Chapter 3AAdditional Examples of Supply and DemandCopy

Chapter 3A
Additional Examples of Supply and Demand
Copyright © 2015 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
This appendix provides additional examples of demand and
supply analysis using real-world economic occurrences. This is
helpful for those trying to understand or explain current events.
*
3A-*
Lettuce
Supply shifts left for lettuce
Weather destroys part of the crop
Demand doesn’t change
Consumers still want as much lettuce as before
Equilibrium price rises which will reduce the quantity
demanded
LO7
As a result of bad weather, the supply of lettuce decreases and
shifts to the left, but demand has not changed because there
haven’t been any changes in any of the determinants of demand.
When supply decreases, equilibrium price increases and
quantity falls.

*
3A-*
Lettuce
LO7
D1
S1
Q1
P1
Quantity (pounds)
Price (per pound)
S2
Q2
P2
0
This market represents the demand and supply of lettuce.
Freezing weather decreases the supply of lettuce reflecting
lower quantities supplied at every price. The demand for lettuce
remains the same after the freeze. The price of lettuce rises and
the quantity available in the market is reduced.
*
3A-*
Exchange Rates
Exchange rates are the price of one country’s currency in terms
of another country’s currency
Currency appreciation

Currency depreciation
LO7
Currency appreciation means the value of one of the currencies,
in terms of the other, has increased. Currency depreciation
means the value of one of the currencies, in terms of the other,
has decreased.
*
3A-*
Exchange Rates
LO7
D1
S1
Q1
$1.25
Quantity of euros
Dollar price of 1 euro
D2
0
$1.50
Q2
Currency appreciation can occur as the demand for a country’s
product increases around the world, the demand for that
country’s currency will increase. This increases the value of
that country’s currency.
Currency depreciation can occur as the home country sells more
of the home country’s currency to buy the other currency; this

has increased the supply of the home currency which decreases
the value of the home currency.
In this graph, the demand for euros is increasing causing the
euro to appreciate and the US dollar is depreciate.
*
3A-*
Pink Salmon
Supply shifts right for pink salmon
New technology
New fishers enter the industry
Demand shifts left for pink salmon
Increases in consumers’ income
Reductions in the price of substitutes
LO7
Supply shifts due to new technology which increases the catch
and lowers the cost of fishing. High profits encourage new
fishers to enter the industry. Demand shifts due to increases in
consumers’ income causing them to shift away from canned fish
such as pink salmon. Reductions in the price of substitutes for
pink salmon, such as fresh salmon from the Atlantic, cause the
demand for pink salmon to fall.
*
3A-*
Pink Salmon
LO7
D1
S1

Q1
P1
Quantity (in pounds)
Price (per pound)
S2
D2
P2
Q2
0
As a result of the changes in the pink salmon market, supply
shifts to the right and demand shifts to the left. In this example,
the supply shift was greater than the shift in demand therefore
the result is a lower price and higher quantity.
*
3A-*
Gasoline
Supply of gasoline decreases
Refinery breakdowns
Mideast politics and warfare
Rising price of oil
Demand for gasoline increases
Consumers’ incomes increased
Low mileage SUVs popular
LO7
The supply curve for gasoline shifts left due to a decrease in the
number of producers, and increases in input costs (oil). The

demand curve shifts to the right due to increases in consumers’
income which causes an increase in the demand for the normal
good (gasoline) and increased use of automobiles that do not get
very good gasoline mileage.
*
3A-*
Gasoline
LO7
D2
S2
Q1
P2
Quantity (in gallons)
Price (per gallon)
S1
D1
P1
Q2
0
An increase in the demand for gasoline, as shown by the shift
from D1 to D2, coupled with a decrease in supply, as shown by
the shift from S1 to S2, boosts equilibrium price (here from P1
to P2). In this case, equilibrium quantity increases from Q1 to
Q2 because the increase in demand outweighs the decrease in
supply.
*

3A-*
Sushi
Supply shifts right
Increase in the number of sushi bars
Demand shifts right
Consumers’ tastes for sushi increases
LO7
With the increase in the number of sushi bars, there is an
increase in the number of sellers; this increases the supply of
sushi and shifts the supply curve to the right. A preferable
change in tastes for sushi causes demand to increase and the
demand curve to shift to the right.
*
3A-*
Sushi
LO7
D2
S2
Q1
Quantity (pounds)
Price (per pound)
S1
D1
P1
Q2
0

Equal increases in the demand for sushi, as from D1 to D2, and
in the supply of sushi, as from S1 to S2, expand the equilibrium
quantity of sushi (here from Q1 to Q2) while leaving the price
of sushi unchanged at P1.
*
3A-*
Land in San Francisco
Vertical supply curve
Quantity supplied fixed and unresponsive to price changes
Demand increase causes price to rise but quantity stays the
same
Demand decrease causes price to fall but quantity stays the
same
Explains high real estate prices in cities
LO7
When a supply curve is upsloping, any change in demand is
tempered by a change in quantity supplied. However, when the
supply curve is vertical and fixed, any change in demand only
results in changes in price; the quantity supplied stays the same
no matter what the price is. There is only so much land
available in major cities, like San Francisco, therefore when
demand increases, the only market response is an increase in
price.
*
3A-*

Land in San Francisco
D1
S1
Q0
P1
Quantity of land (acres)
Price (per acre)
D2
0
P2
LO7
Because the quantity of land in San Francisco is fixed, the
supply curve is vertical and parallel to the vertical axis.
Therefore, when demand changes the only market response is a
change in price. In this graph, the demand for land in San
Francisco increases from D1 to D2 and causing price to rise
from P1 to P2. The supply is the same no matter what the price
is.
*
3A-*
Preset Prices
Preset prices can cause market imbalances
Olympics figure skating finals
Preset price results in a shortage of tickets
Olympics curling preliminaries
Preset prices result in a surplus of tickets
LO7

Due to the shortage of tickets in the formal market, a secondary
market develops and tickets sell for higher prices. It is safe to
assume that the shortage was caused by the original price being
set too low.
Contrast this to the surplus of tickets to the curling
preliminaries. Demand is low for this event and tickets were
priced too high causing the stands to be relatively empty. Event
officials should lower the price to sell more tickets.
*
3A-*
Preset Prices
LO7
D
S
P1
P2
Q1
Q2
D
S
P1
P2
Q1
Q2
a
b
a
b

0
P
Figure Skating
Quantity (tickets)
Price (per ticket)
0
P
Curling
Quantity (tickets)
Price (per ticket)
Shortage
Surplus
In the market for tickets to the Olympic women’s figure skating
finals the demand curve, D, and supply curve, S, produce an
equilibrium price that is above the P1 price printed on the
ticket. At price P1 the quantity of tickets demanded, Q2, greatly
exceeds the quantity of tickets available (Q1). The resulting
shortage of ab (= Q2-Q1) gives rise to a legal, or illegal,
secondary market.
In the market for tickets to the Olympic curling preliminaries
the demand curve, D, and supply curve, S, produce an
equilibrium price below the P1 price printed on the ticket. At
price P1 the quantity of tickets demanded is less than the
quantity of tickets available. The resulting surplus of ba (= Q1-
Q2) means the event is not sold out.
*

Section 2:
The Entrepreneurial Journey Begins
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1
Essentials of Entrepreneurship and Small Business Management
Ninth Edition
Chapter 5
Crafting a Business Plan and Building a Solid Strategic Plan
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Learning Objectives (1 of 2)
Explain the benefits of an effective business plan.
Describe the elements of a solid business plan.
Explain the “five Cs of credit” and why they are important to
potential lenders and investors reviewing business plans.
Understand the keys to making an effective business plan

presentation.
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In this chapter, you will:
1. Explain the benefits of an effective business plan.
2. Describe the elements of a solid business plan.
3. Explain the “five Cs of credit” and why they are important to
potential lenders and investors reviewing business plans.
4. Understand the keys to making an effective business plan
presentation.
3
Learning Objectives (2 of 2)
Understand the importance of strategic management to a small
business.
Explain why and how a small business must create a
competitive advantage in the market.
Develop a strategic plan for a business using the nine steps in
the strategic management process.
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In addition, you will:
5. Understand the importance of strategic management to a
small business.
6. Explain why and how a small business must create a
competitive advantage in the market.
7. Develop a strategic plan for a business using the nine steps in
the strategic management process.
4

Benefits of Creating a Business Plan
Business Plan:
A written summary of:
An entrepreneur’s proposed business venture
The operational and financial details
The marketing opportunities and strategy
The managers’ skills and abilities
A business plan is the best insurance against launching a
business destined to fail or mismanaging a potentially
successful company.
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For decades, research has proved that companies that engage in
business planning outperform those that do not. Most potential
investors and lenders insist on a business plan as an essential
step when considering funding an entrepreneurial venture. A
business plan describes the direction the company is taking,
what its goals are, where it wants to be, and how it intends to
get there. It captures a full picture of the business model and all
of the planning and preparation an entrepreneur undertakes
when starting a business. The plan is written proof that an
entrepreneur has performed the necessary research, has studied
the business opportunity adequately, and is prepared to
capitalize on it with a sound business model.
5
Essential Functions of a Business Plan
Guiding the company by charting its future course and defining
its strategy for following it.
Attracting lenders and investors who will provide needed
capital.

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A business plan serves two essential functions. First, it provides
a battery of tools – a mission statement, goals, objectives,
budgets, financial forecasts, marketing plans, and entry
strategies – to help entrepreneurs subject their ideas to one last
test of reality before launching a business and serve as
benchmarks to evaluate the progress of the business as it grows.
The second function of a business plan is to attract lenders and
investors.
6
A Plan Must Pass Three Tests
The Reality Test: proving that:
A market really does exist for your product or service.
You can actually build or provide it for the cost estimates in the
plan.
The Competitive Test: evaluates:
A company’s position relative to its competitors.
Management’s ability to create a company that will gain an edge
over its rivals.
The Value Test: proving that:
A venture offers investors or lenders an attractive rate of return
or a high probability of repayment.
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To get external financing, an entrepreneur’s plan must pass
three tests with potential lenders and investors: (1) the reality
test, (2) the competitive test, and (3) the value test.
7
Why Take the Time to Build a Business Plan?
Although building a plan does not guarantee success, it does
increase your chances of succeeding in business.

A plan is like a road map that serves as a guide on a journey
through unfamiliar, harsh, and dangerous territory. Don’t
attempt the trip without a map!
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Building a business plan is one controllable factor that can
reduce the risk and uncertainty of launching a company.
8
Key Elements of a Business Plan (1 of 5)
Title Page and Table of Contents
Executive Summary
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A business plan should contain a title page with the company’s
name, logo, and address as well as the names and contact
information of the company founders.
To summarize the presentation to each potential financial
institution or investors, the entrepreneur should write an
executive summary. It should be concise – a maximum of one
page – and should summarize all of the relevant points of the
proposed deal.
9
Executive Summary
The executive summary is a written version of “the elevator
pitch”
A good elevator pitch provides:
Context
Benefit
Target customers

Point of differentiation
Clincher
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Like a good movie trailer, an executive summary is designed to
capture readers’ attention and draw them into the plan. If it
misses, the chances of the remainder of the plan being read are
minimal.
10
Executive Summary
Mission and Vision Statement
Description of a Firm’s Product or Service
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A mission statement expresses an entrepreneur’s vision for what
his or her company is and what it is to become.
An entrepreneur should describe the company’s overall product
line, giving an overview of how customers will use its goods or
services. Drawings, diagrams, and illustrations may be required
if the product is highly technical.
11
Product or Service Description
Describe the benefits customers get from the product or service
A feature is a descriptive fact about a product or service.
A benefit is what the customer gains from the product or service
feature.

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The emphasis of this section should be on defining the benefits
customers get by purchasing the company’s products or services
rather than on just a “nuts and bolts” description of the features
of those products or services.
12
Executive Summary
Business and Industry Profile
Competitor Analysis
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If one goal of creating a plan is to raise funding, the
entrepreneur should include a section that acquaints lenders and
investors with the industry in which the company competes.
This section should provide readers with an overview of the
industry or market segment in which the new venture will
operate.
An entrepreneur should describe the new venture’s competition
and the ways in which its business strategy will position it
effectively against key competitors.
13
Competitor Analysis (1 of 2)
Who are the company’s key competitors?
What are there strengths and weaknesses?
What are their strategies?
How successful are they?
What distinguishes the entrepreneur’s product or service from

others already in the market, and how will these differences
produce a competitive edge?
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The plan should include an analysis of each significant
competitor and how well the competing business is meeting the
important criteria that target customers use to make their
purchase decisions among the various companies.
14
Executive Summary
Competitor Analysis
Market Entry Strategy
Marketing Strategy
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The market entry section of a business plan addresses the
question of how to attract customers. By laying out a market
entry strategy, an entrepreneur explains how he or she plans to
enter the market and gain a competitive edge and how his or her
value proposition sets the business apart from the competition.
Proving that a profitable market exists involves two steps:
showing customer interest and documenting market claims.
15
Marketing Strategy (1 of 2)

Show customer interest
Prove that target customers actually need or want the product or
service.
Document market claims
Support market size and growth rates with facts.
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An important element of any business plan is showing how a
company’s product or service provides a customer benefit or
solves a customer problem. Entrepreneurs must be able to prove
that their target customers actually need or want their goods or
services and are willing to pay for them.
Entrepreneurs must support claims of market size and growth
rates with facts, and that requires market research. Quantitative
market data are important because it forms the basis for all of
the company’s financial projections in the business plan.
16
Marketing Strategy (2 of 2)
Address:
Target market
Advertising and promotion
Market size and trends
Location
Pricing
Distribution
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An effective market analysis should address the following
items in detail, based on the framework developed in the
business model.
Target market

Advertising and promotion
Market size and trends
Location
Pricing
Distribution
17
Executive Summary
Competitor Analysis
Marketing Strategy
Entrepreneurs’ and Managers’ Resumes
Plan of Operation
Pro Forma (Projected) Financial Statements
The Loan or Investment Proposal
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A plan should include the résumés of business officers, key
directors, and any person with at least 20% ownership in the
company. This is the section of the plan in which entrepreneurs
have the chance to sell the qualifications and the experience of
their management team.
To complete the description of the business, an entrepreneur
should construct an organization chart that identifies the
business’s key positions and the people who occupy them.
One of the most important sections of a business plan is an
outline of the proposed company’s financial statements – the
“dollars and cents” of the proposed venture. An entrepreneur
should carefully prepare projected (pro forma) financial

statements for the operation for the next year using past
operating data (if available), published statistics, and research
to derive forecasts of the income statement, balance sheet, cash
forecast (always!), and a schedule of planned capital
expenditures.
The loan or investment proposal section of a business plan
should state the purpose of the financing, the amount requested,
and the plans for repayment or, in the case of investors, an
attractive exit strategy.
18
Visualizing Risks and Rewards
Figure 5.1 Visualizing a Venture’s Risks and Rewards
Source: Based on William A. Sahlman, “How to Write a Great
Business Plan,” Harvard Business Review, July/August 1997,
pp. 98–108.
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Figure 5.1 explains how two simple diagrams communicate
effectively to investors both the risks and the rewards of a
business venture.
19
Tips for a Good Business Plan
First impressions count! Use an attractive cover.
Checks for errors.
Make it visually appealing.
Include a table of contents with page numbers.
Make it interesting!
Show that it will make money.
Use spreadsheets for realistic financial forecasts.
Include cash flow projections.

Keep the plan “crisp.”
Tell the truth.
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A plan is usually the tool an entrepreneur uses to make a first
impression on potential lenders and investors. To make sure that
impression is a favorable one, an entrepreneur should keep in
mind these tips.
20
What Lenders and Investors Look for in a Business Plan
The “5 Cs” of Credit
Capital
Capacity
Collateral
Character
Conditions
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To increase their chances of success when using their business
plans to attract capital, entrepreneurs must be aware of the
criteria lenders use to evaluate the creditworthiness of
businesses seeking financing. Lenders and investors refer to
these criteria as the five Cs of credit: capital, capacity,
collateral, character, and conditions.
21
The Pitch: Presenting the Plan
The time allotted for presenting is usually less than 20 minutes,
so it’s important to rehearse and be prepared.
A basic presentation should cover:
Your company and its products and services.

The problem to be solved.
A description of your solution to the problem.
Your company’s business model.
Your company’s competitive edge.
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No matter how good a written business plan is, entrepreneurs
who stumble through the presentation will lose the deal.
Entrepreneurs who are successful at raising the capital their
companies need to grow have solid business plans and make
convincing presentations of them.
22
Tips for Making the Pitch (1 of 3)
Prepare
Practice your delivery and then practice some more.
Demonstrate enthusiasm about the business but don’t be overly
emotional.
Focus on communicating the dynamic opportunity your idea
offers and how you plan to capitalize on it.
Hook investors quickly with an up-front explanation of the new
venture, its opportunities, and the anticipated benefits to them.
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Entrepreneurs should follow these tips when making a business
plan presentation to potential lenders and investors.
23
Use visual aids.
Follow the 10/20/30 rule for PowerPoint presentations.
Explain how your company’s products or services solve some

problems and emphasize the factors that make your company
unique.
Offer proof.
Hit the highlights.
Keep the presentation “crisp.”
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24
Avoid the use of technical terms that will be above most of the
audience.
Remember to tell lenders and investors how they will benefit.
Be prepared for questions.
Anticipate questions and prepare for them in advance.
Focus your answers on what’s important to lenders and
investors.
Follow up with every lender and investor to whom you make a
presentation.
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Building a Strategic Plan
Entrepreneurs must be able to adapt to changes in the
marketplace.
Strategic planning is a tool that can help: it involves developing
a game plan to guide the company as it works to accomplish its
vision, mission, goals, and objectives and to keep it from
straying off course.
It’s crucial to building a successful business.

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The strategic plan gives everyone targets to shoot for, and it
provides a yardstick for measuring actual performance against
those targets, especially in the crucial and chaotic start-up
phase of the business.
26
A Major Shift . . .
The biggest change facing entrepreneurs today is the shift from
financial capital to intellectual capital
Human
Structural
Customer
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Today, a company’s intellectual capital is likely to be the
source of its competitive advantage in the marketplace.
27
Building a Competitive Advantage
Developing a strategic plan is crucial to creating a sustainable
competitive advantage: the aggregation of factors that sets a
company apart from its competitors and gives it a unique
position in the market that is superior to its competitors.
Example: Whole Foods
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Companies that fail to define their competitive advantage fall
into “me-too” strategies that never set them apart from their
competitors and do not allow them to become market leaders or
to achieve above-average profits.

28
Define Competitive Advantage
Consider five aspects of a small company:
Products they sell
Service they provide
Pricing they offer
Way they sell
Values to which they are committed
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Entrepreneurs should examine these five aspects of their
businesses to define their companies’ competitive advantages.
29
The Key: Core Competencies
Unique set of capabilities a company develops in key areas,
such as superior quality, customer service, innovation, team-
building, flexibility, responsiveness, and others that allow it to
vault past competitors.
They are what a company does best.
Best to rely on a natural advantage (often linked to a company’s
“smallness”).
Example: Noodles & Company
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In the long run, a company gains a sustainable competitive
advantage through its ability to develop a set of core
competencies that enable it to serve its selected target
customers better than its rivals.
30

Building a Sustainable Competitive Advantage
Figure 5.2 Building a Sustainable Competitive Advantage
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The key to success is building the company’s strategy on its
core competencies and concentrating on providing value for
target customers.
31
Strategic Management Process (1 of 2)
Step 1: Develop a vision and translate it into a mission
statement
Step 2: Assess strengths and weaknesses
Step 3: Scan environment for opportunities and threats
Step 4: Identify key success factors
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Strategic management is a continuous process that consists of
nine steps.
32
Strategic Management Process (2 of 2)
Step 5: Analyze competition
Step 6: Create goals & objectives
Step 7: Formulate strategies
Step 8: Translate plans into actions
Step 9: Establish accurate controls
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Step 1: Develop a Vision and Create a Mission Statement (1 of
2)
Vision: the result of an entrepreneur’s dream of something that
does not exist yet and the ability to paint a compelling picture
of that dream for everyone to see.
A clearly defined vision:
Provides direction
Determines decisions
Inspires people
Allows for perseverance in the face of adversity
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Highly successful entrepreneurs communicate their vision and
their enthusiasm about that vision to those around them.
34
Step 1: Develop a Vision and Create a Mission Statement (2 of
2)
Mission statement: addresses the question: “what business are
we in?”
Clarifies “why we are here” and “where we are going.”
Serves as a “strategic compass.”
Examples: Bongo World, Nisolo Shoes, Badger Mining, Putney,
Inc., Clymb
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Establishing the purpose of the business in writing gives a
company a sense of direction.
35
Elements of a Mission Statement

Four key questions:
What are we in business to accomplish?
Who are we in to business to serve?
How are we going to accomplish that purpose?
What principles and beliefs form the foundation of the way we
do business?
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A sound mission statement need not be lengthy to be effective.
In fact, shorter usually is better.
36
Step 2: Assess Company Strengths and Weaknesses
Use a balance sheet to identify:
Strengths
Positive internal factors a company can draw on to accomplish
its mission, goals, and objectives.
Weaknesses
Negative internal factors that inhibit a company’s ability to
accomplish its mission, goals, and objectives.
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Building a successful competitive strategy requires a business
to magnify its strengths and overcome or compensate for its
weaknesses.
37
Step 3: Scan for Opportunities and Threats
Identify and manage:
Opportunities
Positive external factors the company can exploit to accomplish
its mission, goals, and objectives.

Threats
Negative external factors that inhibit the firm's ability to
accomplish its mission, goals, and objectives.
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Once entrepreneurs have taken an internal inventory of company
strengths and weaknesses, they must turn to the external
environment to identify any opportunities and threats that might
have a significant impact on the business.
38
Identifying and Managing Threats
Table 5.4 Identifying and Managing ThreatsSourceSpecific
ThreatSeverity
(1 = Low, 10 = High)Probability of Occurrence (0 to 1)Threat
Score (Severity × Probability, Max = 10)1. Channels of
distributionBlankBlankBlankBlank2.
CompetitionBlankBlankBlankBlank3. Demographic
changesBlankBlankBlankBlank4.
GlobalizationBlankBlankBlankBlank5.
InnovationBlankBlankBlankBlank6. Waning customer or
supplier loyaltyBlank
BlankBlankBlank7. Offshoring or
outsourcingBlankBlankBlankBlank8. Stage in product life
cycleBlankBlankBlankBlank9. Government
regulationBlankBlankBlankBlank10. Influence of special
interest groupsBlankBlankBlankBlank11. Influence of
stakeholdersBlankBlankBlankBlank12. Changes in
technologyBlankBlankBlankBlank
Source: Based on Edward Teach, “Apocalypse Soon,” CFO,
September 2005, pp. 31–32.
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Table 5.4 provides a simple analytical tool to help entrepreneurs
identify the threats that pose the greatest danger to thei r
companies.
39
Step 4: Identify Key Success Factors
Key Success Factors (KSFs): factors that determine the relative
success of market participants.
The keys to unlocking the secrets of competing successfully in a
particular market segment.
Example: Five Guys Burgers an d Fries
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Identifying the KSFs in an industry allows entrepreneurs to
determine where they should focus their companies’ resources
strategically.
40
Identifying Key Success Factors
List the specific skills, characteristics, and core competences
your business must possess if it is to be successful in its market
segment.
Table 5.5 Identifying Key Success FactorsKey Success
FactorHow Your Company Rates . . .1Low 1 2 3 4 5 6 7 8 9 10
High2Low 1 2 3 4 5 6 7 8 9 10 High3Low 1 2 3 4 5 6 7 8 9 10
High4Low 1 2 3 4 5 6 7 8 9 10 High5Low 1 2 3 4 5 6 7 8 9 10
HighConclusions:Blank
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Table 5.5 presents a form to help owners identify the most
important success factors in the industry and their implications

for their companies.
41
Step 5: Analyze the Competition (1 of 2)
Small business owners believe they operate in a highly
competitive environment and the level of competition is
increasing.
Yet, 97% of all U.S. businesses do not systematically track the
progress of their key competitors.
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Ask small business owners to identify the greatest challenge
their companies face, and the most common response is
competition.
42
Step 5: Analyze the Competition (2 of 2)
Goal of competitive intelligence:
Conduct continuous rather than periodic analysis of
competition.
Avoid surprises from existing competitors’ use of new
strategies and tactics.
Identify potential new competitors.
Improve reaction time to competitors’ actions.
Anticipate rivals’ next strategic moves.
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The primary goals of a competitive intelligence program
include the following:
● Conducting continuous rather than periodic analysis of
competition
● Avoiding surprises from existing competitors’ new strategies

and tactics
● Identifying potential new competitors
● Improving reaction time to competitors’ actions
● Anticipating rivals’ next strategic moves
43
Competitor Analysis (2 of 2)
Direct Competitors
Offer the same products and services
Customers often compare prices, features, and deals among
these competitors when they shop
Significant Competitors
Offer some of the same or similar products or services
Product or service lines overlap but not completely
Indirect Competitors
Offer same or similar products in only a small number of areas
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Sizing up the competition gives a business owner a realistic
view of the market and his or her company’s position in it. Yet,
not every competitor warrants the same level of attention in the
strategic plan.
44
Collecting Competitive Intelligence (1 of 3)
Monitor industry and trade publications.
Talk to customers and suppliers.
Debrief employees, especially sales representatives and
purchasing agents.
Attend trade shows and conferences and study competitors’
sales literature.
Watch for competitor’s employment ads.

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Entrepreneurs can use these low-cost competitive intelligence
methods to collect information about their rivals.
45
Watch for competitor’s employment ads.
Conduct patent searches for patents competitors have filed.
Get EPA reports for the factories of competing manufacturers.
Monitor direct competitors via social media.
Learn about the kinds of equipment and raw materials
competitors are importing from the Journal of Commerce Port
Import Export Reporting Service.
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Buy competitors’ products and “benchmark” them.
Get competitors’ credit reports.
Check out the reports publicly-held competitors must file with
the SEC.
Investigate UCC reports.
Check out the resources in your local library.
Use the Internet to learn more about competitors.
Visit competing businesses to observe their operations.
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Competitive Profile Matrix
Table 5.6 Sample Competitive Profile MatrixblankblankYour
BusinessBlankCompetitor 1blankCompetitor 2blankKey Success
Factors (from Step 4)WeightRatingWeighted

ScoreRatingWeighted ScoreRatingWeighted
ScoreQuality0.2541.0020.5020.50Customer
retention0.2030.6030.6030.60Location0.1540.6030.4540.60Perc
eption of value0.2040.8020.4030.60Cost
control0.2030.6010.2040.80Total1.00Blank 3.60Blank2.15Blank
3.10
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A competitive profile matrix allows owners to evaluate their
firms against the major competitor by using the KSFs for that
market segment.
48
Why Set Goals and Objectives?
“Would you tell me, please, which way I ought to go from
here?” said Alice.
“That depends a good deal on where you want to get to,” said
the Cheshire cat.
“I don’t much care where.…” said Alice.
“Then it doesn’t matter which way you go,” said the cat.
From Lewis Carroll’s Alice in Wonderland
Rights Reserved.
A small business that “doesn’t much care where” it wants to go
(i.e., one that has no goals and objectives) will find that “it
really doesn’t matter which way” it chooses to go (i.e., its
strategy is irrelevant).
49
Step 6: Create Company Goals and Objectives
Goals: Broad, long-range attributes to be accomplished.
BHAGs

Inspire and focus the company
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Goals are not intended to be specific enough for a manager to
act on but simply state the general level of accomplishment
sought.
50
What Makes an Effective BHAG?
Figure 5.3 What Makes an Effective BHAG?
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Figure 5.3 shows that effective BHAGs originate at the
intersection of a company’s mission, vision, and values; its
distinctive competencies; and its KSFs. Addressing these broad
issues will help entrepreneurs focus on the next phase –
developing specific, realistic objectives.
51
Step 7: Formulate Strategies
Strategy: a road map of the actions an entrepreneur draws up to
achieve a company’s mission, goals, and objectives.
It is the company’s game plan for gaining a competitive
advantage.
Rights Reserved.
By this point in the strategic management process,
entrepreneurs should have a clear picture of what their
businesses do best and what their competitive advantages are.

They also should understand their firms’ weaknesses and
limitations, as well as those of their competitors. The next step
is to evaluate strategic options and then prepare a game plan to
achieve the stated mission, goals, and objectives.
52
Porter’s Three Strategies
Strategy?
Cost Leadership
Differentiation
Focus
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A strategy is the master plan that covers all the major parts of
the organization and ties them together into a unified whole.
53
Three Strategic Options
Figure 5.4 Three Strategic Options
Source: Based on Michael E. Porter, Competitive Strategy (New
York: Free Press, 1980), Chapter 2.
Rights Reserved.
Three basic strategies identified by Michael Porter are cost
leadership, differentiation, and focus.
54
Cost Leadership (1 of 2)
Goal: Be the low-cost producer in the industry or market
segment.
Low-cost leaders have advantages:

Reaching buyers who buy on the basis of price.
The power to set the industry’s price floor.
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A company pursuing a cost leadership strategy strives to be the
lowest cost producer relative to its competitors in the industry.
55
Cost Leadership (2 of 2)
Cost Leadership works well when:
Buyers are sensitive to price changes.
Competing firms sell the same commodity products.
A company can benefit from economies of scale.
Examples: Dollar General and Dollar Tree
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This strategy works well when buyers are sensitive to price
changes, when competing firms sell the same commodity
products and compete on the basis of price, and when
companies can benefit from economies of scale.
56
Differentiation
Goal: Build customer loyalty by positioning its goods or
services in a unique or different fashion.
Be special at something customers value.
Key: Build basis for differentiation on a distinctive competence,
something that the small company is uniquely good at doing in
comparison to its competitors.
Example: RentTheChicken.com

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Small companies encounter risks when pursuing a
differentiation strategy. One danger is trying to differentiate a
product or service on the basis of something that does not boost
its performance or lower its cost to customers. Another pitfall is
trying to differentiate on the basis of something customers do
not see as important.
57
Focus
Goal: Select one or more customer segments in a market,
identify customers’ special needs, wants, or interests, and then
target them with a product or service designed specifically for
them.
Strategy builds on the differences among market segments.
Rather than try to serve the total market, the company focuses
on serving a niche (or several niches) within that market.
Example: I Do Now I Don’t
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A focus strategy recognizes that not all markets are
homogeneous. In fact, in any given market, there are many
different customer segments, each having different needs,
wants, and characteristics. Businesses with a focus strategy sell
to these specific segments rather than trying to sell to the mass
market.
58
Long Tail Markets
Figure 5.5 Long Tail Markets
Source: Based on Chris Anderson, The Long Tail: Why the
Future of Business Is Selling Less of More (New York:

Hyperion Books, 2008).
Rights Reserved.
In his book The Long Tail, Chris Anderson, editor-in-chief of
Wired Magazine, explains that the digital age has opened up
smaller niche market segments to smaller businesses, creating a
long tail of niche markets.
The principal idea of a focus strategy is to select one (or more)
segment(s); identify customers’ special needs, wants, and
interests; and provide them with goods or services designed to
excel in meeting these needs, wants, and interests.
59
Step 8: Translate Strategies into Action Plans
Make plans workable by defining:
Purpose
Scope
Contribution
Resource requirements
Timing
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Failure to implement a strategy effectively is a common
problem. The lesson is that even sound strategies, unless
properly implemented, will fail.
60
Step 9: Establish Accurate Controls
Plan establishes the standards against which actual performance
is measured.
Entrepreneur must:

Identify and track key performance indicators.
Take corrective action.
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So far, the planning process has created company objectives and
has developed a strategy for reaching them, but rarely, if ever,
will the company’s actual performance match stated objectives.
Entrepreneurs quickly realize the need to control actual results
that deviate from plans.
61
Dashboards (1 of 2)
A set of measurements unique to a company that includes both
financial and operational measures.
Gives managers a quick, yet comprehensive, picture of a
company’s overall performance.
Rights Reserved.
To judge the effectiveness of their strategies, many companies
use dashboards, a set of measurements that incorporate both
financial and operational measures to give entrepreneurs and
leadership teams a quick yet comprehensive picture of the
company’s overall performance.
62
Sample Dashboard
Figure 5.6 Sample Dashboard for a Jewelry Store
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Figure 5.6 shows a sample dashboard for a small jewelry store.
When creating dashboards for their companies, entrepreneurs
should consider the following:
● Include graphics for strategic objectives and key success
factors.
● Display data in such a way that the conclusions are clear for
decision making.
● Help identify opportunities to improve profit margins.
● Allow for quick and definitive decisions.
● Offer an overall picture of the business that focuses everyone
on the team on a common set of facts.
63
Dashboards (2 of 2)
Five Perspectives:
Customer: How do customers see us?
Internal Business: At what must we excel?
Innovation and Learning: Can we continue to improve and
create value?
Financial: How do we look to shareholders?
Corporate Citizenship: Do we meet our responsibility to society
as a whole, the environment, the community, and other external
stakeholders?
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Consider five important perspectives: customer, internal,
innovation and learning, financial, and corporate citizenship.
64
Conclusion
The strategic planning process:
Begins with the nine steps.

Becomes more efficient each time.
Teaches entrepreneurial discipline for a higher chance of
survival.
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Copyright
Rights Reserved.
66
Section 2:
The Entrepreneurial Journey Begins
Rights Reserved
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1
Essentials of Entrepreneurship and Small Business Management
Ninth Edition

Chapter 6
Forms of Business Ownership
Rights Reserved.
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Learning Objectives
Explain the advantages and disadvantages of sole
proprietorships and partnerships.
Describe the similarities and differences of C corporations and
S corporations.
Understand the characteristics of a limited liability company.
Explain the process of creating a legal entity for a business.
Rights Reserved.
In this chapter, you will:
1. Explain the advantages and disadvantages of sole
2. Describe the similarities and differences of C corporations
and S corporations.
Understand the characteristics of a limited liability company.
Explain the process of creating a legal entity for a business.
3
Choosing a Form of Ownership
There is no one “best” form of ownership.
The best form of ownership depends on an entrepreneur’s
particular situation.

Key: Understanding the characteristics of each form of
ownership and how well they match an entrepreneur’s business
and personal circumstances.
Rights Reserved.
When an entrepreneur makes the decision to launch a business,
one of the first issues he or she faces is choosing a form of
ownership.
4
Factors Affecting the Choice
Tax considerations
Liability exposure
Start-up and future capital requirements
Control
Managerial ability
Business goals
Management succession plans
Cost of formation
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These are some of the factors entrepreneurs should consider
when they evaluate different forms of ownership.
5
Major Forms of Ownership
Sole Proprietorship
General Partnership
Limited Partnership
Corporation
S Corporation
Limited Liability Company

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Percentage of Business (1 of 3)
Figure 6.1 Forms of Business Ownership: (a) Percentage of
Businesses, (b) Percentage of Sales, and (c) Percentage of Net
Income
Source: Based on data from Sources of Income, Internal
Revenue Service.
Rights Reserved.
When it comes to organizing their businesses, entrepreneurs
have a wide choice of forms of ownership, including sole
proprietorship, general partnership, limited partnership,
corporation, S corporation, and limited liability company. This
figure provides a breakdown of these forms of ownership as a
percentage of business.
7
[Figure 6.1 Continued]
Revenue Service.
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This figure provides a breakdown of the different forms of
ownership as a percentage of sales.
8

[Figure 6.1 Continued]
Revenue Service.
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This figure provides a breakdown of the different forms of
ownership as a percentage of net income.
9
Advantages of a Sole Proprietorship
Simple to create
Least costly form to begin
Profit incentive
Total decision making authority
No special legal restrictions
Easy to discontinue
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The simplest and most popular form of ownership remains the
sole proprietorship. A sole proprietorship, as its name implies,
is a business owned and managed by one individual. Sole
proprietorships make up 72% of all businesses in the United
States.
10
Disadvantages of a Sole Proprietorship
Unlimited personal liability
The company’s debts are the owner’s debts.
Limited skills and capabilities
Feelings of isolation

Limited access to capital
Lack of continuity of the business
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Entrepreneurs considering the sole proprietorship as a form of
ownership must be aware of its disadvantages.
11
Partnership
An association of two or more people who co-own a business
for the purpose of making a profit.
Always wise to create a partnership agreement: states in writing
the terms under which the partners agree to operate the
partnership and that protects each partner’s interests in the
business.
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A partnership is an association of two or more people who co-
own a business for the purpose of making a profit. In a
partnership, the co-owners (partners) share the business’s
assets, liabilities, and profits according to the terms of a
previously established partnership agreement (if one exists).
12
Revised Uniform Partnership Act
Three key elements of any partnership under RUPA:
Common ownership in a business.
Agreement on how the business’s profits and losses will be
shared.
The right to participate in managing the operation of a

partnership.
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When no partnership agreement exists, the Revised Uniform
Partnership Act (RUPA) governs a partnership.
13
Advantages of the Partnership (1 of 2)
Easy to establish
Complementary skills of partners
Division of profits
Larger pool of capital
Ability to attract limited partners
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Here are some of the advantages of the partnership.
14
Types of Partners
General Partners:
Take an active role in managing a business.
Have unlimited liability for the partnership’s debts.
Every partnership must have at least one general partner.
Limited Partners:
Cannot participate in the day-to-day management of a company.
Have limited liability for the partnership’s debts.
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When partners share in owning, operating, and managing a
business, they are general partners.

Limited partners are financial investors in a partnership, cannot
participate in the day-to-day management of a company, and
have limited liability for the partnership’s debts.
15
Types of Limited Partners
Two Types of Limited Partners:
Silent Partners:
Not active in a business but are generally known to be members
of the partnership
Dormant Partners:
Neither active nor generally known to be associated with the
business
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Two types of limited partners are silent partners and dormant
partners.
16
Advantages of the Partnership (2 of 2)
Easy to establish
Complementary skills of partners
Division of profits
Larger pool of capital
Ability to attract limited partners
Minimal government regulation
Flexibility
Taxation
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Here are some reasons to form a partnership.
17

Disadvantages of the Partnership
Unlimited liability of at least one partner
Capital accumulation
Difficulty in disposing partnership interest without dissolving
the partnership
Potential for personality and authority conflicts
Partners bound by law of agency
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A partnership is like a business marriage, and before entering
into one, an entrepreneur should be aware of the disadvantages.
18
Limited Liability Partnerships
All partners in a business are limited partners.
Gives the advantage of limited liability for the debts of the
partnership.
Does not pay taxes – income is passed through to the limited
partners who pay taxes on their share of the company’s income.
Rights Reserved.
Many states now recognize limited liability partnerships
(LLPs), in which all partners in a business are limited partners,
giving them the advantage of limited liability for all of the
partnership’s debts.
19
Corporations
Corporation: a separate legal entity from its owners.
Types of corporations:
Publicly held: a corporation that has a large number of

shareholders and whose stock usually is traded on one of the
large stock exchanges.
Closely held: a corporation in which shares are controlled by a
relatively small number of people, often family members,
relatives, or friends.
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The corporation is the most complex of the three major forms of
business ownership. It is a separate entity apart from its owners
and may engage in business, make contracts, sue and be sued,
own property, and pay taxes.
20
Avoiding Legal Tangles (1 of 2)
Identify the company as a corporation by using “Inc.” or
“Corporation” in the business name.
File all reports and pay all necessary fees required by the state
in a timely manner.
Hold annual meetings to elect officers and directors.
Keep minutes of every meeting (formal and informal) of the
officers and directors.
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Follow these tips to avoid legal tangles in a corporation:
Identify the company as a corporation by using “Inc.” or
“Corporation” in the business name.
File all reports and pay all necessary fees required by the state
in a timely manner.
Hold annual meetings to elect officers and directors.
Keep minutes of every meeting (formal and informal) of the
officers and directors.

21
Avoiding Legal Tangles (2 of 2)
Be sure that the corporation’s board makes all major decisions.
Make it clear that the business is a corporation – officers should
sign all documents in the corporation’s name.
Keep corporate assets and the personal assets of the owners
separate.
Never sign or negotiate corporate documents, such as contracts
and other agreements, or sign official corporate correspondence,
as an owner or shareholder.
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In addition:
Be sure that the corporation’s board makes all major decisions.
Make it clear that the business is a corporation – officers should
sign all documents in the corporation’s name.
Keep corporate assets and the personal assets of the owners
separate.
Never sign or negotiate corporate documents, such as contracts
and other agreements, or sign official corporate correspondence,
as an owner or shareholder.
22
C Corporation
Traditional form of incorporation.
Pays taxes at the corporate tax rate and stockholders also pay
taxes on dividends they receive at their individual tax rates.
Double taxation: a disadvantage of the corporate form of
ownership in which the corporation’s profits are taxed twice,
once at the corporate rate and again at the individual rate on the
portion of profits distributed to shareholders as dividends.

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All large publicly traded companies and some small businesses
are C corporations. C corporations are separate legal entities
and therefore must pay taxes on their net income at the federal
level, in most states, and to some local governments as well.
23
S Corporation
No different from any other corporation from a legal
perspective.
An S corporation is taxed like a partnership, passing all of its
profits (or losses) through to individual shareholders.
To elect “S” status, all shareholders must consent, and the
corporation must file with the IRS within the first 75 days of its
tax year.
Follow 1/3, 1/3, 1/3 rule of thumb.
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In 1954, the IRS Code created the Subchapter S corporation,
more commonly known as S corporation or S Corp. Unlike C
corporations, S corporations do not pay taxes on corporate
income. Income earned by S corporations is passed through to
the owners, just as it is in a sole proprietorship or a partnership.
24
Tax Rate Comparison
Table 6.2 Tax Rate Comparison: C Corporation and S
Corporation or Limited Liability CompanyBlankC Corporation
S Corporation or LLCCorporate or limited liability company net
income$500,000$500,000Maximum corporate
tax35%0%Corporate tax$175,0000After-tax
income$325,000$500,000Maximum shareholder tax
rate39.6%39.6%Shareholder tax$65,000*$198,000**Total tax

paid$240,000$198,000(Corporate tax plus shareholder
tax)BlankBlankTotal tax savings by choosing an S corporation
or limited liability company = $42,000blankblank
*Using the marginal 20% tax rate on dividends: $325,000 ×
20% = $65,000.
**Using the marginal 39.6% tax rate on ordinary income:
$500,000 × 39.6% = $198,000.
Source: U.S. Small Business Administration, 2010.
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Table 6.2 shows a comparison of the tax bill for a small
company organized as a C corporation and the tax liability of
the same company organized as an S corporation (or a limited
liability company, which shares the same tax treatment as an S
corporation).
25
Limited Liability Company (LLC)
Resembles an S Corporation but is not subject to the same
restrictions.
Two documents required:
Articles of organization: creates an LLC by establishing its
name and address, method of management, its duration, etc.
Operating agreement: establishes for an LLC the provisions
governing the way it will conduct business.
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A limited liability company (LLC), like an S corporation, offers
its owners limited personal liability for the debts of the
business, providing a significant advantage over sole
26

Creating a Legal Business Entity
The average cost to create a legal business entity is about
$1,000, but it can range from $500 to $5,000.
Can use Web sites like MyCorporation and BizFilings and
incorporate for just $100.
But, be careful! The cost of filing incorrectly can be high.
States have different regulations on forming business entities.
Rights Reserved.
Establishing and maintaining C corporations, S corporations,
and LLCs can be costly and time-consuming.
27
Conclusion
To choose the best form of ownership, consider the
characteristics of each form.
Evaluate tax considerations, liability exposure, start-up and
future capital requirements, amount of control over the
company, managerial ability, business goals, management
succession plans, and cost of formation.
The forms of business ownership include sole proprietorship,
general partnership, limited partnership, C corporation, S
corporation, and limited liability company.
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An entrepreneur must decide among several forms of business
ownership when launching a new business. Each form of
ownership offers both advantages and disadvantages.
28
Copyright

Rights Reserved.
29
Write 300 words on discussion and respond to two articles with
200 words for response.1)Write 300 words for discussion with 3
peer reviewed references
After you finish the reading, viewing, and / or listening
assignments for this week respond to the following:
Discuss what business, service, or product you plan to use for
your business plan due by the end of the semester. Make sure
to explain why you chose this topic and why it matters to you.
Your initial post should be a minimum of 200 words or more.
The initial discussion post is due by Wednesday night at
midnight. No follow-up posts are necessary.
2) Respond to two articles with 200 words each
Article 1
An effective business plan is essential for attracting investment
for an emerging company that
has not yet established a track record of profitability and
success. They are also an effective
tool for businesses to use in order to stay on track in the future.
In order for new businesses to
get off the ground and attract outside investors, they must first
establish business plans. A
business plan is, at its core, a tool that assists you in
demonstrating to yourself and others that
your business idea is viable and worthy of further examination

and development. Prior to
delving into the specifics of your concept, you must first
identify and overcome any concerns
that may arise in the future, even if they are years
away(Patnaik,2019).
This will help you to take a step back and look at your idea
from a more comprehensive
perspective. This post provides an outline of what should be
included in a business plan, as
well as sample business plans to help you get started on the
correct path when writing your
own plan. According to experts, any decision that a firm makes
should be accompanied by a
complete business plan that details the planned expenses as well
as any potential problems
that may arise. When it comes to business plans, even among
competitors in the same
industry or industrial area, they are rarely the same as one
another(Hider,2018).
For the most part, however, the fundamental features of all
business plans are the same, and
typically include an executive summary of the company as well
as a full explanation of the
company, its services, and its goods. It also defines the
approach that the organisation intends
to take in order to attain its goals and objectives. Despite the
fact that there is no such thing as
a "good" or "poor" business plan, it is
possible to categorise company plans into two
categories. The first is the traditional approach, and the second
is the lean startup approach.
According to the Small Business Administration, the basic
business plan is the most common
type of business plan that is faced by business owners. Standard

in that each component is
significantly more in-depth than the one before it, this version
is the most popular. There is a
great amount of additional effort required for these, and they
are frequently significantly
longer(Patnaik,2019).
References
Patnaik D, de Mola ML, Bates B.(2019). Making a Post-Covid
Field-tried system. Harvard
Business Overview Automated Articles.1-5.
https://search.ebscohost.com/login.aspx?direct=true&Auth
Type=sso&db=buh&AN=1480361
50
HIDER J.(2018). New Field-tried system Enables Shop to
Assemble Ventilator Part Creation.
Current Machine Shop.93(1),78-82.
https://search.ebscohost.com/login.aspx?direct=true&Auth
Type=sso&db=f5h&AN=1435454
71
Article 2
Business plans are to be made in advance before the business is
being commenced and the best ideas of business include the
combination of skills, passion, and strategic thinking, and
timing also. I would like to make a business plan of starting an
E-commerce business, and I have selected this is my business
plan because in the present competitive world every Businesses,
as well as retailers, are moving online faster. I would like to
make my products and sell them online on my website. But it’s
better if I prefer drop shipping because they will handle the
shipping of the product since I am a beginner, and the only
thing we need to manage is to take orders (Ibidunni et al.,
2017).

So for this business plan, we need to do proper market research
and need to identify what type of products are highly demanded
and in which areas. So online products can be sold by selecting
a proper platform of E-commerce and then we need to add
product info about store and designing of theme and web pages
are one of the important elements in this business plan as the
client and customer (Ibidunni et al., 2017).
Nowadays many people prefer to make their purchases by using
e-commerce platforms due to lack of time to visit stores and
they want to save their time and so they prefer e-commerce
websites for shopping online as they get huge varieties being
available for them and delivery is done at their place and this is
the reason why I would like to start an e-commerce business
after my semester as it requires fewer resources, and we can
earn profits also (McKenzie, 2017).
References
Ibidunni, A.S., Peter, F. and Ogbari, M., 2017.
ENTREPRENEURSHIP EDUCATOR'S COMPETENCEON
UNIVERSITY STUDENTS’COMMITMENT TO LEARNING
AND BUSINESS PLAN WRITING. Academy of Strategic
Management Journal, 16(2), pp.1-10.
McKenzie, D., 2017. Identifying and spurring high-growth
entrepreneurship: Experimental evidence from a business plan
competition. American Economic Review, 107(8), pp.2278-
2307.
Chapter 3
Demand, Supply, and Market Equilibrium

This chapter provides an introduction to demand and supply
concepts. Both demand and supply are defined and illustrated;
determinants of demand and supply are listed and explained.
The concept of equilibrium and the effects of changes in
demand and supply on equilibrium price and quantity are
explained and illustrated. The chapter also includes brief
discussions of efficiency (productive and allocative) and price
controls (floors and ceilings). In the Last Word, you can read
how creation of a legal market for human organs could reduce
the shortages of kidneys, lungs, and other needed organs
available for transplant.
*
3-*
Markets
Interaction between buyers and sellers
Markets may be
Local
National
International
Price is discovered in the interactions of buyers and sellers
LO1
In this chapter, the focus is on markets that are competitive.
This requires large numbers of buyers and sellers acting
independently. An example of a local market is the farmer’s
market that brings together buyers and sellers of produce in the
summer. An example of a national market is the US real estate
market and the New York Stock Exchange is an international

market.
*
3-*
Demand
Demand
Demand schedule or demand curve
Amount consumers are willing and able to purchase at a given
price
Other things equal
Individual demand
Market demand
LO2
To be part of the demand for a good, consumers have to be
willing and able to purchase the good. When deriving demand,
we are assuming that the only factor that causes consumers to
buy more or less is the price of the good. It is assumed that all
other factors that influence the amount that consumers will buy
are constant. Market demand is derived by summing the
individuals’ demand curves.
*
3-*
Law of Demand
Law of demand
Other things equal, as price falls, the quantity demanded rises,
and as price rises, the quantity demanded falls
Explanations
Price acts as an obstacle to buyers
Law of diminishing marginal utility

Income effect and substitution effect
LO2
An inverse relationship exists between price and quantity
demanded. Prices act as obstacles for buyers and keep them
from being able to buy everything that they want. So, it makes
sense that with a limited income, consumers will buy more at
lower prices.
Diminishing marginal utility refers to the decrease in added
satisfaction that results as one consumes additional units of a
good or service, i.e., the second “Big Mac” yields less extra
satisfaction (or utility) than the first. Because additional units
yield less utility, the price has to be lower to make up for less
utility.
The income effect occurs as a lower price increases the
purchasing power of money income; this enables the consumer
to buy more at a lower price (or less at a higher price) without
having to reduce consumption of other goods.
The substitution effect is when a lower price gives an incentive
to substitute the lower-priced good for the now relatively
higher-priced goods.
*
3-*
The Demand Curve
LO2
P

Qd
$5
4
3
2
1
10
20
35
55
80
P
Q
D
6

5
4
3
2
1
0
10 20 30 40 50 60 70 80
Quantity demanded (bushels per week)
Price (per bushel)
The demand curve illustrates the inverse relationship between
price and quantity. The downward slope indicates a lower
quantity (horizontal axis) at a higher price (vertical axis), and a
higher quantity at a lower price, reflecting the law of demand.
*
3-*
Market Demand
LO2Market Demand for Corn, Three BuyersPrice
per bushelQuantity DemandedTotal
Qd
per
weekJoeJenJay$510128304202317603353926100255603915418
08754221

There are three buyers in the market for corn. The market
demand is the horizontal summation of the individual demand
curves of all of the consumers in the market. At a price of $3,
for example, the three individual curves yield a total quantity
demanded of 100 bushels.
*
3-*
Changes in Demand
6
5
4
3
2
1

0
Quantity demanded (thousands of bushels per week)
Price (per bushel)
P
Q
D1
2 4 6 8 10 12 14 16 18
D2
D3
LO2
P
Qd
$5
4
3
2
1
2000
4000
7000
11,000
16,000
Decrease
in demand
Increase
in demand

Changes in the demand for corn will be brought about by a
change in one or more of the determinants of demand. An
increase in demand is shown as a shift of the demand curve to
the right, as from D1 to D2. A decrease in demand is shown as a
shift of the demand curve to the left, as from D1 to D3.
*
3-*
Changes in Demand
LO2
6
5

4
3
2
1
0
Quantity demanded (thousands of bushels per week)
Price (per bushel)
P
Q
D1
2 4 6 8 10 12 14 16 18
D2
D3
Change in demand
Change in quantity demanded

These changes in demand are to be distinguished from a change
in quantity demanded, which is caused by a change in the price
of the product and is shown by a movement from one point to
another point on a fixed demand curve.
*
3-*
Determinants of Demand
Determinants of demand
Change in consumer tastes and preferences
Change in the number of buyers
Change in income
Normal goods
Inferior goods
LO2
Determinants are those things that can shift the entire demand
curve causing demand to change. When most consumers
experience the same change in tastes for a particular good, the
demand for the good will change. If there is a preferable change
in tastes, demand will increase. On the other hand, if there is an

unfavorable change in tastes, demand will fall.
If there are more buyers in the market for a good, demand will
increase, whereas when there are fewer buyers in the market for
a good, demand will decrease.
Normal goods are goods that we buy more of as our incomes
increase. Most of the goods that we buy are normal goods. We
buy fewer normal goods when our income decreases.
Inferior goods are goods we buy more of as our income
decreases. We buy fewer inferior goods if our income increases.
*
3-*
Determinants of Demand
Change in prices of related goods
Complementary good
Substitute good
Change in consumer expectations
Future prices
Future income
LO2
Complementary goods are goods that we consume jointly. It
isn’t beneficial to have one without its complement. When the
price of one complement increases, the demand for the other
complement decreases. When the price of one complement
decreases, the demand for the other complement increases.
Some examples are cell phones and cell phone service, tuition
and textbooks.
Substitute goods are goods that we use in place of another. A
perfect substitute is a good that we use in place of the other
without any loss of satisfaction. If the price of one good
increases, the demand for its substitute increases. If the price of
one good decreases, the demand for the other substitute

decreases. Some examples are Colgate and Crest toothpaste,
Nike and Reebok shoes.
If consumers expect the future price of a product to be higher,
they increase their current demand for the product.
If consumers expect the future price of a product to be lower,
they decrease their current demand for the product.
If consumers expect their future income to rise, they increase
purchases now. If consumers believe their future income will be
less, they reduce their demand for some products.
*
3-*
Determinants of DemandDeterminants of Demand: Factors That
Shift the Demand CurveDeterminantExamplesChange in buyers’
tastesPhysical fitness rises in popularity, increasing the demand
for jogging shoes and bicycles; cell phone popularity rises,
reducing the demand for land-line phones.Change in the number
of buyersA decline in the birthrate reduces the demand for
children’s toys.Change in incomeA rise in incomes increases the
demand for normal goods such as restaurant meals, sports
tickets, and necklaces while reducing the demand for inferior
goods such as cabbage, turnips, and inexpensive wine.Change in
the prices of related goodsA reduction in airfares reduces the
demand for bus transportation (substitute goods); a decline in
the price of DVD players increases the demand for DVD movies
(complementary goods).Change in consumer
expectationsInclement weather in South America creates an
expectation of higher future coffee bean prices, thereby
increasing today’s demand for coffee beans.

A change in one or more of these determinants will change
demand and shift the demand curve.
*
3-*
Supply
Supply
Supply schedule or a supply curve
Amount producers are willing and able to sell at a given price
Individual supply
Market supply
LO3
To be part of the supply of a good, producers have to be willing
and able to produce the good. When creating supply, we are
assuming that the only factor that causes firms to produce more
or less is the price of the good. It is assumed that all other
factors that influence the amount that firms will produce are
constant. Market supply is created by summing the individual
firms’ supply curves.
*
3-*
Law of Supply
Law of supply
Other things equal, as the price rises, the quantity supplied rises

and as the price falls, the quantity supplied falls
Explanation
Price acts as an incentive to producers
At some point, costs will rise
LO3
Producers are willing to produce and sell more of their product
at a high price than at a low price. There is a direct relationship
between price and quantity supplied. Given product costs, a
higher price means greater profits and thus an incentive to
increase the quantity supplied. Beyond some level of output,
producers usually encounter increasing costs per added unit of
output.
*
3-*
The Supply Curve
LO3
5
4
3
2
1
0
Price (per bushel)
Quantity supplied (bushels per week)

S1
10 20 30 40 50 60 70
P
Q
P
Qs
$5
4
3
2
1
60
50
35
20
5

Because price and quantity supplied are directly related, the
supply curve graphs as an upsloping curve. Other things equal,
producers will offer more of a product for sale as its price rises
and less of the product for sale as its price falls.
*
3-*
Changes in Supply
LO3
S1
P
Q
S2
S3
Increase
in supply
Decrease
in supply
P
Qs
$5
4
3
2
1

12,000
10,000
7000
4000
1000
$6
5
4
3
2
1
0
Price (per bushel)

Quantity supplied (thousands of bushels per week)
2 4 6 8 10 12 14 16
A change in one or more of the determinants of supply causes a
change in supply. An increase in supply is shown as a rightward
shift of the supply curve, as from S1 to S2. A decrease in supply
is depicted as a leftward shift of the curve, as from S1 to S3.
*
3-*
Changes in Supply
S1
P
Q
S2
S3
Change in quantity supplied
Change in supply
LO3

$6
5
4
3
2
1
0
Price (per bushel)
Quantity supplied (thousands of bushels per week)
2 4 6 8 10 12 14 16
These changes in supply are to be distinguished from a change
in quantity supplied, which is caused by a change in the price of
the product and is shown by a movement from one point to
another point on a fixed supply curve.
*

3-*
Determinants of Supply
Determinants of supply
A change in resource prices
A change in technology
A change in the number of sellers
A change in taxes and subsidies
A change in prices of other goods
A change in producer expectations
LO3
If resource prices (input prices) go up, supply decreases. If
resource prices (input prices) go down, supply increases.
If technology increases, supply increases. If we adopt, or use,
less efficient technology, supply decreases.
If the number of sellers increases, supply increases. Economic
profits in the market draw producers from less profitable
markets into this market. If the number of sellers decreases,
supply decreases. Economic losses in the market cause
producers to leave market.
If taxes are increased on a specific product, supply decreases. If
taxes are decreased, or eliminated on a specific product, supply
increases. If subsidies are increased on a specific product,
supply increases. If subsidies are decreased on a specific
product, supply decreases.
If the price of another good that the producer could produce
with the same resources rises, the supply decreases for the
product the producers are currently producing.
If the price of another good that the producer could produce
with the same resources falls, the supply increases for the
product the producers are currently producing.
If producers expect that the price of the product they are
producing will be higher in the future, they cut back on current
supply and supply will decrease. If producers expect the price

of the product they are producing will be lower in the future,
they increase current supply to take advantage of the currently
higher price.
*
3-*
Determinants of SupplyDeterminants of Supply: Factors That
Shift the Supply CurveDeterminantExamplesChange in resource
pricesA decrease in the price of microchips increases the supply
of computers; an increase in the price of crude oil reduces the
supply of gasoline.Change in technologyThe development of
more effective wireless technology increases the supply of cell
phones.Change in taxes and subsidiesAn increase in the excise
tax on cigarettes reduces the supply of cigarettes; a decline in
subsidies to state universities reduces the supply of higher
education.Change in prices of other goodsAn increase in the
price of cucumbers decreases the supply of watermelons.Change
in producer expectationsAn expectation of a substantial rise in
future log prices decreases the supply of logs today.Change in
the number of suppliersAn increase in the number of tattoo
parlors increases the supply of tattoos; the formation of
women’s professional basketball leagues increases the supply of
women’s professional basketball games.

A change in one or more of these determinants will change
supply and shift the curve.
*
3-*
Market Equilibrium
Equilibrium occurs where the demand curve and supply curve
intersect
Equilibrium price and equilibrium quantity
Surplus and shortage
Rationing function of prices
Efficient allocation
LO4
The equilibrium price is also known as the market-clearing
price. Graphically, note that the equilibrium price and quantity
are where the supply and demand curves intersect. It is
important to note that it is not correct to say supply equals
demand.
The rationing function of prices is the ability of competitive
forces of supply and demand to establish a price where buying
and selling decisions are coordinated.
At prices above this equilibrium, note that there is an excess
quantity supplied, or a surplus.
At prices below this equilibrium, note that there is an excess
quantity demanded, or shortage.
At equilibrium the markets are economically efficient.
*
3-*

Efficient Allocation
Productive efficiency
Producing goods in the least costly way
Using the best technology
Using the right mix of resources
Allocative efficiency
Producing the right mix of goods
The combination of goods most highly valued by society
LO4
Competitive markets generate productive efficiency that is the
production of any particular good in the least costly way.
Sellers that don’t achieve the least-cost combination of inputs
will be unprofitable and have difficulty competing in the
market.
The competitive process also generates allocative efficiency
which is producing the combination of goods and services most
valued by society. Allocative efficiency requires that there be
productive efficiency. Productive efficiency can occur without
allocative efficiency. Goods can be produced in the least costly
method without being the most wanted by society. Allocative
and productive efficiency occur at the equilibrium price and
quantity in a competitive market. Resources are neither over -
allocated nor under-allocated based on society’s wants.
*
3-*
Market Equilibrium
6
5
4

3
2
1
0
2 4 6 8 10 12 14 16 18
Bushels of corn (thousands per week)
Price (per bushel)
P
Qd
$5
4
3
2
1
2000
4000
7000
11,000
16,000
P
Qs
$5
4

3
2
1
12,000
10,000
7000
4000
1000
7
3
D
S
6,000 bushel
surplus
7,000 bushel
shortage
LO4

The intersection of the downsloping demand curve, D, and the
upsloping supply curve, S, indicates the equilibrium price of $3
and equilibrium quantity of 7,000 bushels of corn per week.
The shortages of corn at below-equilibrium prices (for example,
7000 bushels at $2) drive up the price. The higher prices
increase the quantity supplied and reduce the quantity demanded
until equilibrium is achieved. The surpluses caused by above-
equilibrium prices (for example, 6000 bushels at $4) push the
price down. As price drops, the quantity demanded rises and the
quantity supplied falls until equilibrium is established. At the
equilibrium price and quantity, there are neither shortages nor
surpluses of corn.
*
3-*
Rationing Function of Prices
The ability of the competitive forces of demand and supply to
establish a price at which selling and buying decisions are
consistent
LO4
Prices automatically rise and fall and bring a market closer to
equilibrium. Prices are the best tool for eliminating market
shortages and surpluses.
*

3-*
Changes in Demand and Equilibrium
LO5
0
P
D4
D3
0
P
D1
D2
S
Increase in demand
D increase:
D decrease:
Decrease in demand
S

An increase in demand results in an increase in price and an
increase in quantity exchanged.
A decrease in demand results in a decrease in price and a
decrease in the quantity exchanged.
*
3-*
Changes in Supply and Equilibrium
0
P
D
S4
S3
0
P
D
S2
S1
Increase in supply
S increase:
S decrease:
Decrease in supply

LO5
An increase in supply results in a decrease in price and an
increase in the quantity exchanged.
A decrease in supply results in an increase in price and a
decrease in the quantity exchanged.
*
3-*
Complex Cases
LO5Effects of Changes in Both Supply and DemandChange in
SupplyChange in DemandEffect on Equilibrium PriceEffect on
Equilibrium Quantity1.
IncreaseDecreaseDecreaseIndeterminate2.
DecreaseIncreaseIncreaseIndetermi nate3.
IncreaseIncreaseIndeterminateIncrease4.
DecreaseDecreaseIndeterminateDecrease

These cases demonstrate what happens to equilibrium price and
equilibrium quantity when supply and demand shifts occur
simultaneously.
If supply increases and demand decreases, price declines, but
the new equilibrium quantity depends on the relative sizes of
shifts in demand and supply.
If supply decreases and demand increases, price rises, but the
new equilibrium quantity depends on the relative sizes of shifts
in demand and supply.
If supply and demand change in the same direction (both
increase or both decrease), the change in equilibrium quantity
will be in the direction of the shift but the change in
equilibrium price now depends on the relative shifts in demand
and supply.
*
3-*
Government Set Prices
Price ceiling
Set below equilibrium price
Rationing problem
Black markets
Example is rent control
LO6
Price ceilings are maximum prices that can be charged on a
good. Price ceilings are set on goods that are considered to be
necessities, but the equilibrium price is so high that many
people are unable to purchase the item. To be effective, the

price ceiling must be set below the equilibrium price. When
price ceilings are placed on a good, this creates a chronic
shortage which makes it difficult to determine how to ration the
limited output for all of the consumers who are willing and able
to buy the good. The shortages often lead to black markets
where the good is sold at a higher price than the price ceiling.
Price ceilings distort the efficient allocation of resources.
*
3-*
S
P
Q
D
P0
PC
Q0
Shortage
Qd
Qs
Ceiling
$3.50
3.00
LO6
A price ceiling is a maximum legal price such as Pc. When the
ceiling price is below the equilibrium price, a persistent product
shortage results. Here that shortage is shown by the horizontal
distance between Qd and Qs.
*

3-*
Price floor
Prices are set above the market price
Chronic surpluses
Example is the minimum wage law
LO6
A price floor is a minimum price fixed by the government. A
price at or above the price floor is legal; a price below it is not.
*
3-*
LO6
S
P
Q
D
P0
Pf
Q0
Surplus
Qs
Qd
Floor
2.00
$3.00

A price floor is a minimum legal price such as Pf. When the
price floor is above the equilibrium price, a persistent product
surplus results. Here that surplus is shown by the horizontal
distance between Qs and Qd.
*
3-*
Legal Market for Human Organs
What if we created a legal market for human organs?
Positive effects
Increase the incentive to donate
Eliminate the persistent shortage of eyes, livers, hearts,
kidneys, etc.
Organ transplants have become increasingly common, but not
everyone who needs a transplant can get one. In 2012, there
were 116,000 Americans on the waiting list for transplants. It is
estimated that there are 6,900 deaths per year in the U.S.
because not enough organs are available.
Why shortages? No market exists for human organs. The
demand curve for human organs would resemble others in that a
greater quantity would be demanded at low prices than at higher
prices. Donated organs that are rationed by a waiting list have a
zero price. The existing supply is perfectly inelastic, and there
is a fixed quantity offered by willing donors. There is a
shortage of human organs because at a zero price the quantity
demanded exceeds the quantity supplied.
*
3-*

Legal Market for Human Organs
Negative effects
Diminishes the special nature of life by commercializing it
The market would leave out the poor and uninsured
Increases the cost of medical care
Prohibition on market solution has resulted in a $1 billion
illegal market
The first negative effect is a moral objection that turning human
organs into commodities commercializes human beings and
diminishes the special nature of human life.
An analytical critique based on the elasticity of supply suggests
that the likely increase in the actual number of usable organs for
transplants would not be great. A health cost concern suggests
that a market for body organs would greatly increase the cost of
health care.
Prohibitions on a human organ market have given rise to a
worldwide, $1 billion-per-year illegal market. There is concern
that those willing to participate in an illegal market such as this
may also be willing to take extreme measures to solicit organs
from unwilling donors.
Supporters of legalizing the market for organs argue that it
would increase the supply of legal organs, drive down the price
of organs, and reduce the harvesting of organs from unwilling
sellers (the lower price would make it less profitable).
*
Grading Rubric for Discussions
Total Possible Points: 20 points per discussion question
Exemplary
Proficient
Partially Proficient or Incomplete
Presentation of Major Discussion Posting

Up to 10 points
Well-thought-out, very clearly presented persuasive posting that
responds to the question
Incorporated and cited the textbook or other sources, such as
current events, articles, Web resources (do not simply copy and
paste information from a Website; instead, summarize the
information and properly cite the source in your posting)
Up to 7 points
A reasonably well thought out and somewhat clearly presented
posting with a citation
0 points
Posting is vague or lacks clear point of view
Did not cite supporting information from the textbook or
outside sources
Writing Mechanics
Up to 5 points
Discussion posting contains minimal grammar, punctuation, or
spelling errors.
Up to 3 points
Discussion posting contains some grammar, punctuation, or
spelling errors.
0 points
Grammar, punctuation and/or spelling errors affected the
readability and/or effectiveness of the discussion.
Replies to Other Students' Postings
Up to 5 points
Clearly and politely provided a counter perspective or identified
additional points to support another student's perspective,
Motivated discussion with further questions
Up to 3 points

Replied to another student's posting but did not provide reasons
for either challenging or agreeing with the posting
0 points
Did not reply to another student's posting OR used belligerent
or attacking language when responding to another student's
perspective
Chapter 1
Limits, Alternatives, and Choices
This chapter introduces many of the fundamental concepts in
economics and covers a wide variety of concepts. It begins with
the definition of economics; then the economic perspective is
discussed. After that, the discussion moves to the development
of economic theory. The individual’s and society’s economizing
problems are examined using a budget line and production
possibilities curves where economic growth is addressed. The
Last Word deals with common mistakes students make when
thinking about economics.
*
1-*
Economics

Economics
A social science concerned with making optimal choices under
conditions of scarcity
Economic wants exceed society’s productive capacity
LO1
If wants didn’t exceed our productive capacity, everyone could
have everything that they ever wanted and this class wouldn’t
exist. Since we can’t get everything that we want, we have to
make choices. The choices that we make are the best options
available given the circumstances. Every choice that is made
has an impact on the economy. Being in this class right now
impacts the economy.
*
1-*
The Economic Perspective
Economic perspective
Scarcity and choice
Opportunity cost
Purposeful behavior to increase utility
Marginal analysis
LO1
The economic perspective is the way economists view the
world. This includes considering scarcity of resources, the
opportunity costs of economic decisions, and how consumers
and businesses exhibit purposeful behavior in order to increase
their utility. Often economists use marginal analysis, which is
weighing the marginal benefits and the marginal costs of some
activity, in their work.
*

1-*
Scarcity and Choice
Resources are scarce
Choices must be made
Opportunity cost
There’s no free lunch
LO1
If resources weren’t scarce, we wouldn’t have to make choices.
Because we have to make choices, there is a cost to every
choice and that’s called “opportunity cost.” This is where the
phrase “There’s no such thing as a free lunch” comes from.
What did you give up to be in this class? What would you be
doing if you weren’t in class right now?
It’s important to note that everyone’s opportunity cost will be
different.
*
1-*
Purposeful Behavior
Rational self-interest
Individuals and utility
Firms and profit
Desired outcome
LO1
Individuals and businesses make rational decisions; decisions
that will make them better off, not worse off.
With rational self-interest, the goal is to maximize utility or

satisfaction. This does not mean that we are completely selfish
or that we can’t make wrong decisions. We can derive utility by
helping others and often when we make decisions, we don’t
have all of the information, so wrong decisions can be made.
Firms are rational when they make choices about which
products to produce in an attempt to maximize their profits.
People make decisions with some desired outcome in mind.
*
1-*
Marginal Analysis
Marginal benefit
Marginal cost
Marginal means “extra”
Comparison between marginal benefit and marginal cost
LO1
Every time we make a choice, we are weighing the marginal
benefit and cost. We will choose to do something if the
marginal benefit is greater than the marginal cost because that
is rational and will help to maximize utility.
If a person says, “That’s not worth it,” then they are saying the
marginal cost is greater than the marginal benefit.
*
1-*
Theories, Principles, and Models
The scientific method

Observe
Formulate a hypothesis
Test the hypothesis
Accept, reject, or modify the hypothesis
Continue to test the hypothesis, if necessary
LO2
Based on the scientific method, economic principles and
theories are created. Observing real world behavior, formulating
a possible explanation or hypothesis, testing this, and deciding
to accept, reject, or modify the explanation. Continue to test the
hypothesis again real-world facts.
*
1-*
Economic Principle
Generalizations
Other-things-equal assumption
Ceteris paribus
Graphical expression
LO2
Economic principles are generalizations about economic
behavior that are true for the average person. The other -things-
equal assumption is the ceteris paribus assumption which means
that all variables other than those under consideration are held
constant or is assumed to not change for a particular analysis.
In economics, graphs are often used to illustrate the relationship
between variables.
*

1-*
Micro and Macro
Microeconomics
The study of the individual consumer, firm, or market
Macroeconomics
The study of the entire economy or a major aggregate of the
economy
LO3
In microeconomics an individual consumer, household, or
industry is examined. Examining the price of a particular
product or demand or supply of a particular products’ market is
studied in microeconomics.
In macroeconomics the entire economy is examined.
Macroeconomics also looks at the basic groups in the economy
such as all households, all businesses, all of the government, or
the foreign sector. All goods and services produced in the
economy, or the unemployment rate for the entire labor force,
or the inflation rate are all macroeconomics topics.
*
1-*
Positive and Normative Economics
Positive economics
Economic statements that are factual
Normative economics
Economic statements that involve value judgments
LO3
Positive economics can be supported or disproved with data.

There isn’t any subjectivity.
Normative economics is what “ought to be.” This is subjective
since everybody has different opinions about what is desirable.
*
1-*
The Economizing Problem
The economizing problem
Limited income and unlimited wants
The budget line
Attainable and unattainable combinations
Trade-offs and opportunity costs
LO4
The individual’s economizing problem exists because of the
combination of a limited income and unlimited wants.
A budget line is used to illustrate the greatest combinations of
two goods that can be purchased with a certain amount of
income. It reflects the greatest amount of these two goods that
can be purchased.
A budget line is created for a specific level of income so that
when income changes, the budget line will shift to show the
higher or lower incomes.
*
1-*
The Consumer’s Budget Line
12
10

8
6
4
2
0
2 4 6 8 10 12 14
LO4The Budget Line: Combinations of DVDs and Books
Attainable with $120Units of DVDs
(Price = $20)Units of Books
(Price=$10)Total
Expenditure60$12052$12044$12036$12028$120110$120012$12
0
Income = $120
Pdvd = $20
= 6
Income = $120
Pb = $10

= 12
Attainable
Unattainable
Any combination of goods inside the budget line can be
purchased, but that combination of goods is not representative
of the maximum that could be purchased. Since the blue budget
line represents the maximum of goods that can be purchased,
any point outside (to the right) of the budget line represents a
combination whose price exceeds the available income and
therefore can’t be purchased. A budget line clearly illustrates
how much of one good must be sacrificed to get more of another
good (opportunity costs).
If income increases, the budget line will shift to the right to
show that now more books and DVDs can be purchased. If
income falls, the budget line shifts to the left to show that fewer
books and DVDs can be purchased.
*

1-*
Global Perspective
LO4
This global perspective shows how average incomes vary
greatly among countries. If average incomes vary, so will the
budget constraints for these nations.
*
1-*
Society’s Economizing Problem
4 categories of economic resources
Land
Labor
Capital
Investment
Entrepreneurial ability
LO5
For the economy as a whole, the economizing problem exists
because resources are scarce.
Resources refers to inputs that are used in the production of
other goods and services.
Land refers to all natural resources.
Labor is one of the human resources and refers to all physical
and mental talents used in the production of a good or service.
Capital refers to anything man-made and used to produce goods
and services. Capital is an investment good; it is not the same
as money. Money isn’t even considered a resource.
Entrepreneurs are another type of human resource but is
different from labor mainly because entrepreneurs are risk-

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