Entrepreneurs in a Market Economy

Economy
Economics is the social science that analyzes the

production, distribution, and consumption of goods and services. The large set of inter-related economic production and consumption activities which aid in determining how scarce resources are allocated. An economy consists of the economic system of a country or other area, the labor, capital and land resources, and the economic agents that socially participate in the production, exchange, distribution, and consumption of goods and services of that area. Activities related to the production and distribution of goods and services in a particular geographic region.

Demand and supply

Demand refers to how much (quantity) of a product or service

is desired by buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price; the relationship between price and quantity demanded is known as the demand relationship.

Supply represents how much the market can offer. The

quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price. The correlation between price and how much of a good or service is supplied to the market is known as the supply relationship. Price, therefore, is a reflection of supply and demand.

Law of demand
y Law of demand states that the amount demanded

increases with a fall in the price and diminishes with a rise in price, other things remaining the same.

Law of supply
y Law of supply-Other things remaining unchanged,

a rise in the price of a product is followed by an extension of supply and a fall in price is followed by a contraction of the supply of that product

Supply and Demand Affects Price

y If the Demand is more, but supply is less then there

will be a rise in the price.

y If the demand is less and supply is more then there

will be a fall in price of the product.

Equilibrium
When supply and demand are equal, then the economy is

said to be at equilibrium. At this point, the allocation of goods is at its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded. At the given price, suppliers are selling all the goods that they have produced and consumers are getting all the goods that they are demanding.

Disequilibrium
1) Excess supply: The suppliers are trying to produce more goods, which they hope to sell to increase profits, but those consuming the goods will find the product less attractive and purchase less because the price is too high.

2) Excess Demand: There are too few goods being produced to satisfy the wants (demand) of the consumers. However, as consumers have to compete with one other to buy the good at this price, the demand will push the price up, making suppliers want to supply more and bringing the price closer to its equilibrium.

Economic Systems
The economic system within an economy is the process

and correlation between the production, consumption, and distribution of services and goods. All economies must answer three questions: 1)What goods and services will be produced? 2) How will the goods and services be produced? 3)What needs and wants will be satisfied with the goods and services produced? Economies must choose a way to allocate, or distribute , the goods and services that are available to the people who need or want them. These different allocation processes are what create an economy.

Types of Economy
y Command Economy y Market Economy y Traditional Economy y Mixed Economy

Command Economy
y The government determines what, how, and for

whom products and services are produced. y Government makes the decisions y Little choice for the consumers in what is available. y Individuals may not be able to obtain exactly what they want.

Market Economy
Individuals and Businesses decide , what, how and

for whom goods and services are produced. Entrepreneurship thrives in a market economy Decisions about the production and consumption are made by millions of people, each acting alone. Individual choice creates the market so there are many items available that are similar If a good sells, it will remain in the market, otherwise the good will not continue to be produced. Products and services are always available to everyone who has the means to pay for them

Traditional Economy
In a traditional economy goods and services are

produced the way they have always been produced. The traditional economy is used in countries that are less developed and are not yet participating in the global economy. Most of what is produced is consumed and what is left over is traded. It lacks the formal structure found in more advanced economic system and usually have limited capital resources available to improve this condition.

Mixed Economy
y Has elements of both command and market

economies. y It results when a country shifts away from a command economy toward a market economy but still has government involvement in the market place. y Government makes all the decisions about how the country's resources will be utilized.

Cost
y Costs are expenses the company has to pay during

the production of its product.

y Fixed Cost y Variable Cost y Total Cost y The total cost of producing all output. It is calculated

by FIXED COSTS + VARIABLE COSTS

Fixed Cost
y A cost that remains constant, regardless of any

change in a company's activity. y Example: If you are leasing a building at Rs.50,000per month, then you will pay that amount each month, no matter how well or how poorly the business is doing. y Costs that don't change over a period of time and don't vary with output. E.g. salaries, rent, tax, insurance. Fixed costs can also be called indirect costs as they are not directly associated with the final product. Fixed costs have to be paid even if the company is not producing any goods.

y In economics, fixed costs are business expenses that

are not dependent on the level of goods or services produced by the business. They tend to be timerelated, such as salaries or rents being paid per month.

Variable Cost
y Costs that vary directly with output so when output

increases, variable costs also increase. E.g. raw materials, electricity. Variable costs can also be called direct costs as they are directly associated with production. y A cost that changes in proportion to a change in a company's activity or business.

Opportunity Cost
y The cost of an alternative that must be forgone in

order to pursue a certain action. Put another way, the benefits you could have received by taking an alternative action.
y 2. The difference in return between a chosen

investment and one that is necessarily passed up. Say you invest in a stock and it returns a paltry 2% over the year. In placing your money in the stock, you gave up the opportunity of another investment - say, a risk-free government bond yielding 6%. In this situation, your opportunity costs are 4% (6% - 2%).

y Opportunity cost is the process of choosing one good

or service over another. The item that you don't pick is the opportunity cost.
y A benefit, profit, or value of something that must be

given up to acquire or achieve something else. Since every resource (land, money, time, etc.) can be put to alternative uses, every action, choice, or decision has an associated opportunity cost.

Marginal cost
y Marginal cost is the change in total cost that arises

when the quantity produced changes by one unit. That is, it is the cost of producing one more unit of a good. y The marginal cost of production is the increase in total cost as a result of producing one extra unit. y Marginal costs are defined as the change in total costs resulting from a one unit change in output. They are the variable costs associated with increasing output in the short run. A change in marginal costs might come about for example because of a change in the prices of essential raw materials or an increase in the wage rate paid to part-time employees.

y Marginal cost is the cost of the next unit or one

additional unit of volume or output.

y To illustrate marginal cost lets assume that the total

cost of producing 10,000 units is $50,000. If you produce a total of 10,001 units the total cost is $50,002. That would mean the marginal costthe cost of producing the next unitwas $2.
y Fixed costs such as salaries, depreciation, property

taxes generally do not increase when one additional unit is produced.

Role of Government in a market Economy

y Provide a legal System to make and enforce laws y y y y y

and to protect private property rights Provide public goods that individuals or private businesses would not provide Correct Market Failures-such as external costs and economic slowdown(unemployment) Maintain Competition-by regulating monopolies Redistribute Income-by taxing those with larger incomes and helping those in need. Stabilize the Economy-by reducing unemployment and inflation and promoting economic growth

Advantages of Purchasing an Existing Business

y Some of the groundwork to get the business up and

running will have been done. y It may be easier to obtain finance as the business will have a proven track record. y A market for the product or service will have already been demonstrated. y There may be established customers, a reliable income, a reputation to capitalize and build on and a useful network of contacts.

y A business plan and marketing method should

already be in place. y Existing employees should have experience you can draw on. y Many of the problems will have been discovered and solved already.

Disadvantages of Purchasing an Existing Business

y You often need to invest a large amount up front,

and will also have to budget for professional fees for solicitors, surveyors, accountants etc. y You will probably also need several months' worth of working capital to assist with cash flow. y If the business has been neglected you may need to invest quite a bit more on top of the purchase price to give it the best chance of success.

y You may need to honor or renegotiate any

outstanding contracts the previous owner leaves in place. y You also need to consider why the current owner is selling up and how this might impact the business and your taking it over. y It's possible current staff may not be happy with a new boss, or the business might have been run badly and staff morale may be low

Steps Involved in Buying a Business

1) Research :Research the sector you're interested in,

including the best time to buy, and shortlist two or three businesses. 2) Get professional advice: Professional help is required as you go through the negotiation, valuation and purchase process. 3) Initial viewing and valuation:Be discreet - the owner may not want staff to know they are selling, but be thorough and record key findings.

4) Arrange finance: y details of the business/sales particulars y accounts for the last three years y financial projections - if no accounts are available y details of your personal assets and liabilities y There are several possible sources of finance you could consider bank finance, financing from friends and family. 5) Make a formal offer: If you make your initial offer by phone, follow this up in writing. Head your letter subject to contract and include this phrase in all written communication.

6) Negotiation: y Before completing the sale, it may be worth trying to negotiate an overlap period so you have time to become familiar with the business before taking over. y You and your solicitor need to verify the information you have based your offer on to make sure whether the business is worth buying. 7)Completion: Even after you reach an agreement on the price and terms of sale, the deal could still fall through. You have to meet certain conditions of sale to complete, including: verification of financial statements ,transfer of leases, transfer of contracts/licenses , transfer of finance, transfer of existing or new VAT registration

Looking after Existing Employees

y There are regulations that govern what happens to

employees when someone new takes over a business. y These apply to all employees when a business is transferred as a going concern, meaning employees automatically start working for the new owner under the same terms and conditions. y Employment tribunal awards: When you buy an existing business, you might decide you need to employ fewer staff. But be careful about making any changes, as an employee might take a case to an employment tribunal for unfair dismissal or unfair selection for redundancy. It's best to consult a solicitor before making any such changes

y Inform and consult employees: If you do want to

discuss reducing employee numbers or reorganizing staff, it's a good idea to do this once you have completed the due diligence period, but before you take over the business. As the new employer you should inform and consult all employees - including employee representatives - who may be affected. y Pensions:As their new employer, you do not have to take over rights and obligations relating to employees' occupational pension schemes put in place by the previous employer. However, if you don't provide comparable pensions arrangements, you could theoretically face a claim for unfair dismissal.

Investigating
y Do I have experience in this type of business? y Will I enjoy running the business six months or six

years from now?

y Do I have the finances to buy the business and keep

it operational?

y Then ask these types of questions about the existing

business:
 Whats its history over the past five years?  Have revenues been increasing or decreasing?  Why is the owner selling?  What do customers say about the business?

y If no major roadblocks exist after the initial

investigation, youre ready to establish a fair purchase price. A common formula combines the market value of hard assets, the cost value of the inventory, any liabilities, and the goodwill value of the business.
y When you and the seller come close to agreeing on a

price, get the professionals involved. An accountant experienced in buying and selling businesses should thoroughly review the business financial picture of the past five years and help you negotiate the final purchase price. Also have an attorney prepare a purchase offer and the final sales contract.

Advantages of a Family Business

1. Family members behave as stewards of the business and its capital needs for the benefit of the next generation. So they tend to take a long-term view regarding their investments. 2. Hiring family members means hiring people who are more committed to the success of a business than when they are ordinary employees. When things get tough, they will do what is needed to make it work.

3. Often a family business defines success not only in terms of profit but also in providing employment and benefits to the community. A business, as your brothers said, can offer employment to qualified relatives and opportunities to bond with them as well as put cherished beliefs into practice. 4. Other advantages include having shared values, improved customer relations through family contract, and long-term stability.

Disadvantages of Family Business

y 1. A business can be a breeding ground for family

problems: jealousy, anger, resentment. There is less reservation about letting feelings out among family members and family problems can easily spill over into the workplace.
y 2. The manager of a family business may be hard put

turning down relatives as employees regardless of lack of qualifications. Relatives who are allowed into the company may abuse family ties and feel that they can under-perform simply because they are relation.

y 3. Some family members, especially the elderly, may

find it difficult to retire and let the younger members take over.
y 4. Other disadvantages include possible managerial

incompetence, lack of exposure to other business, nepotism, and inability to separate family and work.
y 5.The interests of a family member may not be

aligned with the interest of the business. For example, if a family member wants to be president but is not as competent as a non-family member, the personal interest of the family member and the well being of the business may be in conflict.

6) The interests of the entire family may not be balanced with the interests of their business. For example, if a family needs its business to distribute funds for living expenses and retirement but the business requires those to stay competitive, the interests of the entire family and the business are not aligned. 7) Finally, the interest of one family member may not be aligned with another family member. For example, a family member who is an owner may want to sell the business to maximize their return, but a family member who is an owner and also a manager may want to keep the company because it represents their career and they want their children to have the opportunity to work in the business.

Advantages of starting a new Business

y Being your own Boss - you can make your own

decisions, keep your own time and not have to answer to "The Boss" y Hard Work & Know How - If you are a hard worker and / or have immense industry know how, you may want to benefit from the long hours you do or the knowledge that you have acquired over time. y Financial Independence - One day, you may realise your dream of financial independence y Creative Freedom - no more restrictions, you can do what you like and have the freedom to work, design, create, build what you think is best - your way!

y Goodwill - you don't have to pay for it (as if your

y y y

would if you were buying a business) - you get to build it Location, Premises, Building Fit out - you get to choose it all Staff - your not lumped with staff you don't want. You hire and train from scratch - your way No Bad Name - a fresh business, a fresh start. Your name has no bad history with suppliers or customers. If you buy a business, you may find some people just won't deal with the business because of past dealings Business Image - you create the business image you want. Your way.

Disadvantages of starting a new Business

y Cash Flow - your business may not have a positive

cash flow for two years - how are you going to cover that? y Competitors - you may invest all this time, money and effort into your business and a large competitor targets your customers and offers them a similar product / service at below your cost - until your business has failed. While this may be anti competitive and contravene sections of The Trade Practices Act 1974, it may be too late for your business

y Homework - have you done it? You may do it all and

then find when you are all set up, that something from left field becomes apparent and significantly alters the outlook of your business y History - If you buy a business, you are buying something. You are buying history of the business trading, you have staff in place, equipment and premises in place, customers ringing in with orders on your first Monday morning. If you start a business, you have no history. Everything must be generated from scratch. y Long hours of Work and Commitment- this is a common phrase from small business owners. It basically means, your hours of work and level of commitment is such that you cannot take a holiday, your business is always with you on all days of a

y month and basically your neck is on the line. You

can't just throw the keys back and give it all away if it gets too hard! y Suppliers - Suppliers may not extend you credit as your business has no history, so you may have to pay upfront for your goods, and you may not collect money from your customers for those goods for 90 120 days. This is very detrimental to cash flow. Can you sustain this? Have you factored it into your budget? y Starting a business from scratch means a huge sacrifice with no guarantee of reward. Your current employed situation may actually be a better position than starting a small business