On the other hand, many of the nation’s entrepreneurs run small businesses, including restaurants, convenience stores, and farms. These individuals are true entrepreneurs, because entrepreneurship involves not merely the organization and management of a business, but also an individual’s willingness to accept risks in order to make a profit.
Throughout its history, the United States has had many notable
entrepreneurs, including 18th-century statesman, inventor, and publisher
Benjamin Franklin, and early-20th-century figures such as inventor Thomas
Edison and automobile producer Henry Ford. More recently, internationally
recognized leaders have emerged in a number of fields: Bill Gates of
Microsoft Corporation and Steve Jobs of Apple Computer in the computer
industry; Sam Walton of Wal-Mart in retail sales; Herb Kelleher and
Rollin King of Southwest Airlines in the commercial airline business; Ray
Kroc of MacDonald’s, Harland Sanders of Kentucky Fried Chicken (KFC), and
Dave Thomas of Wendy’s in fast food; and in motion pictures, Michael
Eisner of the Walt Disney Company as well as a number of entrepreneurs at
smaller independent production studios that developed during the 1980s
and 1990s.
Acquiring the Factors of Production
All four factors of production—natural resources, labor, capital, and entrepreneurship—are traded in markets where businesses buy these inputs or productive resources from individuals. These are called factor markets. Unlike a grocery market, which is a specific physical store where consumers purchase goods, the markets mentioned above comprise a wide range of locations, businesses, and individuals involved in the exchange of the goods and services needed to run a business.
Businesses turn to the factor markets to acquire the means to make goods and services, which they then try to sell to consumers in product or output markets. For example, an agricultural firm that grows and sells wheat can buy or rent land from landowners. The firm may shop for this natural resource by consulting real estate agents and farmers throughout the Midwest. This same firm may also hire many kinds of workers. It may find some of its newly hired workers by recruiting recent graduates of high schools, colleges, or technical schools. But its market for labor may also include older workers who have decided to move to a new area, or to find a new job and employer where they currently live.
Firms often buy new factories and machines from other firms that specialize in making these kinds of capital goods. That kind of investment often requires millions of dollars, which is usually financed by loans from banks or other financial institutions.
Entrepreneurship is perhaps the most difficult resource for a firm to acquire, but there are many examples of even the largest and most well- established firms seeking out new presidents and chief executive officers to lead their companies. Small firms that are just beginning to do business often succeed or fail based on the entrepreneurial skills of the people running the business, who in many cases have little or no previous experience as entrepreneurs.
Markets and the Problem of Scarcity
A basic principle in every economic system—even one as large and wealthy as the U.S. economy—is that few, if any, individuals ever satisfy all of their wants for goods and services. That means that when people buy goods and services in different markets, they will not be able to buy all of the things they would like to have. In fact, if everyone did have all of the things they wanted, there would be no reason for anyone to worry about economic problems. But no nation has ever been able to provide all of the goods and services that its citizens wanted, and that is true of the U.S. economy as much as any other.
Scarcity is also the reason why making good economic choices is so important, because even though it is not possible to satisfy everyone’s wants, all people are able to satisfy some of their wants. Similarly, every nation is able to provide some of the things its citizens want. So the basic problem facing any nation’s economy is how to make sure that the resources available to the people in the nation are used to satisfy as many as possible of the wants people care about most.
The U.S. economy, with its system of private ownership, has an extensive
set of markets for final products and for the factors of production. The
economy has been particularly successful in providing material goods and
services to most of its citizens. That is even more striking when results
in the U.S. economy are compared with those of other nations and economic
systems. Nevertheless, most U.S. consumers say they would like to be able
to buy and use more goods and services than they have today. And some
U.S. citizens are calling for significant changes in how the economic
system works, or at least in how the purchasing power and the goods and
services in the system are divided up among different individuals and
families.
Not surprisingly, low-income families would like to receive more income, and often favor higher taxes on upper-income households. But many upper- income families complain that government already taxes them too much, and some argue that government is taking over too many things in the economy that were, in the past, left up to individuals, families, and private firms or charities.
These debates take place because of the problem of scarcity. For individuals and governments, resources that satisfy a particular want cannot be used to satisfy other wants. Therefore, deciding to satisfy one want means paying the cost of not satisfying another. Such choices take place every time the government decides how to spend its tax revenues.
What Are Markets?
Goods and services are traded in markets. Usually a market is a physical place where buyers and sellers meet to make exchanges, once they have agreed on a price for the product. One kind of marketplace is a grocery store, where people go to buy food and household products. However, many markets are not confined to specific locations. In a broader sense, markets include all the places and sources where goods and services are exchanged. For example, the labor market does not exist in a specific physical building, as does a grocery market. Instead, the term labor market describes a multitude of individuals offering their labor for sale as well as all the businesses searching for employees.
Traders do not always have to meet in person to buy and sell. Markets can
operate via technology, such as a telephone line or a computer site. For
example, stocks and other financial securities have long been traded
electronically or by telephone. It is becoming increasingly common in the
United States for many other kinds of goods and services to be sold this
way. For instance, many people today use the Internet—the worldwide
computer-based network of information systems—to buy airline tickets,
make hotel reservations, and rent a car for their vacation. Other people
buy and sell items ranging from books, clothing, and airline tickets to
baseball cards and other rare collectibles over the Internet. Although
these Internet buyers and sellers may never meet face to face the way
buyers and sellers do in more traditional markets, these markets share
certain basic features.
How a Single Market Works
Buyers hope to buy at low prices and will purchase more units of a product at lower prices than they do at higher prices. Sellers are just the opposite. They hope to sell at high prices, and typically they will be willing to produce and sell more units of a product at higher prices than at lower prices.
The price for a product is determined in the market if prices are allowed to rise and fall, and are not legally required to be above some minimum price floor or below some maximum price ceiling. When a product, for example, a personal computer, reaches the market, consumers learn what producers want to charge for it and producers learn what consumers are willing to pay. The interaction of producers and consumers quickly establishes what the market price for the computer will actually be. Some people who were considering buying a computer decide that the price is higher than they are willing to pay. And some producers may determine that consumers are not willing to pay a price high enough for them profitably to produce and sell this computer.
But all of the buyers who are willing and able to pay the market price get the computer, and all of the sellers willing and able to produce it for this price find buyers. If more consumers want to buy a computer at a specific market price than there are suppliers are willing to sell at that price—or in other words, if the quantity demanded is greater than the quantity supplied—the price for the computer increases. When producers try to sell more of their computers at a price higher than consumers are willing to buy, the quantity supplied exceeds the quantity demanded and the price falls.
The price stops rising or falling at the price where the amount consumers are willing and able to buy is just equal to the amount sellers are willing and able to produce and sell. This is called the market clearing price. Market clearing prices for many goods and services change frequently, for reasons that will be discussed below. But some market prices are stable for long periods of time, such as the prices of candy bars and sodas sold in vending machines, and the prices of pizzas and hamburgers. Most buyers of these products have come to know the general price they will have to pay for these items. Sellers know what prices they can charge, given what consumers will pay and considering the competition they face from other sellers of identical, or very similar, products.
A System of Markets for All Goods and Services
How markets determine price is simple enough to understand for a single good or service in a single location. But consider what happens when there are markets for nearly all of the goods and services produced and consumed in an economy, across the entire country. In that context, this reasonably simple process of setting market prices allows an economic system as large and complex as the U.S. economy to operate with great efficiency and a high degree of freedom for consumers and producers.
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