Entrepreneurship. & the Economy. Section 2.1 Importance of. Entrepreneurship. in the Economy Section 2.2 Thinking Globally, Acting Locally CHAPTER

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1 CHAPTER Entrepreneurship & the Economy Section 2.1 Importance of Entrepreneurship in the Economy Section 2.2 Thinking Globally, Acting Locally

2 SECTION Importance of Entrepreneurship in the Economy OBJECTIVES Describe an economic system Identify different economic systems Examine supply and demand relationships Explore the role of competition in a market economy Describe the profit motive Learn about nonprofit organizations Section 2.1: Importance of Entrepreneurship in the Economy 2

3 What Is an Economic System? Economics is a social science concerned with how people satisfy their demands for goods (things you can buy) and services (things people do for a fee) when the supply of those goods and services is limited. Economics is all about the flow of goods and services between people. When there are not enough goods and services to meet the demand, the result is a scarcity of those goods and services. An economic system (or economy) is a method used by a society to allocate goods and services among its people and to cope with scarcity. Section 2.1: Importance of Entrepreneurship in the Economy 3

4 Fundamental Questions of Economics What goods and services are produced? What quantity of goods and services are produced? How are goods and services produced? For whom are goods and services produced? Section 2.1: Importance of Entrepreneurship in the Economy 4

5 Types of Economic Systems Two very different types of economic systems are often used to compare how societies deal with the fundamental questions of economics. These systems are the command economy and the market economy. In a command economy, the government owns or manages the nation s resources and businesses. In a market economy, suppliers produce whatever goods and services they wish and set prices based on what consumers are willing to pay. Another name for the market economy is the free enterprise system. Section 2.1: Importance of Entrepreneurship in the Economy 5

6 Supply and Demand Supply is the quantity of goods and services a business is willing to sell at a specific price and a specific time. A supply curve on a graph shows the quantity of a product or service a supplier is willing to sell across a range of prices over a specified period of time. Section 2.1: Importance of Entrepreneurship in the Economy 6

7 Demand Curve Demand is the quantity of goods and services consumers are willing to buy at a specific price and a specific time. A demand curve on a graph shows the quantity of a product or service consumers are willing to buy across a range of prices over a specified period of time. Section 2.1: Importance of Entrepreneurship in the Economy 7

8 Supply and Demand Curves A supply and demand curve is a graph that includes both a supply curve and a demand curve. It shows the relationship between price and the quantity of a product or service that is supplied and demanded. Section 2.1: Importance of Entrepreneurship in the Economy 8

9 Competition in a Market Economy Competition is common in a market economy. People are free to start and operate businesses that compete against each other. If a supplier lowers the price of a product or service, consumers typically buy from that supplier rather than from others. In a market economy, there is not only competition between suppliers but also competition between consumers. When consumers compete against each other to buy a product, they push prices upward. Section 2.1: Importance of Entrepreneurship in the Economy 9

10 Profit Motive A business makes a profit when the amount of money coming in from sales is greater than the business s expenses. Profit is a business s reward for successfully providing goods and services that satisfy consumers demands. The profit motive is an incentive that encourages entrepreneurs to take business risks in the hope of making a profit. Entrepreneurs who consistently make a profit over time can build their own wealth and ensure financial independence. Many entrepreneurs use profit to benefit their existing businesses, start new ones, or invest in the enterprises of others. Section 2.1: Importance of Entrepreneurship in the Economy 10

11 Economics of One Unit The economics of one unit is a calculation of the profit (or loss) for each unit of sale made by a business. Calculate the economics of one unit by subtracting the expenses for the unit of sale from its selling price. A unit of sale has a selling price to the consumer and an expense for the entrepreneur. The economics of one unit is the difference between the selling price and its expense. Selling Price Expense = Profit (or Loss) Section 2.1: Importance of Entrepreneurship in the Economy 11

12 Economics of One Unit If the equation on the previous slide results in a positive number, you ve made a profit. If it s negative, you have a loss. A business that cannot make a profit from one unit of sale will not ever make a profit, no matter how many units it sells. Another way to look at profit is as a percentage of the selling price. This calculation tells an entrepreneur the profit percentage based on sales. The formula per unit of sale is: (Profit/Selling Price) x 100 = Profit % Section 2.1: Importance of Entrepreneurship in the Economy 12

13 Economics of One Unit An entrepreneur buys plain backpacks and decorates them at home with hand-drawn art, stitching, buttons, and stickers before reselling them at the flea market for $25 each. Because each backpack is different, the entrepreneur uses an average backpack as the unit of sale. Section 2.1: Importance of Entrepreneurship in the Economy 13

14 Nonprofit Organizations A nonprofit organization operates solely to serve the good of society. Nonprofits are not governmental organizations. They operate much like for-profit businesses. Money comes into the nonprofit from donations, government grants, or the sale of goods and services to consumers. Nonprofit companies also have expenses. If the money coming in is greater than the money going out, a nonprofit company will have a surplus (profit). Any profit a nonprofit earns must, by law, be used to support the organization s social mission. It cannot be used for the financial gain of the people running the nonprofit. Section 2.1: Importance of Entrepreneurship in the Economy 14

15 SECTION Thinking Globally, Acting Locally OBJECTIVES Define the global economy Identify factors that affect entrepreneurs in international trade Describe relationships between the global economy and the local economy Section 2.2: Thinking Globally, Acting Locally 15

16 The Global Economy The global economy is the flow of goods and services around the whole world. Exporting is the business activity in which goods or services are sent from a country and sold to foreign consumers. Importing is the business activity in which goods and services are brought into a country from foreign suppliers. Modern technology connects suppliers and consumers around the world. The Internet, in particular, has made international trade easier, faster, and more convenient than ever before. Section 2.2: Thinking Globally, Acting Locally 16

17 Entrepreneurs and International Trade Entrepreneurs benefit from international trade by exporting goods or services that are in demand in foreign countries and importing foreign goods and materials to their own country. A trade barrier is a governmental restriction on international trade. The foreign exchange rate is the value of one currency unit in relation to another. Fair trade policies ensure that small producers in developing nations earn sufficient profit on their exported goods to improve their working, environmental, and social conditions. Section 2.2: Thinking Globally, Acting Locally 17

18 The Local Economy A local economy covers a limited area, such as a community or town. Entrepreneurs can benefit their local economies by: Purchasing materials and supplies from local merchants Opening an account at a local bank, credit union, or other financial institution Joining a local business association, trade group, or civic organization that supports local economic development Paying local taxes that benefit schools and other public services Investing money in local businesses Donating money, time, or goods to local charities and organizations Hiring local employees Supplying goods and services to local consumers Section 2.2: Thinking Globally, Acting Locally 18