Building WealthIn the classroom

Unit 2: SAVE AnD inVESt

Federal reserve Bank oF dallas

economic educationwww.dallasfed.org

Table of Contents

Unit 2: Save and Invest Lesson 2.1 The Rewards and Risks of Saving and Investing Page 5 This lesson explores the potential returns and risks of saving and investing. It also introduces students to various bank accounts and investment instruments. It requires two 50-minute periods of instruction. Lesson 2.2 Entrepreneurs and the Economy Page 28 Investing in a small business is one way to build wealth. This lesson explores the creativity and risk taking of entrepreneurs. It requires one 50-minute period of instruction.

Using the CD-ROM in the Classroom

Throughout the lesson plans, the icon indicates where information and visuals from the interactive CD-ROM coincide with the lesson material. Each icon is followed by a reference to the drop-down menus at the top of the screen.

2

Preface This collection of lesson plans is designed to facilitate the use of Building Wealth in the

high school classroom. The lessons use a variety of instructional techniques and include student handouts as well as presentation visuals to be used by the teacher.

These lessons are built around the idea that teenagers are active participants in the

economy. These students make decisions every day about earning, spending and saving. Rather than looking toward some future reality, these lessons encourage the student to learn and use sound financial practices today.

Building Wealth was originally developed by the Community Affairs Department of the Federal Reserve Bank of Dallas. The impetus for the publication was research showing that poor credit and lack of financial wealth were major barriers preventing individuals from purchasing homes or starting small businesses. The book offers basic guidance on wealth-creating strategies for individuals and families. It contains information about budgeting, saving and investing, controlling debt, and protecting wealth with insurance. Building Wealth has reached a diverse audience of more than one million people. It has been used in a wide variety of settings, ranging from credit counseling to homebuyer education classes to high school classrooms. Building Wealth is newly revised and expanded. New terms and concepts have been included as well as the information about various types of insurance. In conjunction with the new print edition, an interactive CD-ROM that animates features from the book is also available.

The CD-ROM features an introduction by Ben Bernanke, chairman of the Board of Governors of the Federal Reserve System, and Richard Fisher, president of the Federal Reserve Bank of Dallas. These videos emphasize the importance of sound personal finance decision-making.

Ordering Materials Visit www.dallasfed.org/educate/ to find the latest information about economic education at the Federal Reserve Bank of Dallas. Visit www.dallasfed.org/ca/wealth/ to

• Order a classroom set (45 copies) of the English or Spanish version of the book • Order the CD-ROM • Download the PDF of the English and Spanish versions of the book • Play the interactive version online

Visit www.dallasfed.org/educate/everyday/ to

• Order a classroom set of Everyday Economics: Entrepreneurs and the Economy • Download a PDF of the publication

Call 1-800-333-4460, extension 25254, to order materials.

3

Personal Finance Education in Texas

In 2005, the Texas Legislature passed two bills mandating personal financial literacy

training in Texas high schools. One of those bills requires that all economics classes contain instruction in personal finance.

In the spring of 2006, Building Wealth was approved by the Texas State Board of Education (SBOE) for use in economics classes for the instruction in personal finance. These lesson plans were originally developed to assist teachers as they used Building Wealth in their classrooms to teach the following Required Areas of Instruction identified by the SBOE.

Required Areas of Instruction Lesson 2.1

Lesson 2.2

1. Understanding interest, avoiding and eliminating credit card debt 2. Understanding the rights and responsibilities of renting or buying a home 3. Managing money to make the transition from renting a home to homeownership 4. Starting a small business 5. Being a prudent investor in the stock market and using other investment options 6. Beginning a savings program and planning for retirement 7. Bankruptcy 8. Types of bank accounts available to consumers and the benefits of maintaining a bank account

9. Balancing a checkbook 10. Types of loans available to consumers and becoming a low-risk borrower 11. Understanding insurance 12. Charitable giving

4

Unit 2: Save and Invest

Lesson 2.1 The Rewards and Risks of Saving and Investing

Lesson Description This lesson introduces students to the major concepts of saving and investing. The ideas of risk and reward are introduced using an analogy from the ratings for ski trails. Simple and compound interest are discussed, and students use the Rule of 72 to compute the time required for an investment to double in value. Investment growth from rising value and various types of financial risk are introduced. Students complete a graphic organizer of saving and investment instruments. As a final activity, students devise an investment strategy based on their financial goals. National Standards in K-12 Personal Finance Education (www.jumpstart.org)

Financial Responsibility and Decisionmaking Standard 4: Make financial decisions by systematically considering alternatives and consequences. Planning and Money Management Standard 6: Develop a personal financial plan. Risk Management and Insurance Standard 1: Identify common types of risks and basic risk management methods. Saving and Investing Standard 1: Discuss how saving contributes to financial well-being. Standard 2: Explain how investing builds wealth and helps meet financial goals. Standard 3: Evaluate investment alternatives.

Instructional Objectives Students will:

• Explain that savers are paid interest to compensate them for delaying consumption. • Compare the growth of savings using simple and compound interest. • Compute the time required for savings or investments to double in value using the “Rule

of 72.” • Describe various types of risks associated with an investment or savings plan. • Describe the various insured accounts offered by financial institutions. • Distinguish between stocks, bonds and mutual funds. • Use personal financial goals to develop an investment strategy.

Time Required Two 50-minute class periods

5

Materials Required • Class set of Building Wealth books • Copies of the following handouts for each student

o The Reward of Saving o Graphic Organizer o What Would You Do?

• Copies of Visuals 1–8 Procedure Teachers should read Building Wealth, pages 10–15, in preparation for this lesson.

1. Review the difference between the two personal finance tools introduced in Unit 1: Budget to Save. • Balance Sheet—measures the value of assets that are currently owned and liabilities

that are owed • Budget Worksheet—a record of income and expenditures

Use Visual 1 to illustrate. Consider a bathtub full of water. The depth of the water is affected by the water flowing from the faucet and out of the drain. The balance sheet describes the depth of the water, and the budget worksheet measures the flows in and out of the bathtub.

2. Write this definition of investing on the board:

Investing—the act of using money to make more money

Introduce this lesson by telling students that savers can choose to allow money to “work” for them. By depositing money in interest-bearing accounts or using money to purchase wealth-building assets, money grows over time. As the interest income is reinvested and assets grow in value, savers build wealth.

3. Have students read Building Wealth, pages 10–11. 4. Discuss the rewards and risks of saving and investing.

• The wide range of saving and investing options make it important for a saver to develop a system to analyze various options. Saving and investment decisions should be evaluated for the potential return (or reward) and the perceived risk.

• Use an analogy of ski trail ratings to illustrate the concepts of reward and risk. o Display Visual 2. In the U.S., most ski resorts use these four symbols to rate

the difficulty and/or danger associated with ski slopes. Slopes are rated using a combination of factors, including the steepness of the slope, the width of the trail, the terrain and the conditions.

o Describe the type of slope associated with each symbol. o Ask for students to vote by raising their hand to indicate the type of trail that

they would like to ski, if they were on a ski vacation.

6

o Discuss student choices and reasons for their preference. Some factors might

include: Experience as a skier General physical fitness Knowledge of a particular slope Rewards of skiing a more difficult trail (thrills, sense of

accomplishment, etc.) Fear of injury

o Guide a discussion that helps students to see that trails of increasing difficulty might offer more thrills or satisfaction, but these slopes are also riskier to the skier. Only with appropriate training, experience, knowledge and equipment should a skier attempt the more challenging courses.

5. Discuss the similarities of skiing and saving/investing. Savers have opportunities to

accept additional risk and will expect to receive a higher reward for doing so. This lesson will examine the rewards and the risks associated with saving and investing, as well as particular types of investment instruments.

6. Remind students that savers expect their savings and investments to grow in value over

time. This growth in value is the reward for giving up consumption today. Growth in value is measured by the annual rate of return and typically comes from three sources: interest paid, dividend income and rising market prices.

7. Discuss interest.

• Interest is a fee for the use of money over time. It is paid by a borrower and received by a lender or a saver.

• Interest is similar to rent. If someone buys a house, the owner can use the house (by living in it) or can let a renter use the house. If a renter lives in the house, the owner will be paid rent to compensate them for not using the property that they own.

• With simple interest, the interest payment is computed on the original investment amount. For example, if $100 in savings earns 5 percent simple interest, the saver will receive $5 in interest in every period. Over 10 years, the saver would earn $50 in interest.

• With compound interest, interest is paid on the original amount as well as on accumulated interest from previous periods. Use Visual 3 to illustrate. Complete the table with student responses. Emphasize that in each year, the interest payment is computed on the sum of the principal (the original $100) and the interest received up to that point. Visual 4 shows the completed table.

Save and Invest; Investment Advise; Compound Interest Chart

8. Discuss dividend payments. • When an investor owns shares of stock in a corporation and the corporation

generates a profit, a portion of those profits may be distributed to shareholders. • These dividend payments become a source of income for a household. That income,

like all types of income, can be saved or consumed.

7

9. Discuss the growth in the value or price of assets.

• When financial instruments (such as stocks or bonds) or real property (such as houses, land or collectibles) are purchased with monetary savings, the investor hopes that the market price of these items will appreciate.

• Use a basic supply and demand graph (Visual 5) to show that prices can rise and fall with a shifting demand curve. Scenarios might include:

o Investors believe that a company has discovered a major innovation that will lead to long-term profitability. Demand for the stock rises and price rises.

o A work of art is found to be a forgery. Museums and other collectors are unwilling to buy the painting. Demand falls and the price decreases.

o A new highway is built next to a piece of land. Retailers are anxious to build stores close to the new road. Demand for the land in the area increases and the price rises.

o A new shopping center is built down the street from a house. Because of the new levels of traffic, the neighborhood is less desirable. Demand falls for the house and the price decreases.

• If the price of an asset appreciates, the owner can sell the asset for a profit. This profit is called a capital gain.

10. Describe the rule of 72. This shortcut allows a saver to use the annual rate of return to

estimate the length of time required for savings to double in value. Use Visual 6 to facilitate discussion. The correct answers are: • At 4%, the savings will double in 18 years. (72 ÷ 4 = 18) • At 6%, the savings will double in 12 years. (72 ÷ 6 = 12) • At 9%, the savings will double in 8 years. (72 ÷ 9 = 8) • At 12%, the savings will double in 6 years. (72 ÷ 12 = 6)

Save and Invest; Investment Advise; Rule of 72s Calculator Save and Invest; Invest for Retirement; Calculate Future Value

11. Use Visual 7 to discuss the mathematical formula used to calculate the future value of

money over time, as appropriate for an individual class. This formula allows a saver to compare the benefits of more frequent compounding. Answers to problems on visual:

• $500 invested at 8% for 5 years compounded annually (once a year) $500 [1 + (.08/1)] 5*1 = $734.66 • $1,000 invested at 6% for 5 years compounded semiannually (twice a year) $1,000 [1 + (.06/2)] 5*2 = $1,343.92 • $200 invested at 9% for 5 years compounded quarterly (four times a year) $200 [1 + (.09/4)] 5*4 = $312.10

12. Distribute the two-page activity, The Reward of Saving. Have students complete the

activity in class, as time permits, or assign as homework. 13. Summarize the information on investment reward.

• Savings and investments can produce income from interest and dividend payments. These payments become income and are tracked on a person’s

8

budget worksheet. The money is “working” and earning income. The additional income allows the person to increase savings.

• Wealth-creating assets grow in value as market prices rise. Until the asset is sold, the increased value does not affect a person’s income; thus, it does not impact the budget worksheet. However, the higher value adds to a person’s wealth by increasing the asset side of the balance sheet.

14. Discuss risk.

• The reward of interest or growth of value is accompanied by risk. • Risk is the possibility that savings or investments will lose value over time

rather than gaining value. • Generally, the higher the risk of losing money, the higher the expected return.

For less risk, an investor will expect a smaller return. • Discuss the four types of risk described in Visual 8. • Have students read the sidebar on page 11 of Building Wealth. Discuss the

factors that determine an investor’s willingness to assume risk.

Save and Invest; Risk v. Return Saving and Investment Instruments

15. Distinguish between savings accounts and investments. These are broad categories of tools that allow the savings to grow over time. • Savings accounts—deposits in a financial institution that earn interest. These

accounts are: o Insured (up to legal limits) by the FDIC. o Liquid—depositors can withdraw money when needed (subject to various

limits on different accounts). o Used by most savers for short-term needs (financial emergencies or near-term

financial goals). • Investments—ownership of real and financial assets.

o When these assets are purchased, risks are assumed in exchange for anticipated returns.

o These assets must mature or be sold to realize returns or capital gains. Remember, this is not investment in the economic sense. Typically, when an economist speaks of investment, the term is specific and refers to the purchase of a capital resource by a producer, such as machinery, not a purely financial transaction like the purchase of a stock or bond.

16. Distribute the graphic organizer and have students complete the activity using Building

Wealth, pages 12–15. Note that in the text of Building Wealth, municipal and corporate bonds are covered in a paragraph that also contains introductory information on the topic of bonds. Please refer to the suggested answers to assist students.

9

17. Review the correct answers using the key provided. Emphasize that all investment

options are characterized by differing levels of potential risks (of all types) and possible rewards.

Save and Invest; Tools for Saving and Tools for Investing

18. Use the following suggestions, along with Visual 2, to relate the ski trail symbols to saving and investment options. • Green Circle—Saving and investment options that are insured but offer very

small returns. The only significant risk is not keeping pace with inflation. • Blue Square—Saving and investment options are not insured but are very safe.

Even without deposit insurance, these instruments have virtually no default risk. Often the most significant risk for these investments is the requirement for holding the investment for a specified period of time. These investments might offer slightly better returns than insured savings.

• Black Diamond—Saving and investment options that are more risky and offer the potential of higher returns. These instruments face some price risk in the market and perhaps the possibility of losing the original investment.

• Double Black Diamond—High-risk investments that offer the possibility of very high returns but also represent significant chance of losing all value.

19. Assign What Would You Do? (two pages) as homework.

Note: See the ideas for extension at the conclusion of this lesson for other ways to use this activity.

Closure Review the major concepts of the lesson using the following questions:

• What does the ski trail rating system tell us about risk and return? More risk on the ski trail in the form of steeper slopes and other dangers often accompanies a more exciting or thrilling experience. A gentle slope that is carefully groomed might pose less risk, but it comes at the cost of fewer thrills or less excitement. More risk has to be carefully considered and should only be attempted by a person with the appropriate training, skills and equipment.

• What is interest? It is a fee for the use of money over time. It is an expense to the borrower and revenue for the lender (or saver).

• Why is compound interest better for savers than simple interest? Interest is paid on earned interest from prior periods.

• How do capital gains affect wealth? As assets grow in value, the asset side of the balance sheet grows and net worth increases. While the increased value is reflected on a balance sheet, it is important to remember that this wealth is not income. The only way to increase income and consumption (as seen on the budget worksheet) is to sell the asset at its current market price.

• What is the cost often associated with a higher return on an investment? Higher returns are often accompanied by more financial risks.

10

• Are there times that a higher risk strategy is appropriate? Maybe. It is appropriate only when a person has carefully considered alternatives and is willing to accept the risks.

Assessment

1. Student completion of interest rate activity 2. Student completion of the graphic organizer 3. Student completion of the assignment, What Would You Do? Teachers could consider the

following benchmarks in the assessment of this assignment: a. Has the student included appropriate investment instruments? b. Has the student discussed both potential rewards and risks in each justification?

Extension The assignment, What Would You Do?, could be used to have students consider an investment strategy for another person of different age, financial goals or risk tolerance. Students should recognize that saving and investment strategy are affected by many factors, including age, income, responsibilities and more.

11

Water flowing into the bathtub = income from all sources (work, interest, dividends, capital gains)

Water flowing out of the bathtub = expenditures and losses (spending, payments, losses from sale of assets)

Depth of the water = Wealth

lesson 2.1Visual 1

12

easiestGreen Circle trails are wide trails that have been groomed. They have a gentle slope.

intermediateBlue Square trails are steeper than Green Circle trails. They are generally groomed and may contain some slightly advanced elements.

DifficultBlack Diamond trails are usually narrow or steep or both. They might not be groomed. Most of these trails contain advanced elements, such as moguls.

expertDouble Black Diamond trails have many haz-ards. They contain extremely steep slopes and drop-offs. Elements such as difficult moguls are part of the trail.

lesson 2.1Visual 2

13

Compound interest

Year Beginning Balance interest Paid Year-end Balance

1 $100.00 $5.00 $105.002 $105.00 $5.253 $110.254

5

6

7

8

9

10 $162.90

If a saver deposits $100 in an account that earns 5% interest, compounded annually, how will the balance grow over 10 years?

lesson 2.1Visual 3

14

Compound interest

Year Beginning Balance interest Paid Year-end Balance

1 $100.00 $5.00 $105.002 $105.00 $5.25 $110.253 $110.25 $5.51 $115.764 $115.76 $5.79 $121.555 $121.55 $6.08 $127.636 $127.63 $6.38 $134.017 $134.01 $6.70 $140.718 $140.71 $7.04 $147.759 $147.75 $7.39 $155.1410 $155.14 $7.76 $162.90

lesson 2.1Visual 4

15

market Graph

Price

Quantity

Demand

supply

Q1

P1

lesson 2.1Visual 5

16

rule of 72The Rule of 72 is a shortcut that can be used to find out how many years it will take an investment to double in value.

To use the rule, divide 72 by the annual rate of return (or interest rate).

If you invest $50,000, how many years will it take for it to grow to $100,000?

• At 4% annual interest• At 6% annual interest• At 9% annual interest• At 12% annual interest

lesson 2.1Visual 6

17

Compound interestand the Future Value of money

FV = P [1+(r/n)] Y*n

FV is future valueP is the initial principalr is the annual interest rateY is the number of yearsn is the number of times the interest is compounded each year

Use the formula to compute the future value of the following investments.

$500 invested at 8% for 5 years compounded annually (once a year)

$1,000 invested at 6% for 5 years compounded semiannually (twice a year)

$200 invested at 9% for 5 years compounded quarterly (four times a year)

lesson 2.1Visual 7

18

threats toWealth-Building assets

risk of defaultIf the institution or agency fails to repay the original amount of the investment, the entire amount can be lost.

risk of falling market priceWhen the asset is bought and sold in an open market, the price can go down or up.

risk of lost purchasing powerIf savings do not grow more quickly than the rate of inflation, the saver is harmed.

risk of liquidityCan an investment be quickly or easily converted to cash by sell-ing the asset?

lesson 2.1Visual 8

19

Name: Date:

The Reward of Saving Simple and Compound Interest If you save $100 in an account that pays 10 percent simple interest, how will your original investment grow over 10 years? Round all values to a whole dollar amount.

Year Beginning Balance Interest Paid Ending Balance 1 $100 $10 $110 2 $110 3 4 5 6 7 8 9

10 If you save $100 in an account that pays 10 percent interest and is compounded annually, how will your original investment grow over 10 years? Round all values to a whole dollar amount.

Year Beginning Balance Interest Paid Ending Balance 1 $100 $10 $110 2 $110 3 4 5 6 7 8 9

10

20

The Reward of Saving Page 2

Rule of 72 Use the Rule of 72 to answer the following questions.

1. If you save $500 in an account that pays 3 percent annual interest, how many years will it take for your savings to double in value?

2. For your 10th birthday, your aunt gave you $4,000. You decide that you would like to save the money to buy a car when you turn 18, but by then you think you will need $8,000. What interest rate is required to allow you to reach your goal?

Summary In the space provided, answer the following questions.

1. Define “interest” in your own words.

2. What is the difference between simple and compound interest?

21

The Reward of Saving Suggested Answers

Simple and Compound Interest If you save $100 in an account that pays 10 percent simple interest, how will your original investment grow over 10 years? Round all values to a whole dollar amount.

Year Beginning Balance Interest Paid Ending Balance 1 $100 $10 $110 2 $110 $10 $120 3 $120 $10 $130 4 $130 $10 $140 5 $140 $10 $150 6 $150 $10 $160 7 $160 $10 $170 8 $170 $10 $180 9 $180 $10 $190 10 $190 $10 $200

If you save $100 in an account that pays 10 percent interest compounded annually, how will your original investment grow over 10 years? Round all values to a whole dollar amount.

Year Beginning Balance Interest Paid Ending Balance 1 $100 $10 $110 2 $110 $11 $121 3 $121 $12 $133 4 $133 $13 $146 5 $146 $15 $161 6 $161 $16 $177 7 $177 $18 $195 8 $195 $19 $214 9 $214 $21 $235 10 $235 $24 $260

22

The Reward of Saving Page 2

Suggested Answers Rule of 72 Use the Rule of 72 to answer the following questions.

1. If you save $500 in an account that pays 3 percent annual interest, how many years will it take for your savings to double in value?

24 years

2. For your 10th birthday, your aunt gave you $4,000. You decide that you would like to save the money to buy a car when you turn 18, but by then you think you will need $8,000. What interest rate is required to allow you to reach your goal?

9% annual interest Summary In the space provided, answer the following questions.

1. Define “interest” in your own words. Student answers will vary, but should include some of the following ideas:

• Interest is the price paid to use someone else’s money. • Interest is the payment received if someone else uses your money. • Interest is paid to a saver in return for giving up consumption in the present. • Interest is paid by a borrower because he or she is consuming before income

has been earned.

2. What is the difference between simple and compound interest?

Simple interest is paid on the amount of the original investment and does not change over time. Compound interest is paid on the amount of the original investment and all accrued interest.

23

Tool

s fo

r Sav

ing

and

Inve

stin

g

Sugg

este

d An

swer

s

Wea

lth-B

uild

ing

Asse

ts

Insu

red

Savi

ngs

Inve

stm

ents

Savin

g Acco

unts

*

*

*

Mon

ey M

arket

Sa

vings

Certi

ficate

ofDe

posit

(CD)

Stock

sBo

nds

Mut

ual F

unds

Corp

orate

Mun

icipa

lU.

S. Sav

ings

Bond

sU.

S. Trea

sury

Bond

s,Bi

lls &

Notes

24

Tool

s fo

r Sav

ing

and

Inve

stin

g

Use

the

info

rmat

ion

from

Bui

ldin

g W

ealth

, pag

es 1

2-15

, to

com

plet

e th

is g

raph

ic o

rgan

izer.

Unde

r eac

h tit

le, w

rite

note

s ab

out p

oten

tial r

isks

an

d re

war

ds fo

r eac

h in

stru

men

t.

Nam

e:

Dat

e:

Wea

lth-B

uild

ing

Asse

ts

Insu

red

Savi

ngs

Inve

stm

ents

25

Name: Date:

What Would You Do? Imagine that you have $5,000 to put into savings or investments. What would you do? How would you allocate the money among all the potential investment alternatives? You should consider your financial goals. The length of time you have to invest, your risk tolerance and your required return should be considered too. Instructions:

• List a financial goal for each of the periods listed below. • Use the information from the graphic organizer and your knowledge of risk and rewards

to allocate the entire $5,000 among saving and investment options for each period. • Explain in a few sentences why you chose those particular investment instruments.

Remember to discuss the potential risks and rewards of your choices. Less than one year …

Financial goal: Saving or investment strategy: Justification:

More than one year but less than five years …

Financial goal: Saving or investment strategy: Justification:

26

More than five years…

Financial goal: Saving or investment strategy: Justification:

Please note: Savers should always seek sound advice and do research on any investment

opportunity under consideration.

27

Unit 2: Save and Invest

Lesson 2.2 Entrepreneurs and the Economy

Lesson Description Savers have a wide variety of financial goals. Retirement or homeownership might be the

incentives for saving and investing, but some savers dream of becoming entrepreneurs and starting a business. In Building Wealth, Duncan used his savings to start a printing business.

Save and Invest; Other Investments; Duncan Invests in a Small Business

Entrepreneurs possess qualities of creativity and risk taking that make them unique in the business community. In this lesson, the introduction describes the four types of productive resources and identifies the unique contributions of the entrepreneur in the productive process. Students complete a graphic organizer about the creative ideas and assumed risks of American entrepreneurs and discuss the role of government in providing competitive markets and property rights. The lesson concludes with an out-of-class assignment to interview a local entrepreneur and write a report about the creativity and risk taking seen during the interview. National Standards in K-12 Personal Finance Education (www.jumpstart.org)

Income and Careers Standard 1: Explore career options.

Instructional Objectives Students will:

• Identify the four types of productive resources. • Analyze the difference between entrepreneurship and other productive resources. • Analyze the creativity and risk taking demonstrated by local and nationally known

entrepreneurs. • Evaluate the role of property rights and competitive markets in supporting entrepreneurs.

Time Required One 50-minute class period plus student time outside class Materials Required

• Class set of Entrepreneurs and the Economy (EE) (See Ordering Materials, p. 3) • Copies of the following handouts for each student

o Creativity and Risk o Interview with an Entrepreneur

• Copies of Visuals 1–6

28

Procedure 1. Show students Visual 1. Read the definition of the word entrepreneur out loud and

briefly discuss it. Preview the lesson by focusing on two parts of the definition: • The entrepreneur as innovator and risk taker • The entrepreneur as the organizer of economic resources

Have students read “What Is an Entrepreneur?” (EE, pages 4–5). Reinforce the two concepts from the definition.

2. Brainstorm a class fundraiser to facilitate a discussion of the role of the entrepreneur as

organizer of economic resources. • Tell the students to imagine that they are officers in a school club that needs to raise

money for a project. The officers decide to organize a car wash. Brainstorm the materials needed for the fundraising car wash. Write student responses on the board. Some typical responses include:

o Hoses o Water o Sponges o Towels o Signs o Workers o Parking lot or location

• Categorize student responses into the resource categories of land, labor, capital and entrepreneurship. Display Visual 2 to show the four types of resources, and use the following abbreviated definitions to facilitate the process of sorting the list.

o Land—Natural resources o Labor—Human resources o Capital—Manufactured resources o Entrepreneurship—A person’s ability to organizes other resources to

produce a product • Student responses typically include examples of the first three types of resources

(land, labor and capital) but neglect the role of the entrepreneur. The entrepreneur had the idea, arranged the location, bought the supplies and recruited the workers. Emphasize that the entrepreneur organizes the other productive resources to fulfill his or her idea.

3. Have students read “Entrepreneurs as Vital Resources” (EE, pages 6–7) and

“Entrepreneurs and Creative Destruction” (EE, pages 7 and 10). Discuss the role of entrepreneurs in society as innovators whose new ideas bring change and progress to an economy. • Entrepreneurs devise new ways of using land, labor and capital, but those resources

could have been used in other ways. • The work of the entrepreneur brings new products to the market in order to meet the

demand of the buying public. • The entrepreneur has an idea, invested time and money to gather resources, and

brought the good or service to the marketplace.

29

4. Discuss innovation and risk taking, two essential qualities for entrepreneurs. • The entrepreneur must be creative to devise the new idea or the innovative use of

other resources. • The entrepreneur must be willing to assume risk.

o Financial risk—using savings or taking out a loan to acquire the resources needed for production

o Opportunity costs—time and energy that the entrepreneur could have devoted to other endeavors; starting a business might mean that other ideas will have to wait

5. Discuss Oprah Winfrey as an example of a successful entrepreneur. Have a student read

the information below to the class. Have students identify the elements of creativity in her business and the risks she took in her career.

Oprah Winfrey began her broadcasting career in Nashville while still in high school. She anchored news in Nashville and Baltimore before moving to Chicago to host a morning talk show that was quickly expanded and renamed The Oprah Winfrey Show. It entered national syndication and became the highest-rated talk show in television history. In 1988, Winfrey established Harpo Studios, making her the third woman in the American entertainment industry (after Mary Pickford and Lucille Ball) to own her own studio. The company has produced movies and telefilms and launched new television shows featuring Dr. Phil and Rachael Ray. With her partners, Oprah has launched a magazine, a cable television network and an XM Satellite Radio station.

6. Distribute the handout, Creativity and Risk. Have students complete the handout using

the information on American entrepreneurs on pages 8–9 of EE. 7. Have students read “Entrepreneurs in the Marketplace” (pages 10–11 of EE). Discuss the

reading and emphasize the importance of the market system in the allocation of resources. • Entrepreneurs who take their ideas to the marketplace are willing to assume

financial risks, along with other types of risk, in the hope of earning a profit. • The talents of the entrepreneur are directed to the tasks that are valued by the

buying public. • Land, labor and capital are efficiently used because entrepreneurs do not buy

resources to produce things that will not sell in the marketplace.

8. Have students read “Incentives for Entrepreneurship” (pages 14–15 of EE). Discuss the reading. • Property rights give entrepreneurs the assurance that they will retain the profit from

their ideas. • The government plays an important role in providing the foundations of an efficient

economic system through strong property rights and competitive markets.

30

9. Research assignment: • Distribute the handout Interview with an Entrepreneur. Explain to the students

that they should identify an entrepreneur who started a business in their community. They should make an appointment with the entrepreneur and conduct a brief interview in person or on the phone. Students could be allowed to conduct these interviews in pairs.

• After the interview, students should write a short expository essay explaining both the creativity demonstrated and the risk assumed by the entrepreneur.

Closure Review the major points of class discussion using the following questions.

• What are the four types of productive resources? Land, labor, capital and entrepreneurship

• How is entrepreneurship different from the other three? The entrepreneur organizes the other three resources in the productive process. If the other resources are fuel for production, entrepreneurship represents the “spark” that starts the engine.

• Why is creativity an essential quality of an entrepreneur? Entrepreneurs must conceive of a new way to combine land, labor and capital to create an innovative product that is desirable to consumers.

• Why is the willingness to assume risk an essential quality of an entrepreneur? Entrepreneurs must acquire the resources necessary to produce a good or service. In doing so, the entrepreneur assumes financial risk if the good does not sell. Also, the entrepreneur invests personal time and energy and incurs the opportunity costs of forgone income and endeavors.

• How do private property rights create incentives for entrepreneurs? These rights ensure that entrepreneurs will receive the profit from their ideas. Without the assurance that the entrepreneur will receive the profit, the person would be unwilling to assume the risk.

• How do competitive markets allocate resources efficiently? Entrepreneurs will only buy resources for production that are profitable (or are likely to be profitable in the future). If society does not value a product, the item will not sell and the business will not be profitable. If the business fails, the resources will be used by a different entrepreneur in a different enterprise.

Assessment

1. Student completion of handout entitled Creativity and Risk. 2. Student completion of entrepreneur interview as demonstrated by completion of

interview questionnaire. 3. Student completion of essay assignment. Evaluation categories might include:

• Does the essay introduce and describe the entrepreneur and the business? • Does the essay identify and describe the creativity of the entrepreneur? • Does the essay identify and describe the risks assumed by the entrepreneur? • Does the essay use correct grammar, spelling and punctuation?

31

Optional Extension Divide students into groups and tell each group that they are in charge of raising money for a student group at school. Each group should devise a business plan for the fundraiser and present the idea to the class. Groups could create posters or other visuals to accompany their presentation. Suggested components of the business plan(s) include:

• Description of product or service • Retail price • Advertising plan • Resources required for production • Cost of resources or manufacturing cost • Profit potential • Source of startup funds • Market analysis • Anticipated risks

For additional information about creative destruction, see the 1992 Federal Reserve Bank of Dallas Annual Report, The Churn, at www.dallasfed.org/fed/annual/index.html. Students could also research other famous entrepreneurs and develop visuals, presentations and reports using the analytical framework of innovation and risk taking as important qualities for entrepreneurial success.

32

entrepreneur (än trə prə nər΄) n. an innovator and risk taker who tries a new way of doing things; one who develops products and processes and organizes economic resources to please customers.

Duncan

lesson 2.2Visual 1

33

lesson 2.2Visual 1

34

Name: Date:

Creativity and Risk Use the short profiles on pages 8 and 9 of Entrepreneurs and the Economy to briefly describe the creative idea of each of these entrepreneurs. Also describe the risk these people assumed when they started their businesses.

The Idea

Great American

Entrepreneurs The Risk

Ray Kroc

Berry Gordy Jr.

Debbi Fields

Henry Ford

Bill Cosby

Michael Dell

Mary Kay Ash

35

Name: Date:

Interview with an Entrepreneur Name of the entrepreneur: Name of the business: Brief description of the business: When did you have the initial idea for your business? Where did you get the money required to start your business? What challenges did you face as you started your business? What is a typical workday like for you? What types of responsibilities do you have?

36