Читать книгу Fascinating economy - Larissa Zaplatinskaia - Страница 5

You live in a world where goods and services are essential. Can you imagine what the world would be like if you could not buy food, use public transportation, or attend classes? The goods and services you use every day are important. Your life would not be the same without them.

In the game of economics, different players produce and consume these goods and services. Consumers and producers make the decisions that drive the game of economics. They gather information and weigh options before making a choice. They ask themselves certain questions: How much am I willing to spend? Or how much should I produce?

The way people answer these and other important questions determines how they allocate resources. And this in turn affects the production, distribution and consumption of goods and services. Economics is powered by the many decisions made by players. Examine how the various players go about making these important decisions.

Economics is like a game. It has rules, properties, outcomes, and players. We all play the game of economics, and of course players are an important part of any game. They make the decisions that drive the action. Economic players make decisions about what to produce, sell, and buy.

Any time you buy something, you are playing the game of economics. You are participating in the economic system. To understand the importance of your role as a player in the economy, as well as the roles that other people play, examine what the many different players do.

People also have wants – that is, things they desire but could live without, such as concert tickets or the latest basketball shoes. Everyone has needs and wants, and everyone tries to fulfill both, if possible.

Everyone plays the game of economics all the time. Even the simplest actions are economic actions. For instance, if you download a ringtone to your phone, you are playing the role of a consumer. Your cell phone is a good.

Consumers make purchases depending on what they need and want. But of course, they must also consider how much money they have to spend, and the prices of the things they want. The decisions made by consumers send messages. The ring tone is a service. Your cell phone provider plays the role of producer.

In every type of economic system, there are exchanges between consumers and producers. The decisions that consumers make influence the decisions of producers. Producers decide what and how much to produce, depending on the desires of consumers.

Consumers

to the other group of players, the producers. Consumers let the producers know what they want to buy and the price they are willing to pay. Every time a consumer decides, it sends this kind of message.

Price has a major effect on a consumer’s decision to buy. If the price of a movie ticket is too high, you might stay home and watch a DVD instead. On the other hand, if the movie theater slashes prices, there will be long lines at ticket office of consumers waiting to see the latest release.

The important role that consumers play includes deciding

– What products and services to use and buy.

– How much to buy.

– What price they are willing to pay.

Producers

Consumers make purchasing decisions, but there would not be anything to purchase without producers. Producers try to satisfy the needs and wants of consumers. They provide consumers with such goods and services as clothing, food, entertainment, and healthcare.

To be successful, producers have to determine what consumers want and how much they are willing to pay. Producers make all their decisions based upon the decisions made by consumers. So, producers are always trying to predict what consumers will want next, and how much they will pay for it.

Have you ever been to a water park? How many services do you buy for the price of admission? You can go down a variety of slides, swim in a wave pool, or maybe even watch a live show. At a water park, producers offer many goods and services in one place. To make a profit, they must be able to anticipate how many consumers will want to buy their many goods and services, and what they will be willing to pay.

Producers play an important economic role. They decide what to produce, how to produce it, and for whom it will be produced. If they make the right decisions, they will satisfy consumers’ needs and wants.

Workers as Economic Players

Producers produce the things that consumers buy. These things have to be made. The people who make the goods and provide the services sold by producers play an important role in the game of economics. We call these players workers.

Workers create goods and services.

Workers, however, are not a third group of economic players. When they make or provide goods and services, they act as producers. But when they purchase things, they act as consumers. Workers play a dual role. They are producers and consumers.

Workers as Consumers and Producers

Workers straddle the line between consumer and producer. Sometimes these two roles can be played simultaneously. For example, when a restaurant employee is sent out to buy potatoes, that worker is both a producer (someone making food) and a consumer (someone buying food).

Open Workers as Consumers and Producers. Sort the activities into the correct column to show when a worker is playing the role of a consumer, a producer, or both.

Businesses as Economic Players

When they make goods or provide services, workers play the role of producer. But it takes more than workers to offer those goods and services to consumers. For instance, a restaurant is more than just a group of workers who decide to make and serve food to people. A successful restaurant needs someone to apply for the appropriate permits, rent the building, hire employees, buy equipment, and oversee production.

When a person or a group of partners decides to undertake these tasks, they start a business. Businesses provide the goods and services the consumers want by hiring, organizing, and supplying workers. Nothing would get made without workers. But it is the task of businesses to get those things to the consumers who want them.

Business Activity

Businesses drive most economic activity. Without businesses, workers would not have anything to produce, and they would be unable to earn money. Without money, they could not play their other economic role as consumers.

When a new business opens, jobs are created for workers. Businesses are producers. But they also provide what the economy needs for consumption. They pay workers what they need to consume the goods and services offered by producers.

For example, when Dell Inc., a computer company, opened a factory in Austin, Texas, in the 1990s, the company provided thousands of jobs for workers in the area. The new workers then had money they could spend on goods and services. This boosted local businesses and created even more jobs in the area. In turn, this led to workers earning more money to spend on things such as Dell computers. From this example, can you see how a big business might help to circulate money within a community?

Government as an Economic Player

So far, you have seen that most economic decisions in the United States are made by individual consumers or businesses. But even under the American free-market system, the government of the United States still plays an important role in the economy. The U.S. government tries to maintain steady growth, keep prices stable, and provide public goods and services. An example of government action came in 2006, when the U.S. government helped stabilize the price of oil by ensuring that oil companies could not raise the price of gasoline above a certain limit. This enabled consumers to continue to afford and use gasoline.

This decision also affected the government, because it also buys a lot of gas. The government plays the role of consumer even while it is attempting to guide and benefit the economy.

Send My Bill to the Government

In many countries, the government plays a more active role in the economy. In Canada, the government provides universal healthcare to all its citizens using taxes paid by workers and businesses. In this case, the government plays the role of producer.

How Does the Government Play?

The government can fill the role of consumer as well as producer. After all, it takes goods and services to run the government. It is helpful, therefore, to think of the government as a very large, public business.

View How Does the Government Play?, then sort the activities into the correct column to show whether the government is playing the role of consumer or producer.

Playing Roles

Consumers and producers play important roles in economics. They decide what to buy or what to produce, and how much of it to buy or to produce. Other players in this game include workers, businesses, and government.

In a free-market system, people are free to decide what to buy. But those choices can be influenced by others. Sometimes people are influenced by family, friends, or advertisements. People are also influenced by what is available, how much it costs, and how much money they have. There are many things that can influence the decisions of consumers.

Producers are also affected by many influences. What do consumers want? What will they pay for those things? What kinds of advertisements help them decide what to buy? These and other questions influence what producers make. Questions about resources influence producers, as well. They need to know what resources are available for production, how much they cost, and how far away they are.

Who Has the Power?

Deciding what to buy seems simple. You choose what you want and pay someone for it. But the buying and selling of goods and services is much more complicated than that. Part of the reason lies in the fact that producers make so many different products. For consumers it can sometimes feel overwhelming. With so much to choose from, it can be hard to decide.

Why do producers make so much stuff? Producers want to sell their goods and services, but not everybody wants to buy the same things. If they did, restaurants would have one-item menus and electronics stores would have only one kind of television.

Consumers have the power to decide what to buy. Producers are aware of this. They make products and services based on what they think consumers will buy. This means producers must pay close attention to how consumers behave. By understanding what consumers have done with their money in the past, producers try to predict what they will be willing to buy in the future. Because of this, consumers have a great influence over the actions of producers. Consumers have a great deal of power over producers.

The Power of Producers

Consumers may make the final choice about what to buy, but that does not mean producers have no power of their own. The choices made by consumers are always limited by what is available. Consumers may want to buy something, but unless a producer makes it, they are out of luck.

Producers determine what is available, and this gives them economic power. For instance, when the quantity of a popular product is limited, consumers will often pay a higher price. For a variety of reasons, including the popularity or rarity of an item, consumers might buy even though the price is high, the quality is not as good, or the choices are limited.

In this way, producers have a great influence on what is bought.

Guessing Game

To sell the things, the goods they make and the services they provide, producers want to know what consumers want. What makes them happy? Producers might make an original product that becomes incredibly popular and sell millions. Or they might make an original product that nobody wants and get stuck with a full warehouse and a lot of unpaid bills. Production sometimes feels like a guessing game.

Producers want to become masters at this guessing game, and they use a variety of methods to do so. Surveys or focus groups are used to test ideas on small groups of consumers. Based on their reactions to new products producers can make better guesses about what the general public will buy.

Collecting information on what consumers like and dislike is called market research. If producers can predict what consumers will buy, what products will be popular, or even simply what people need, they can produce a lot of it. That allows them to sell what they make and grow their business.

Cultural Influences

Producers and consumers influence each other. But the choices made by consumers and producers are also affected by other factors. Culture plays a significant role in economic decisions.

In most societies, the goods and services produced help distinguish one culture from another. Things like food, art, sports, clothing, and literature differ between cultures. Consumers are influenced by their own cultural values and traditions. These traditions influence consumers to buy certain kinds of goods and services. They also have an effect on what producers make.

Producers have to be very conscious of what consumers are going to buy, and many consumer decisions are influenced by cultural values. For instance, many cultures value sports. In the U.S., sports such as baseball, football, and basketball are valued very highly. In Europe and Latin America, soccer plays an important cultural role; in some countries, people are even allowed to take time off work to watch a big game or the World Cup. Sports fans all over the world spend millions of dollars every year on tickets and merchandise, but which sports are valued – and therefore potentially valuable to producers – depends on the culture.

Holidays are another important cultural feature. Thanksgiving is a big holiday in the U.S. People travel by air, car, and train to spend time with their families and eat a special meal. In countries such as Iraq, Lebanon, and Jordan, Eid is a very important holiday. Parents buy their children new clothes, shoes, and toys during Eid, which takes place during three days at the end of Ramadan. They also prepare and share special dishes and take time to visit with family and friends.

In Asian countries such as China, Korea, and Vietnam, the Lunar New Year is the most important holiday of the year. In China, for example, the festivities begin on the first full moon of the year and can last for up to 25 days. The New Year is a time of renewal. Families spend time together eating rich foods and paying respect to ancestors and elders.

Different holidays lead to different consumption decisions, and these consumption decisions affect producers. A producer in China is not going to be very successful trying to sell turkeys in November, but a producer in the U.S. would be wise to go into the turkey business around Thanksgiving.

Peer Pressure

Consumers do not always buy goods and services because of a need or a want. Sometimes consumers make purchases because they feel pressured. Sometimes people buy products simply because others are. This is known as peer pressure.

Peer pressure influences consumer behavior, and it does not just apply to young people. People of all ages feel peer pressure. For example, an adult might feel pressure to buy a luxury car, a boat, or some other expensive item simply because that is what other successful adults do.

Because peer pressure can convince consumers to buy things they might not otherwise purchase, producers like it. Producers cannot control peer pressure, but often try to start a trend in the hopes of creating peer pressure. Producers try to anticipate what the next trend will be, especially during a holiday season like Christmas. They can make a lot of money if they produce the right product at the right time.

Scarce Resources and the Environment

The decisions made by consumers and producers are also affected by the availability of resources. Today, many resources are becoming scarce at the same time that the needs and wants of consumers are increasing. Meeting those needs and wants is a big challenge for any society.

Goods and services can become scarce as a result of limited availability of natural resources. Environmental changes can also lead to scarcity. For example, farmers who experience drought or floods might lose their crops – an important resource. Big cities can lose electricity, another kind of resource, during heat waves.

A Game of Influences

In economics, the players all make free choices, but these free choices are not completely free from influence. Consumers and producers influence each other with the decisions they make. Culture, peer pressure, price, and environmental changes also affect these decisions.

View A Game of Influences, and match each economic situation listed in the left column with the type of influence it corresponds to in the right column.

Over the years, the quantity and variety of goods and services available to consumers has greatly increased. Consumers have many more choices today than ever before.

On one hand, this makes consumers’ choices easier because they can usually find something that they want to buy. However, at the same time it also makes consumer decisions harder. With so many choices, consumers have to sift through many options to find the one that suits them. This takes time and energy.

Consumers use different decision-making methods based on personal values and outside influences. To understand how consumers, participate in economics, we need to understand how they make decisions and what factors influence these decisions.

Over the years, the quantity and variety of goods and services available to consumers has greatly increased. Consumers have many more choices today than ever before.

On one hand, this makes consumers’ choices easier because they can usually find something that they want to buy. However, at the same time it also makes consumer decisions harder. With so many choices, consumers have to sift through many options to find the one that suits them. This takes time and energy.

Consumers use different decision-making methods based on personal values and outside influences. To understand how consumers, participate in economics, we need to understand how they make decisions and what factors influence these decisions.

Like everyone else, you make decisions every day. But do your decisions always make sense? You certainly hope so. When it comes to buying, we all try to use rational choice before we make a decision.

When consumers make a purchase, they try to make rational, or wise, decisions. Often, economic decisions are made after thinking about price, quantity, need, and sacrifice. But sometimes economic decisions are irrational, or unwise. Irrational economic decisions can lead to trouble.

Like everyone else, you make decisions every day. But do your decisions always make sense? You certainly hope so. When it comes to buying, we all try to use rational choice before we make a decision.

When consumers make a purchase, they try to make rational, or wise, decisions. Often, economic decisions are made after thinking about price, quantity, need, and sacrifice. But sometimes economic decisions are irrational, or unwise. Irrational economic decisions can lead to trouble.

Cost-Benefit Analysis

To make rational choices, we need lots of information. In fact, making wise decisions usually involves cost-benefit analysis. A rational choice will seek to maximize benefits while minimizing costs. Costs and benefits differ from one consumer to the next, so each person’s rational choice will be different as well.

It is Your Call

Think, for example, of trying to make a wise decision about which cell provider to use. One company offers 5,000 minutes for $50. Another gives 2,000 minutes for $45. The extra benefit is 3,000 more minutes for a cost of only $5. It seems like a good deal, right? If you regularly use 3,000 minutes per month, it is a good deal. But what if you never use more than 1,500 minutes per month? There is no need to pay for extra minutes if you will never use them.

By using information about the two plans and your own needs, you would be able to make a cost-benefit analysis and come up with a rational decision.

Financial Planning

Cost-benefit analysis is helpful when it comes to making decisions, but it is not the only tool used by consumers. Consuming usually involves money, and most of us need to plan ahead and keep track of our money to make sure there is enough when we need it. This involves financial planning, which is the creation of a strategy to pay for necessities and save for future goals.

Give Me a Break

Imagine that you have saved some money and now you are ready to choose how to spend it. Some of your friends are planning to go to the beach on the weekend. You would like to join them, but if you spend your money on a day at the beach, you will not have any left. Do you need or want that money for something else? A financial plan can help you answer the second question.

As with rational choice, financial planning requires information and an understanding of your financial goals. Financial planning is another form of rational choice. You decide whether the benefits of a purchase now are worth the cost of not having the money for a different purchase later.

The Benefits of a Budget

One tool that some consumers use to help with financial planning is a budget. A budget allows a person to control how much money is coming in and how much is going out.

The main idea behind a budget is to have enough money to pay for the thing you want and need. A consumer with a budget knows whether he or she can afford to go on a beach vacation without spending money needed for rent or bills. A budget can also help consumers reach their financial goals. A budget can help you save for the future by keeping your expenses below your income. This leads to savings now for spending later.

Top Five Benefits of a Personal Budget

Know how much money you are making.

Know how much money you are spending.

Know how much money you are saving.

Plan for future expenses.

Plan for future savings.

Fixed and Flexible Expenses

Expenses are part of life. A budget helps monitor and control them.

There are two main types of expenses: fixed expenses and flexible expenses. Fixed expenses, such as rent, a car payment, or tuition, are necessary and generally do not change from month to month. Flexible expenses, such as buying video games, paying for car repairs, or purchasing new clothes, are non-necessary or unplanned spending. Sometimes, flexible expenses can be adjusted or eliminated. At other times, however, they cannot be avoided.

Fixed expenses must be taken into account in a budget, because they rarely change and usually cannot be eliminated. Once the fixed expenses are paid for, there may or may not be much left for flexible expenses.

Short-Term Expenses

Fixed expenses cannot be avoided. They are part of life. The financial planning that takes care of these expenses is known as short-term planning. Short-term planning involves keeping track of and covering all fixed expenses such as food and rent.

Most consumers do not limit their budget to just the necessities. They also try to plan for flexible expenses like entertainment, gifts, trips, and unforeseen circumstances that are a regular part of nearly every consumer’s spending habits. Short-term planning allows consumers to have enough money to do some of this discretionary spending.

Securing Your Future

Short-term planning takes care of expenses for necessities and some luxuries. But most people have financial goals that go beyond just meeting their day-to-day expenses.

To prepare for spending in the years to come, many people employ long-term planning. This kind of planning involves looking into the future to make wise decisions.

Long-term planning can seem a bit overwhelming. It can be hard to plan for spending that you will not do until 20 years have passed. But long-term planning has many important benefits. Wise consumers try to think about the long-term plan even though it can be difficult to predict the future.

What is Your Plan?

How about you? Have you considered your long-term expenses? Have you started saving money for college, or maybe for a down payment on a car? These are two common reasons for long-term planning.

Assets and Income

When consumers plan for the future, they pay attention to assets and income. An asset is anything a person owns that has monetary value. Personal assets can include cars, computers, jewelry, or a savings account. Income is the money a person gets, whether as a gift, a salary, or earnings from an investment.

Knowing your assets and income is necessary in helping you plan your budget. This, in turn, will affect the way you spend your money. For example, you could decide to invest in stocks this year. Five years from now, you may show a profit on this investment. That extra money can help pay for tuition. This is an example of how long-term planning can be effective. You can plan now for how your assets and income might grow in the future.

View Assets and Income. Sort each example into the appropriate column to show whether it is an asset or a form of income.

Financial Planning and Decision Making

Consumers engage in both short-term and long-term planning. Without short-term planning, you might have fixed expenses that go unmet. Without long-term planning, you cannot move toward your bigger goals such as going to college, owning a home, and eventually retiring.

Both short-term and long-term planning affect how consumers make decisions. What consumers spend now often depends on their plans for the next month, the next year, and the distant future.

View Financial Planning and Decision Making. Sort the following financial goals into the correct column below to make sure you understand the difference between short- and long-term planning.

Consumers in the economy are a bit like runners in a race. The runners each have a different reason for competing. Some may be happy just to be in the race at all. Others may be intent on achieving a personal best, while for others only winning the race will do. All the runners take part in the race to achieve some sort of satisfaction. They run to find fulfillment. Consumers buy goods and services for just the same reason. They want to find satisfaction when they participate in the economy.

What makes someone satisfied? Of course, the answer is different for everyone. Some people are content with little, while others can never seem to get enough. As one of the richest men in the world, Henry Ford was once asked, «How much is enough?» He answered, «Just a little bit more.»

Some want to win, while others are happy to participate.

Utility

Satisfaction cannot be easily measured. But because nearly all economic decisions involve consumers in search of satisfaction, economists try to understand it. They call a person’s economic satisfaction utility. Utility is the amount of personal satisfaction consumers get from the goods and services they purchase.

For instance, if you buy a new CD and find that you really like the music on it, then you are satisfied. Your utility is high. If you do not like the music, however, you are not so satisfied. Your utility is low. The concept of utility applies to every decision you make when buying goods and services. It is an important factor to consider when looking at how consumers make decisions.

Remember that your measure of utility is quite different from that of others. Your utility depends on your personal tastes and preferences, your goals, and your individual situation. Someone else might love a CD that you did not like very much. Utility levels differ from person to person.

Some things can be weighed easily, but satisfaction is not one of them.

Utility and the Cost-Benefit Analysis

You already know that consumers use the cost-benefit analysis to make economic decisions. Costs and benefits can be measured in monetary or nonmonetary terms. Ultimately, costs are measured in satisfaction, or utility. Since each person’s utility is different, different people make different decisions in the same situation.

Consider this example. Mike and Emily are in the same physics class. They are both having a hard time understanding the material, so the teacher offers to help them catch up after school. The cost to each of them is a few hours at the end of the school day. While the time commitment is the same for both, their utility may be quite different. Emily has other after-school activities that she does not want to miss. Mike has no other plans after school. The cost of this time is different to each of them. Their utility is different.

Different decisions result from different tastes and preferences.

The Road Not Traveled

When you make decisions as a consumer, you do not consider just one possibility. For instance, if you are thinking about going to a movie, you are weighing two different options: going and not going. Not going leaves you other options: reading a book, taking a walk, or playing a game with a friend. Every decision involves following one path and not following all the other possible paths.

So, a decision is not just about selecting something that has more benefits than costs. It is about selecting the option that gives the greatest amount of utility from among all the available opportunities. Consumers have to consider the benefits lost as a result of their decisions.

Think of a farmer who decides to grow corn on his land. His opportunity cost is the alternative crop that might have been grown. What if he decided to grow wheat instead of corn? Would he have made more profit? Since he decided to grow corn, he gave up the alternative to grow wheat. He considered both options before making his decision, and in the end, he thought that it would be more profitable to grow corn.

Utility and Incentive

To maximize utility, consumers and producers look at incentives. These are the factors that motivate or influence human behavior.

Incentives can be monetary or nonmonetary. If you work very hard at your job, you might get rewarded with a bonus or a pay raise. Your employer is giving you a monetary incentive to work hard. If your hard work earns an extra week of vacation instead, that is a nonmonetary incentive. Because utility is a person’s satisfaction, an incentive can raise utility whether it is monetary or nonmonetary.

Incentives increase the possible benefits of a decision. As such, they affect the cost-benefit analysis a consumer might make.

Most people would agree that a bonus is a better incentive than a pat on the back.

What Drives You?

When you look at opportunity costs, you consider monetary and nonmonetary incentives.

If you reduce your part-time work hours to do volunteer work in your field of study, you will decrease your monetary benefits but probably increase your nonmonetary benefits. The volunteer work helps others and makes you feel good. This decision could also have a monetary effect; the experience you get from volunteering might help you get a better paying job in the future.

Untangling and calculating the monetary and nonmonetary incentives can be tricky. As a consumer, you do it all the time when you make decisions.

Marginal Analysis

Consumers try to boost their utility by making decisions that maximize satisfaction, or benefits, while minimizing costs. You have seen that cost-benefit analysis and paying attention to opportunity costs help consumers figure out what decision will be best.

Consumers also use marginal analysis when they make decisions. Marginal analysis helps answer an important question: What happens if the situation changes by one unit of something? Economic players ask themselves this question in one way or another all the time.

Consider this situation: The latest summer blockbuster has gotten some pretty bad reviews but seeing it will give you a chance to do something with your friends. Besides, tickets for a matinee are only $5. The utility you will receive from that purchase seems high.

But what if you get to the theater and discover that the ticket prices have been raised by $1? It might still seem worth it to go. But it is also possible that the extra dollar pushes the cost higher than the benefit. If that is true, then your utility has decreased, and you likely will choose not to go.

Will you see the movie for $6? How about $7? What about $8? At a certain point, the price will rise high enough that the cost outweighs the benefit, and your decision would change. That is marginal analysis.

Producers Thinking Like Consumers

Even though they may be unaware of it, consumers use marginal analysis when they make economic decisions. For every good or service, there is a point at which consumers change their minds about making a purchase if the price gets too high. Consumers are not necessarily aware of the fact that it was marginal analysis that led to that decision.

Producers, on the other hand, pay close attention to marginal analysis. They hope to maximize profits, which means they want as many customers as possible to pay the highest price possible. To achieve this, they try to predict consumer behavior. Producers ask themselves questions such as, «Will raising ticket prices by $1 drive away moviegoers, or will most consumers be willing to pay that much more?»

Producers use marginal analysis all the time. When producers can increase the utility of consumers, they sell more goods and services. When they can get the most out of consumers, they will maximize profits.

Producers study consumers to see how they make decisions.

More Than Price

Marginal analysis can be applied to other questions as well. Any time one more unit of something can be added, the question of whether it is beneficial to do this must be asked and answered.

A bank manager looks a bit worried. Her customers seem to be waiting a bit too long before they are served by a teller. What if she hired one more teller? The waiting time would decrease, and her customers would be more satisfied. If the customers do not have to wait very long, it is highly possible they will return to the same branch.

A hungry customer has already eaten three plates of sushi. He is considering ordering one more plate and uses marginal analysis to compare the pros and cons of doing so. He knows that he might not enjoy the fourth plate of sushi as much as he enjoyed the first three. And he does not want to get sick from overeating. In the end, his marginal analysis tells him to forgo that fourth plate.

David is a city council member. The council needs to vote on a one cent increase to a local tax. David and another city council member want to vote in favor of the tax increase. The extra money will allow the city to replace a worn-out playground at a neighborhood park, which would be beneficial to local residents with children. A third council member is against the tax increase, because not all residents will benefit from the new park, and she thinks the money could be spent in a better way. Marginal analysis is different from person to person because everyone has individual goals and values.

Everyone is unique. It is what makes people separate individuals, each with their own likes and dislikes. In the game of economics, this uniqueness means that consumers have different tastes and different preferences when it comes to buying goods and services. Look at all the brands and types of cereals in a grocery store. That should give you some idea of how diverse consumers’ tastes are.

Consumer decisions are influenced by many factors. Taste is just one of them. See the list below for some of the nonmonetary factors that influence consumers.

– Taste

– Culture

– Beliefs

– Values

Beyond Money

Culture, family traditions, and personal values all affect consumer decisions. These factors are nonmonetary incentives.

When a family celebrates Thanksgiving, they make economic decisions that might be influenced by the desire to cook the perfect meal. So, they might ignore other factors, like price, because they gain more utility from the feast itself than from cutting costs. The nonmonetary incentive of hosting a great Thanksgiving meal outweighs monetary incentives – at least to a point.

The combination of cultures, beliefs, and values leads to different kinds of decisions being made by different consumers, even when they face the same situation.

Working together as a family offers incentives that go beyond money.

Culture Matters

The desire for particular goods and services is often influenced by a person’s culture.

Part of the culture of the United States is Independence Day, or the Fourth of July. Thanksgiving is also important in the United States. Because of these features of the culture, consumers buy a lot of fireworks in early July and a lot of turkeys in late November.

How Culture Influences Consumerism

As we learned before, our economic decisions are based on what culture or cultures we belong to. Culture is more than just holidays and sports, though. For instance, the rock-and-roll culture is highly present in many countries around the world. People who belong to this culture enjoy dressing like rockers, buying and listening to rock music, attending concerts given by their favorite bands, and collecting memorabilia.

Traditional Native American cultures consider humans an integral part of the environment, not a dominating force. They are closely tied to natural resources and events, and they value and respect nature. For example, they avoid over-consumption of water or lumber in order to protect lakes and forests. They also value self-sufficiency, and often produce their own goods and services through gathering, hunting, and fishing.

We do not necessarily have to be part of a culture to celebrate it. For example, St. Patrick’s Day is an important holiday in Ireland, but it is also widely celebrated all over the world. On March 17 of every year, people of all different cultures can be found wearing green and making merriment. Producers take advantage of the universal appeal of St. Patrick’s Day to market and sell specific products, such as green clothing, festive decorations, and even green food. In this case, St. Patrick’s Day has become an adopted culture for many.

Values and Beliefs

Culture is more than just holidays and traditions. Different cultures have different values and beliefs that influence their members’ behavior.

Values and beliefs are linked. If you value a clean environment, then recycling is likely to be a part of your value system. Your behavior is guided by that value. If you believe that free trade is the best kind of system, then you would not mind buying leather shoes from Brazil or a pair of jeans imported from Italy. If you believe in supporting local businesses, on the other hand, you might buy only locally grown fruits and vegetables.

Producers try to understand consumers’ values and beliefs when allocating resources, because values and beliefs affect the way consumers make economic decisions.

For example, recycling is an integral part of South Korean culture. The government makes sure that recycling bins are available across the country, and it employs officers who routinely check to make sure people put their refuse in the correct bin. Because this is an important value among South Koreans, producers there try to make eco-friendly products to increase the sense of utility among consumers.

How green are you?

Risk Aversion

Every economic decision a person makes contains some sort of risk. Some decisions are less risky than others. If a college student puts $5 in a savings account, there is little risk, but also very little reward. Her money is safe, but it will not grow fast. If, on the other hand, she uses the $5 to buy a lottery ticket, she is taking a big risk, with the possibility of a great reward. Most likely, she has lost the $5 forever. But there is a slight chance she will win millions.

Many people play the lottery. Many others do not. This is because everyone has a unique level. Some people will always choose the less risky option, even if the possible reward is small. Other people will go with something far riskier in the hope that they will get a big reward.

It is common for people to have a high level of risk aversion. Security is an important value to many people. But many people have low levels of risk aversion. These risk takers make very different decisions than people who prefer to play it safe.

Here is one example of risk aversion. Suppose you loaned a friend $300 last month. Today, he offers to pay it all back, or to invest it in his Internet company. You have a high level of risk aversion if you prefer that he pay you the $300 now. You are not sure how profitable his business will be, so to you it is not worth taking the risk. You have a low level of risk aversion if you decide to let the $300 ride and see if you end up with more in the long run.

There is no such thing as a safe bet.

Let us Talk About You

Cultures, values, beliefs, and risk aversion all play a part in the economic decisions that people make. People do not even have to be consciously aware of these factors. They just do what seems right. This does not mean these factors are not influential. It just means that many consumers are not conscious of their influence.

You can see the influence these factors have more clearly if you think about your own views. Do you know what your value and belief system is? Do you ever think twice about making an economic decision based on what you believe in?

The media has all sorts of messages for us. At times it can feel like a constant bombardment from the television, the phone, and the Internet, not to mention the radio, magazines, mail, billboards, and all the other ways that words and pictures are hurled at us. It is almost impossible to escape the media.

Think of the many advertisements for products and services you see in just one day. Could you even count them all? In addition, you get warnings, instructions, questions, information, and all kinds of other messages.

Communication is an important feature of human behavior, and the media’s primary focus is communicating one message or another to consumers.

Types of Media

Companies use the mass media to communicate information about their products and services to a large number of people. Producers are aware that consumers are the ultimate decision makers in the game of economics. Producers, however, also know that the mass media can be a powerful method of persuading consumers to buy their goods and services. Take a closer look at how this works.

Traditionally, news media is a subset of mass media with its own content and purpose. In recent years, however, the lines between general mass media and news have blurred.

Influencing Consumer Behavior

Television, magazines, and other media can be highly influential. Popular sitcoms create images of consumption that inform our own consumer behavior.

Consciously or not, some people adopt the styles, fashions, and even attitudes of their favorite TV characters. Some consumers make decisions based on their desire to look or live in a way that resembles the lifestyles they see on TV.

Magazines can have a big effect on consumer behavior, as well. Fashion magazines influence some women’s perception of beauty and influence the products they buy. Men’s magazines also influence how men see themselves. They have articles that include news, sports, men’s fashion, and even lists of the top outfits men should have in their closets.

Some people adopt the styles they see on their favorite shows.

Mass Media

Mass media has a big effect on how consumers view themselves.

Companies advertise their products and services in all forms of media. This is done indirectly through product placement and directly through advertising.

Advertising is the biggest method used by producers to influence consumer behavior.

There are many methods and techniques of advertising. You are probably familiar with most of them already. TV commercials, magazine ads, billboards, and even signs on the sides of buses all infiltrate our lives on a daily basis.

On the Internet, most Web pages contain advertising, often including pop-up screens and animations. You can get advertising delivered directly to your cell phone, too.

It pays to advertise.

Over the years, the sophistication of advertising techniques has advanced, as have breakthroughs in communication technology. Many people use the Internet every day and depend on it to get information. This makes the Internet an enticing vehicle for advertisers. Unlike radio, television, and print sources, the Internet is a nonlinear form of media, making it possible to advertise in various ways. Banner ads, pop-up windows, corporate Web pages, and bulk e-mails are some of the methods used.

Advertising Strategies

The main purpose of advertising is to get consumers to demand more goods and services. There are many ways to do this. One is to create a need for a product by emphasizing the connection between a product and a certain aspect of life.

For example, most people want to be clean. Soap and shampoo are needed to be clean, but is that all? If advertising can convince consumers that they also need deodorant and conditioner to feel clean, then more people will buy deodorant and conditioner.

Advertisers can also succeed at increasing demand by getting people to see luxuries as necessities. This is usually just a perception – you think you cannot live without something when, in fact, you probably can.

The Brand-Name Game

In our fast-paced world, producers know that consumers like to find what they need quickly and conveniently. Today, you can order a product online from anywhere in the world and have it delivered to your house in a matter of days.

This leads to a lot of competition among producers who want consumers to buy their stuff. This is another purpose of advertising – to get people to choose a specific product or service instead of the same thing provided by a competitor.

One method used by companies to get people to buy their products instead of someone else’s is branding. Branding gets people to recognize a particular company’s product and associate it with quality and popularity. Some brands can even succeed in becoming common names for the products they sell, such as Kleenex or Band-Aids.

Branding is not the only method that advertisers use. Advertisers know that consumers are more likely to buy products that they identify with, so they make ads that appeal to people by telling a story or connecting the consumer to the product.

Some brands are so familiar that we use their names generically.

Adverse Advertising

People get their news mostly from TV, newspapers, the Internet, and the radio. When it comes to informing the public on goods and services, the news media can be an effective and powerful tool of communication. When a new product comes out, like the latest car, gadget, or toy, the news media will likely discuss it, providing another form of free advertising.

News stories also alert the public to defects, dangers, and recalls. This kind of negative exposure also influences consumers by getting them to avoid certain goods and services and to beware of dangers in general.

Producers Influencing Consumers

Consumers make the final choice in all purchases, but producers do not want to leave all of the deciding up to consumers. They want consumers to demand more goods and services, and they want consumers to choose their products over those offered by someone else. Producers try to influence what consumers think and do to increase demand for their products so they can beat out the competition.

Consumers are the driving force of the economy, but they cannot do it alone. Without producers, there would not be anything to consume. To have consumption, there needs to be production. That is why businesses are important.

Businesses come in all shapes and sizes, from small home businesses run by one person to large international corporations that employ thousands of people in dozens of countries.

In many ways, businesses are like consumers. But there are important differences too. You will study some of these key differences and learn more about the role of businesses in the economic system.

Producers make all kinds of economic decisions. Just like consumers, they use rational choice when they do. In fact, producers are often more likely than consumers to pay close attention to the rationality of their decisions.

Usually, there is a lot more risk for producers when it comes to decisions. As a result, producers have significant incentive to use cost-benefit analysis and other tools of financial management. If they do not make good decisions, they will not make money. If they do not make money, they will go out of business.

Producers try to be as rational as possible, so they can keep playing their role in the economy.

Producers and Rational Choice

Remember that rational choice is a decision-making process that compares the benefits and costs of an action. Rational choice is a way of looking at several potential choices and deciding which choice is the best.

You have seen how consumers do this. Producers do the same thing, though there are some important differences. For one thing, businesses consider benefits and costs just as a consumer does, but only the monetary costs and benefits are relevant to their calculations. Consumers often take into account non-monetary things when doing cost-benefit analysis.

For instance, a farmer decides which crops to grow just like a consumer decides what to eat for dinner. But while the consumer might consider nonmonetary factors, the farmer is going to focus on monetary considerations.

Consumers might think about what is cost-effective when planning dinner, but they probably also prioritize nonmonetary considerations, such as what they like to eat or how healthy the food is.

Farmers do not think about what they like to eat when deciding which crops to grow. A farmer’s food preference does not affect production decisions. What farmers do pay attention to is how much money it will cost to plant various crops and how much they can expect to earn by selling those crops. Whichever crop will have the highest expected return is the crop the farmer will plant. It is the rational choice in monetary terms.

Profit

Monetary calculations are central to any producer’s decision-making process because making money is the reason businesses exist in the first place. In a market economy, businesses are free to make as much money as they can.

To make a profit, a business must have more revenue than costs. This means a business must earn more from the sale of its goods and services than it spends producing those goods and services. Here’s a simple formula that shows how to calculate profit:

Revenue – Costs = Profit

Profit is often called «the bottom line» because it is at the bottom of the calculation. The calculation of profit can be a bit more involved than simply subtracting costs from revenue. There are different types of expenses – production costs, administrative costs, taxes, and so on – that are calculated and subtracted in different ways.

For example, imagine a lemonade stand that rings up $30 in sales on a particularly hot day. Making and distributing the lemonade cost $7. You can calculate profits with a simple equation:

$30 (revenue) – $7 (costs) = $23 (profit)

The lemonade stand made $23 profit.

The Profit Motive

Making profit is not just something businesses like to do. It is something they have to do.

Every producer must make a profit in order to remain in business. Without profits, businesses disappear. This gives producers the profit motive, which tells them that they have to minimize costs and maximize monetary benefits. This is not exactly a law of economics, but it is so universally followed that it might as well be.

The profit motive is a necessity. Producers who choose to ignore profit end up going out of business. Only those businesses that have the profit motive will remain in business. You can easily say that all businesses are driven by the profit motive because they do not have any other choice.

Profits and Losses

A free-market economy is driven by businesses’ desire to make a profit. Businesses make production, pricing, and hiring decisions based on that goal. A business that keeps costs low and brings in more money than it spends makes a profit.

If costs and revenues are equal, the business is just breaking even. And when costs are higher than revenue the business is running at a loss. A business can break even or run at a loss for only so long before going out of business.

Even when a company is making a profit, the profit motive is an incentive. Because of competition, there can be pressure to make greater profits the next year. When other companies are increasing their profits, a business can fall behind even if its revenues are above its costs.

Imagine that you own a small bakery. You manage to sell enough cakes, rills, and doughnuts so that your revenues are greater than your costs. You can pay the rent, buy supplies, and pay your employees, and still earn a profit at the end of each month.

But what if your rent goes up? To break even at the end of the month, you increase the price of your goods. In this case, your revenues are equal to your costs. You are not making a profit, but you can continue with your business.

If you want to continue making a profit at the end of the month, you have to increase the price of your goods even more. Unfortunately, your customers might choose to stop buying your baked goods. In this case, you experience an economic loss because your costs are greater than your revenues.

The profit motive drives businesses to do two things:

– Reduce costs whenever possible

– Increase sales whenever possible

Inputs and Outputs

Profit is revenue minus cost. Simple. But what brings in revenue? And what counts as cost?

Revenue is all of the money a business brings in by selling its goods and services. In other words, it is the money derived from its output. For a business to have output, it needs input.

Inputs are what go into production. They can include the land, labor, and capital that are needed to produce any good or service.

Inputs cost money such as wages for workers, rent for land or capital for raw materials and equipment. They involve monetary costs for businesses. A producer’s costs account for all of the inputs necessary for production.

Opportunity Costs

Because profit dominates a producer’s thinking, businesses have to pay close attention to inputs and outputs. This involves making rational production decisions.

Consumers consider opportunity costs to make rational decisions. Businesses do the same. Remember that this is the cost of opportunities that are passed up when deciding to do one thing instead of another.

Business decisions about opportunity costs involve determining inputs and outputs. For example, if you have decided to open a bicycle factory, you have to decide what kinds of bicycles to make. You also have to decide what to use to make your bikes. Say you decide to make aluminum mountain bikes. The opportunity cost of that decision is what you could earn making steel mountain bikes, aluminum children’s bikes, or any of the various combinations available.

Production Possibilities Frontier

Businesses do not just try to guess about opportunity costs. Guesses are often wrong, and wrong answers lead to losses, not profits. Producers need a better tool of analysis. One tool is the production possibilities frontier, also known as the PPF.

A production possibilities frontier is a graph that shows producers how to set up production in an efficient manner. Efficient production allows a producer to maximize profit.

Production Possibilities Frontier

Businesses do not just try to guess about opportunity costs. Guesses are often wrong, and wrong answers lead to losses, not profits. Producers need a better tool of analysis. One tool is the production possibilities frontier, also known as the PPF.

A production possibilities frontier is a graph that shows producers how to set up production in an efficient manner. Efficient production allows a producer to maximize profit.

Working With the PPF

This graph represents the PPF of a bicycle-making business. The red line shows how many of each bike can be made with the inputs available, such as workers, aluminum, plastic, and other supplies in the factory. The points A, B, and C represent the points at which production of mountain bikes and racing bikes is the most efficient.

This table shows when production is the most efficient. Points A, B, and C show some of the many possibilities of producing bicycles where production is maximized. A maximum of 150 racing bikes and 200 mountain bikes can be produced given the set of inputs available.

Let us a look at that PPF graph again for an example of inefficient production. Point X shows an inefficient use of inputs. By making only 100 of each bike, the available workers and materials are not being used efficiently. No producer would want to choose a level of output that falls below the PPF. As long as the points of production stay on the red line, production is maximized.

How can you decide whether A, B, or C – or any other point on the PPF – is the best one? They are all equally efficient. However, unless mountain bikes and racing bikes sell for the same amount, one decision could lead to more revenue than another. To make a fully rational decision, the prices for each bike must be taken into consideration. The PPF cannot predict price so its usefulness is limited, but it is

still an important tool for creating efficient production.

Market Research

The PPF shows a producer how to maximize efficiency, but there is more to making a rational decision than efficiency. Getting the most output from your inputs – productive efficiency – gives you the possibility of maximum revenue with minimum cost.

Consider the previous example. The PPF tells us that any of the three mixes of production will be efficient.

But which one will generate the greatest revenue? Rational choice always requires information. To get this kind of information, producers do market research.

Producers can decide which type of efficient production will also be profit-maximizing production by

– Researching the price of competing goods in the market.

– Finding out what consumers are willing to pay.

– Determining whether consumers want or need what is being offered.

Getting the Profit Motive

Profits drive producers. After all, making a profit is the reason people start a business in the first place. Producers make decisions that are aimed at maximizing efficiency and profits. Making these decisions requires a lot of information about production and the potential market.

In a free-market system, producers are free to make decisions. This freedom creates competition among businesses as they pursue the same goal of selling goods or services.

A typical example of competition is the long-running contest between soda products Coca-Cola and Pepsi. The two companies that produce these popular beverages have engaged in direct competition with each other for over 100 years. Of course, there are lots of other drinks available, too, and Coke and Pepsi compete against all the available options for the biggest share of the multibillion dollar soda market.

Businesses want as big a share as possible in order to maximize profit. They clash in the free market to get consumers to purchase their goods and services instead of those offered by their rivals. Competition pushes businesses to be as efficient as possible so they can offer the lowest prices. It also drives them to develop new products and services in order to keep attracting new customers.

In a free-market system, producers are free to make decisions. This freedom creates competition among businesses as they pursue the same goal of selling goods or services.

A typical example of competition is the long-running contest between soda products Coca-Cola and Pepsi. The two companies that produce these popular beverages have engaged in direct competition with each other for over 100 years. Of course, there are lots of other drinks available, too, and Coke and Pepsi compete against all the available options for the biggest share of the multibillion dollar soda market.

Businesses want as big a share as possible in order to maximize profit. They clash in the free market to get consumers to purchase their goods and services instead of those offered by their rivals. Competition pushes businesses to be as efficient as possible so they can offer the lowest prices. It also drives them to develop new products and services in order to keep attracting new customers.

What Kind of Competition?

Competition is a clash of rivals pursuing the same goal, but not all competitions are the same. The way rivals compete depends on their goals and the number of competitors.

In a football game, for instance, two teams compete to score the most points. In a 100-meter race, on the other hand, there might be as many as nine runners competing against each other, and also the clock. While there is no victory for finishing in second place in a football game, in a foot race there is. You may not be the very fastest if you place second or even third, but you have beaten many competitors.

Businesses compete to make as much profit as possible. The amount of profit they can make depends on the kind of competition they face. The nature of competition faced by different businesses in different markets is known as the market structure.

Different markets are like different sports. The nature of the competition depends on the number of competitors. The competitors are always trying to maximize revenue and profit, but the number of other businesses selling the same things varies.

Economic competition comes in two different types: competition among the few and competition among the many. In a market with only a few producers making a specific thing, each producer has some control over the price. The distinction between a few producers and many producers tells us about the basic market structure.

But we can be even more specific about the types of competition. One extreme type of market structure is called a monopoly. When only a single producer sells a good or service, there is no competition at all. That is a monopoly. In a monopoly, the consumer is stuck with whatever decisions the producer makes, because there is no rival product to choose.

Oligopoly is another market structure characterized by few sellers. There are more producers than in a monopoly, but the range of businesses is very limited, and consumers have to choose from a short list of providers. Oligopoly offers some competition, but producers do not have to worry very much about competition.

At the other end of the spectrum of market structures is pure competition. In a purely competitive market, there are numerous businesses, and there is a wide variety of products sold. In a purely competitive market, consumers have a wide range of choices, and producers have to find ways to beat out their rivals. All this competition results in a lot of innovation, incentives to be efficient, and lower prices.

Pure Competition

The market structure that works best for consumers is pure competition. Pure competition is an ideal market structure that does not actually exist anywhere in the real world. We can, however, use pure competition as a standard for analyzing the market structures that do exist.

A purely competitive market has

– A large number of small businesses.

– Identical or easily substituted products.

– Freedom of entry into and exit out of the industry.

– Perfect knowledge of prices and technology.

Even though pure competition does not actually exist in the real world, there are places where it is close. The company eBay, an online retailer, created a marketplace on the Internet that functions with a market structure that comes quite close to pure competition.

Consumers can buy almost anything on eBay in a pure competition market structure. Pure competition exists when identical products are sold.

The sellers or producers on eBay set a minimum price for their goods. The consumer can then bid for the goods of his or her choosing. In this case, we have pure competition because everyone has perfect knowledge of the prices set.

Monopoly

Pure competition and monopoly are two extreme types of market structure.

While pure competition allows for perfect competition among a large number of sellers, a monopoly creates a total lack of competition. The monopoly has complete control over its market. This gives the producer complete control over what products to provide and what prices to charge.

The characteristics of a monopoly are

– A single producer.

– A unique product with no close substitutes.

– A price controlled by the producer.

– Entry is blocked to competitors.

The Near Monopoly

A pure monopoly is nearly as rare as pure competition. Most actual monopolies, such as a city’s utility provider, are heavily regulated by the government.

But there are some companies that control a particular market so thoroughly that they come close to creating a monopoly.

Microsoft is one of these near monopolies. While Microsoft is not a monopoly by definition – Apple also creates operating-system software – Microsoft dominates the market so effectively that it has been accused of acting like a monopoly.

The Microsoft Monopoly

Bill Gates and his company Microsoft control the market when it comes to operating systems, such as Windows 95, Office 2003, and other software applications.

Did you know that 90% of the world’s personal computers run on Microsoft software from the minute they are turned on? Microsoft has managed to automatically set up its operating systems in most computers being sold in the world. It has a monopoly, because its products are unique, and its rivals cannot compete against it. Microsoft is also able to control the price of its operating systems because there are no similar products on the market.

In 1998, a court case was filed against Microsoft Corporation. Microsoft rivals accused Microsoft of abusing its monopoly in the way it sold its operating systems and web browsers. The main issue was whether Microsoft was allowed to sell its Internet Explorer web browser software with its Microsoft Windows operating system.

Many technology companies have fought legally against Microsoft’s monopoly, including Apple Computer, Netscape, and Sun Microsystems. However, Microsoft still holds the majority of the market of operating software. It has the monopoly, because it has blocked the entry or has made it very difficult for competitors to enter the same market.

Monopolistic Competition

Monopolistic competition is a market structure that includes many producers providing products or services that are almost the same, but not quite identical.

A market structure of this sort allows some price control. But businesses generally accept the prices charged by rivals, ignoring the impact of their own costs. Monopolistic competition resembles pure competition except that different producers are selling similar products.

Oligopoly

In a system of monopolistic competition, there are a large number of small businesses. In an oligopoly, there are a small number of large businesses dominating a particular market. Businesses keep a close eye on the decisions made by the few other businesses in the industry.

Because there is not much competition, businesses in this type of market do not change prices often. In order to attract customers away from the small number of competitors they face, businesses in an oligopoly offer incentives, including bonuses and rebates.

The characteristics of an oligopoly are

– An industry dominated by a small number of large businesses.

– Businesses sell either identical or slightly differentiated products.

– Businesses give incentives instead of changing prices.

– Significant barriers exist to enter industry.

Oligopoly Models

Oligopoly is a common market structure because many industries are difficult to break into. Anyone can open a lemonade stand with just a few dollars, but it takes millions and millions to build and operate a car factory. As a result, lemonade is a pretty competitive market, while the automobile industry is an oligopoly.

The automobile industry is considered an oligopoly because it is dominated by a small number of large companies. These companies all sell similar cars, such as four-door sedans, minivans, and SUVs.

Another good example of an oligopoly is the airline industry. This industry is dominated by a small number of large companies. These businesses offer their customers similar products. However, certain airlines go to certain cities, while others do not. Airline companies also have incentives to attract customers, such as ticket upgrades or free air miles.

Considering Competition

Businesses compete with each other as they pursue the profit motive, but they take into account the type of competition they face before they make decisions.

The four different market structures you have examined show the differences between the competitive situations faced by producers operating in different markets.

Remember that the level of competition varies depending on the number and size of competitors, the type and quality of their products and services, and their degree of market control over price.

The continuum of market structures

Market Structure Review

From the largest corporation to the humblest small business, participating successfully in the free-market system requires a good plan, lots of determination, and the willingness to take some risks. A person who starts a new business is a risk taker. We call these people entrepreneurs. An entrepreneur is an individual who begins, manages, and bears the risks of a business.

Entrepreneurs play an important role in economics by offering consumers new ideas, new products, or new services. They compete in existing markets and sometimes create entirely new markets. Entrepreneurship is difficult and risky because many new businesses fail. But when successful, entrepreneurship contributes to the growth and prosperity of the overall free-market economy. Entrepreneurs create jobs and encourage a greater exchange of goods and services.

An Entrepreneur’s Motivation

There are many reasons why entrepreneurs decide to start a business. Henry Ford wanted to produce cars more efficiently; Oprah Winfrey wanted to help people make their lives better; Steve Jobs wanted to provide customers with user-friendly personal computers and new entertainment ideas. These are just three examples of innovative and successful entrepreneurs. Entrepreneurs often share common motivations. The also share common characteristics.

Motivations and Characteristics of Entrepreneurs

– Autonomy: Entrepreneurs like to work for themselves.

– Profits: Entrepreneurs are driven by their quest for profits. Successful entrepreneurs can create wealth rapidly.

– Risk: Entrepreneurs have a low level of risk aversion, since investing money in their own businesses is very risky.

– Innovation: Entrepreneurs need innovation in the product, service, or business process in order to be successful.

Innovation

One key to becoming a successful entrepreneur is innovation. The development of new devices, ideas, or ways of doing things helps entrepreneurs sell more goods or provide more services. Innovation is how businesses create new solutions to satisfy their customers’ needs and wants. Innovation includes the creation of more effective products, systems, services, or technology.

Entrepreneurs’ Innovations

Entrepreneurs innovate by creating

– New products.

– New production methods.

– New markets.

– New sources of supply.

The Innovation Game

Entrepreneurs innovate by introducing new means of production, new products, and new forms of organization. Innovations consist of inventions, discoveries, and new methods of production. Sometimes, innovations can change the entire economy.

One of the biggest business sectors in the world is the media industry. The media provide a service that nearly every person consumes in one way or another.

Because the media are a part of nearly every consumer’s life, they are important to producers. Businesses use the media to advertise their message to potential customers. Almost every business relies on the media in some way to stay in business.

Unlike some businesses with a specialized customer base, media companies can sell to everyone – consumers and producers alike.

If a satellite turns in the desert and there is no one there to see it, does it still reach thousands of viewers?

Advertising Dollars

Media companies can make money by selling magazines, newspapers, televisions subscriptions, Internet services, and more directly to consumers. But for most media companies, the bulk of their profits come from selling advertisements. In fact, the mass media and news media make 90 percent of their revenues from advertising. If it were not for advertising, most media companies would not exist.

Businesses spend a lot of money on advertising. In 2012, companies spent more than $152 billion on advertising in the United States and more than $490 billion worldwide.

What Advertisers Are Buying

Advertisers pay a lot of money to media companies, but what exactly are they buying? In one sense, they are simply purchasing time or space: ink on a page, pixels on a screen, or 30 seconds of time. But what advertisers are really paying for is the audience – viewers, listeners, readers, browsers, or whoever might be exposed to the ads. Advertising is all about buying access to an audience.

Media companies provide content – shows, articles, information – to attract an audience so that they can turn around and sell that audience to advertisers. In the world of the media, the consumers are also the product.

How Visible Is It?

Because they pay high prices to advertise their goods and services, businesses want as many people as possible to see their ads. Visibility is an important measurement.

Businesses try to advertise in places where they feel they will have high visibility in front of a large audience.

Visibility is determined by a few factors. One is the size of the advertisement. A full-page image attracts more attention than a half-page image, so a full-page advertisement costs more. A one-minute commercial is more expensive than a 30-second commercial because it has greater visibility.

Another important factor is popularity. Popularity determines the rate for a specific amount of advertising space. If a lot of people read a particular magazine, then a full-page ad will be expensive. If only a few people read it, that same page will be much less expensive.

Expensive Advertising Slots

The Super Bowl regularly has the most expensive advertising on television. A 30-second commercial during Super Bowl XLI costs $2.4 million – that is $80,000 per second. Because of the high cost and high visibility of these ads, advertisers often use the Super Bowl to show innovative or unusual commercials or to launch new ad campaigns.

The Olympics is another sporting event with high visibility. Ad rates vary depending on the time of day, but the average cost of a 30-second commercial during the 2006 Olympics was $700,000. That is a lot less than a Super Bowl ad, but NBC made a total of $900 million selling ads during that Olympics.

Popular TV series also command high ad rates. American Idol, one of the top-rated shows in recent years, charges as much as $700,000 for a single 30-second commercial. The same 30-second ad on CSI costs only $465,000. Survivor and The Apprentice each get $350,000 for a 30-second spot. As ratings drop, ad rates drop, too. ER charged $440,000 for a 30-second commercial in 2004, but its ratings went down the following year, so the rates went down to $400,000.

Measuring the Audience

The cost of advertising depends on the size of the audience and the size of the advertisement. The bigger the audience, the more it will cost a business to advertise to that audience. Advertisers buy access to the audience’s attention, and more audience members means more sales, which means more money.

But how can advertisers know how big the audience is going to be?

What is the Medium?

The method of measurement of the audience size depends on the medium. It is easy to measure consumers on the Internet. A Web page can count the number of times a page has been viewed.

In other forms of media, the count needs to be estimated. For print sources, circulation counts the number of magazines or newspapers that are printed and distributed. Not every magazine or newspaper will actually get read by somebody, and some will get read more than once. However, circulation is still a pretty good measurement of the size of the potential audience. For TV and radio, audience size is measured by a ratings system.

Advertising Outlets

Media companies are not limited to a single way of selling advertisements. In fact, the more ways they can sell ads, the more money they can make. Most media companies use a variety of methods to advertise.

Magazines and newspapers, for instance, have traditionally sold advertising to raise revenues while also charging subscription fees to people who receive the publication in the mail. With the advent of the Internet, many magazines and newspapers have continued to enjoy advertising revenues but have struggled to find ways to charge subscription fees, because so many websites are available for free.

American Media

People get the information they need to make decisions primarily from the media. People watch TV, browse the Internet, read newspapers and magazines, and listen to the radio. What they see, read, and hear affects how they think and choose.

There are thousands of media sources for people to choose from, but a large number are owned by a few large companies. These companies are known as media conglomerates. Their dominance of the media industry creates a market structure that closely resembles an oligopoly because a few large companies control nearly all the media industry.

Global Media Giants

The centralized global media system is a very recent development. Until the 1980s, the basic broadcasting systems and newspaper industries were domestically owned and regulated. Starting in the 1980s, the U.S. government, along with its Federal Communications Commission (FCC), began to deregulate, or remove the legal restrictions that had been in place on media and communication systems.

With the rise of satellite and digital technologies, deregulation resulted in the success of global media giants. There are only a few global media giants today.

The Internet Media Revolution

The Internet operates differently from other forms of media. Because it is relatively easy and inexpensive to build an Internet site, it is easy for many different producers to have an Internet presence.

Millions of people contribute to the information available on the Internet. The popularity of blogging, instant messaging, and social media sites means that more and more people get their information and entertainment from sources that are not controlled by large media companies.

Despite the possibilities of the Internet, many of the most popular websites today belong to large media conglomerates. While it may always remain inexpensive to put information on the Internet, the most popular websites will likely come from large global corporations.

The Business of Media Review

Media companies are unique types of producers. They create content for people to consume, but these consumers are themselves something that is sold to other producers who buy advertisements.

Media companies play an important role in the game of economics. They provide information that affects the decisions of consumers, and they provide advertising services that nearly every producer needs to purchase.

People start new businesses every day. It requires a lot of planning and organizing, not to mention hard work and determination. It also takes money. Potential business owners can use their own money. They can borrow it from the bank, take on a business partner, or have a third party, sometimes called a venture capitalist, invest what it takes to open for business.

There are many kinds of businesses. Some businesses only have one owner. Others have multiple partners who own the company together. In the end, all businesses try to accomplish the same goals: providing goods and services to satisfy the needs and wants of consumers.

The first thing any aspiring business owner has to do is decide which goods or services to offer for sale. The variety of goods and services available from businesses is wide, and new entrepreneurs are always trying to come up with new ideas about what to sell and how to sell it.

Sole Proprietorships

One way to start a business is to operate alone, with little or no help from anyone else. This kind of business is called a sole proprietorship. The owner of a sole proprietorship is completely in charge of the operation of the business. If there are other employees, the owner is the boss. The owner receives all the profits but also bears all the financial risks (that is, the losses).

Many entrepreneurs prefer to open a new business as a sole proprietorship. It is the most common type of business, and it is also the easiest type to build. Almost all small businesses are sole proprietorships. Many medium-sized businesses and large businesses begin as sole proprietorships but grow with success and add partners and investors.

The Risks and Rewards of a Sole Proprietorship

With a sole proprietorship, a business is much like an extension of the business owners. It has no separate existence.

There are many benefits to a sole proprietorship. For instance, business owners can make their own decisions without having to consult other people.

Another advantage is that business owner pay personal income taxes, not corporate taxes, on profits. This makes accounting much simpler. And, of course, business owners also get to keep all the profits.

But there are also downsides. A sole proprietor has unlimited liability. That means that the business owner is responsible for all the debts and financial losses of the business. If the business fails, the owner can lose all assets. This includes not just business assets like equipment and supplies, but also personal assets like real estate and savings.

Sole proprietors also need to have enough money to start the business in the first place. Some potential business owners borrow money from a bank to start a company, but this is risky because of unlimited liability. The bank can collect personal assets if an owner defaults on a small-business loan.

Partnerships

Another way to organize a business is to form a partnership with others. A partnership is a contract in which business partners agree to operate the company together by combining their money, knowledge, and time. Partners share profits based on their contributions.

There are two main ways of organizing a business partnership: as a general partnership and as a limited partnership.

A general partnership is much like a sole proprietorship except that each partner is fully responsible for the debts of the business, including debts incurred by the other partners. Every partner has an equal voice in running the business, and the partners have to consult one another to make decisions related to their business.

In a limited partnership, on the other hand, each partner has limited liability. The most each partner can lose is the amount he or she has contributed to the partnership. In a limited partnership, the business is managed by one or more of the partners, while the other partners are investors who rarely take part in any business decisions.

Failed Partnerships

Two partners decide to start a restaurant. Each contributes $10,000 to fix up an old building, hire servers and cooks, and buy supplies. After the first year, the business is failing. The restaurant is $40,000 in debt by the time it closes its doors. Under a general partnership, each partner is fully responsible for this debt. If one partner only has $5,000 in her savings account while the other partner has $50,000, the partner with more savings can be made to pay $35,000 of the debt.

If this same restaurant had been a limited partnership, each partner would be responsible for only 50% of the debt. So, the richer partner only has to pay back $20,000 of that $40,000. If the other partner can only pay $5,000, some of the debt might go unpaid. This can happen in a limited partnership. Investors generally prefer limited partnerships so that they are not held fully responsible if the business incurs too much debt.

Pros and Cons of Partnerships

There are many advantages to a business partnership. First of all, partnerships are fairly easy to establish. Also, partnerships typically make it easier to raise money that can be invested in the business. That is why partnerships are the preferred type of business for some small companies. Instead of going to the bank and borrowing money, business owners can ask people to be partners and invest their money. Another advantage to a partnership is that there are rarely any extra taxes to file, just personal income taxes on any profit made.

Being held individually responsible for all the company’s debts is one of the major disadvantages to a general partnership. General partnerships can also be difficult to operate because partners need to work together and agree on business decisions. What might be a simple decision with just one person in charge can become much more complicated with two or more people trying to agree. This difficulty is lessened within a limited partnership because business decisions are made only by the managing partner. Still, the lack of input into business decisions by the «silent» partners takes away control, leaving their investment in the hands of the managing partners.

Corporations

Another type of business is a corporation. Corporations are like partnerships in that they are funded and operated by more than one person. But a corporation has many people who invest, and few investors have as much direct control or responsibility in the business operations as they would in a partnership.

The investors in a corporation are not partners but stockholders. A stockholder is someone who owns a share in the corporation in the form of stock. Unlike partners, stockholders do not make the business decisions themselves, unless they own a majority of all available stocks. Usually, a corporation is run by a board of directors, who are elected by stockholders. The board of directors is responsible for managing the business and making the daily decisions required to operate it.

Stockholders

When compared to forming a business partnership, investing in a corporation is much easier and safer. Stockholders do not need to help make day-to-day business decisions the way partners do. Those business decisions are left up to the board of directors. If stockholders do not agree with the decisions made by the board, they can vote for new members or simply sell their stock and invest in another corporation.

Because stockholders own the shares of a corporation, many businesses in the United States face a situation known as «double taxation.» The government taxes both corporate profits as well as the personal income of all the shareholders when they receive dividends or distributions of corporate profits.

Investors who buy stock in profitable corporations usually receive dividends. A dividend is a portion of the company’s profit paid on each share of stock. Investors who own a lot of stock receive large dividend payments.

Stockholders are also protected if a corporation fails. Unlike sole proprietors or partners, stockholders are not responsible for any of the corporation’s debts.

Benefits of Being a Stockholder

A corporation is a legal entity. It has rights to buy, sell, trade, and own property. It must also pay corporate taxes. A corporation has many advantages for its owners and stockholders. One of those advantages is limited liability. As a stockholder, you cannot lose more than you initially invest.

When a company is doing well and paying high dividends, there are always other investors who want to buy that company’s stock. This drives the price up. Stockholders can earn money in two ways: through dividends and by selling their shares for more than the original purchase price.

Still, investing by purchasing stock in a corporation can be risky. People who invest in stocks often lose money because they choose the wrong company.