have different needs and wants
In order to survive, we have to depend on each other, even though some of us are smarter, some have more money, & some are more skilled

17. The Shipwreck
Finally, and most important, there are three fundamental questions we have to answer to determine how we will meet the various needs and wants each of us have:
What goods/services should we produce?
How should they be produced?
Who should receive the goods/services produced?

18. Activity If you were the president of a newly independent nation,
what is one element of traditional economies,
one element of capitalistic economies, and
one element of command economies that you would like to bring to your nation?

19. What Affects Price?
Consumers and produces determine quantities and prices of goods/services produced
Two important forces:
Supply: the quantity of a good/service a producer is willing to produce at different prices
Demand: the quantity of a good/service that consumers are willing to buy at a given price

20. Supply and Demand Curves

21. Demand Elasticity
Demand Elasticity: When the demand for a product is affected by its price
When a change in price creates a change in demand, you have elastic demand
When a change in price creates very little change in demand, you have inelastic demand
Demand is usually inelastic when:
There are no acceptable substitutes
The change in price is small in relation to the income of the consumer
The product is a basic need for consumers (not a want)

22. When Supply and Demand Meet

23. Costs of Doing Business
To determine how much profit you are earning, you need to know how much it costs to produce
You must consider ALL the resources that go into producing the good/service
Fixed Costs: must be paid regardless of how much of a good/service is produced
Also called sunk costs
Variable Costs: costs that go up and down depending on the quantity being produced
Fixed: rent, insurance fees, interest on loans
Variable: expense of buying material

24. Marginal Benefit and Marginal Cost
Marginal Benefit: measures the advantages of producing one additional unit of a good/service
Marginal Costs: measures the disadvantages of producing one additional unit of a good/service
Example staying open late to sell more

25. Economies of Scale
When a business owner decides to grow the business, s/he needs to consider the economies of scale
The cost advantages obtained due to expansion
Economies of scale represent an increase in efficiency of production as the number of units of goods produced increases
A business that achieves economies of scale lowers the average cost per unit through increase production
Costs can be spread over an increased number of units
Lower costs per unit allow the businesses to lower the prices of their product/service, which may attract more customers and lead to increased sales.

26. Market Structure
Determined by the nature and degree of competition among businesses in the same industry
Main criteria:
Number and size of sellers and buyers in the market
The type of goods/services being traded
The barriers to enter into the market for sellers

27. Comparing Market Types
Type of Market
# of Producers
Kind of Competition
Barriers to Entry
Special Traits
Monopoly
One
None
No entry possible
Only one firm
Oligopoly
A few
Primarily non-price competition
Medium barriers (difficult entry)
Firms can collude and behave as a monopolist
Monopolistic Competition
Many
Non-price competition; price competition
Low barriers (easy entry
Product differentiation and branding
Perfect Competition
A great many
Price competition
No barriers (free entry)
Perfectly elastic demand

28. Assingment
Complete the Vocabulary Builder and the Review Your Knowledge section at the end of Chapter 2
Page of the book, page on the PDF
Complete Question #23 in the Apply What you Learned section
Page 60 of the book, page 25 on the PDF
Type all in one GoogleDocs and send to me when done.