Supply and Demand“How Free Enterprise Works”

Entrepreneurship

Entrepreneurship Today Knowledge of economics contributes to an understanding of how entrepreneurs and customers interact.

economics the study of how people allocate scarce resources to fulfill their unlimited wants

Section 1.1 Entrepreneurship and the Economy

Economic Systems An economic system includes a set of laws, institutions, and activities that guide economic decision making.

Section 1.1 Entrepreneurship and the Economy

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Economic Systems

Section 1.1 Entrepreneurship and the Economy

All economic systems attempt

to answer four basic questions.

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What goods and 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?

Free Market VS. Command Economy

The Free Enterprise System Making a profit is a primary incentive of free enterprise.

profit money that is left over after all expenses of running a business have been deducted from the income

Section 1.1 Entrepreneurship and the Economy

Free MarketA free enterprise

economy allows anyone to start a business (legally). Also known as capitalism

Command EconomyIn this economic

system, the government sets prices and tells people where they can work and how much they can earn.

Free Market is more efficient than a command economy. In a free market, millions of entrepreneurs and consumers make millions of economic decisions every day.The result of these decisions is efficiency. ( how desired results are obtained with limited resources in an uncertain world.)

Most world economies are a mix. Governments have some economic control (for example, the gov’t controls the Post Office in the US)

Basic Concepts

Section 1.1 Entrepreneurship and the Economy

basic concepts of economics

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goods and services factors of production

scarcity supply and demand

theory

OwnershipOwnership is

powerfulYou can open any

business you createYou can keep all the

profitsIt is your choiceYou can sell

“shares”You can donate

Price Communicates InformationAn economy is “efficient” when consumer

needs are met with very little waste of resources or labor. Entrepreneurs who succeed at this are rewarded by profit.

Con’tIn a free market, changes in Price send

signals to entrepreneurs. A rise in Price will attract producers and

lead to increased productionIf people stop buying, Price is probably

too highIf it sells out quickly and consumers want

more, Price may be too low.Price relays information b/w the consumer

and the entrepreneur

Laws of Supply and Demandgenerally determine the price of a product

Supply (S): quantities available to consumers at various prices

If everything else remains the same, businesses will supply more at higher prices than at lower ones

As P increases, QS increases

Demand (D):quantities that consumers would be willing to buy at various prices.

If everything else remains the same, people will demand more at lower prices than higher ones

As P increases, QD decreases

Supply and Demand Theory The degree to which demand for a product is affected by its price is either governed by elastic demand or inelastic demand.

elastic demand situations in which a change in price creates a change in demand

Section 1.1 Entrepreneurship and the Economy

inelastic demand situations in which a change in price has little or no effect on demand for products

Supply and Demand Theory Due to the law of diminishing marginal utility, even when a product’s price is low, people will not keep buying it indefinitely.

diminishing marginal utility the effect or law that establishes that price alone does not determine demand, and other factors, such as income, taste, and the amount of product already owned, play a role as well

Section 1.1 Entrepreneurship and the Economy

Supply graph example

Demand graph example

Market behaviorWhat happens to the price of air conditioners

in the summer? fall?When are bathing suits most expensive?

Why?

EquilibriumAlso known as Market Clearing Price.Occurs where the D and S curves meet

CompetitionKeeps prices

down and quality high

The consumer benefits from competition. How?

The opposite is called a monopoly

SummaryOverall, use Supply and Demand as guidesIf D decreases, the market may be telling you

to change your product or lower PriceIf Supply increases, prices may fall