Chapter One – Exploring the World of Business and Economics

Chapter One – Exploring the World of Business and Economics • Learning objectives

o Discuss your future in the world of business.

o Define business and identify potential risks and rewards.

o Define economics and describe two types of economic systems: capitalism and command economy.

o Identify the ways to measure economic performance.

o Outline the four types of competition.

o Summarize the factors that affect the business environment and the challenges that American businesses will encounter in the future.

• Why Study Business?

o For help in choosing a career

o To be a successful employee

o To start your own business

o The become a better informed consumer and investor

• Your future in the changing world of business

o Free enterprise

▪ Individuals are free to decide what to produce, how to produce it, and at what price to sell it

o What does it take to succeed in business?

▪ Have a dream—know what you want

▪ Adapt to changes in the environment—work hard to turn your dreams into reality

o Why study business?

▪ For help in choosing a career

▪ To be a successful employee

▪ To start your own business

▪ To become a better informed consumer and investor

• Business: a definition - The organized effort of individuals to produce and sell, for a profit, the goods and services that satisfy society’s needs

• Combining resources

o Business

▪ Human resources

• Qualified and trained workers who are treated well

o This will provide highest possible production

▪ Material resources

• Work space, machines

▪ Financial resources

• Outside investors or loans

▪ Informational resources

• Getting the best price, hiring industry, industry trends, competitors, ads/promotions

• Classifications of business

o Manufacturing businesses

▪ Process various materials

o Service businesses

▪ Produce services (e.g., haircuts, legal advice, tax preparation)

o Marketing intermediaries

▪ Buy products from manufacturers and resell

o Service industries are going up while marketing is going down (technology and outsourcing)

• Satisfying needs

o People buy goods and services not just to own them, but to satisfy particular needs

o Businesses that understand customer needs, and work to satisfy those needs, are usually successful

• Profit

o The relationship between sales revenue and profit

▪ Profit is what remains after all business expenses have been deducted from sales revenue. A loss (negative profit) results when a firm’s expenses are greater than its revenues.

▪ Purposes

• To reward business owners for producing goods and services consumers want

• As payment for business owners assuming the risks of ownership

▪ Risks

• Not being paid (employees, suppliers, and lenders)

• Losing whatever was invested in the business

o Stakeholders

▪ All of the different people or groups or people who are affected by the policies and decisions made by an organization

• Economic systems

o Economics

▪ The study of how wealth (anything of value) is created and distributed

o Microeconomics

▪ The study of the decisions made by individuals and businesses

o Macroeconomics

▪ The study of the national economy and the global economy

o Economy

▪ The system through which a society creates and distributes wealth

o Factors of Production

▪ Land and natural resources

▪ Labor

▪ Capital

▪ Enterprise

o Entrepreneur

▪ A person who risks time, effort, and money to start and operate a business

o Differences in economic systems

▪ How they answer the four basic economic questions

• What goods and services will be produced?

• How will they be produced?

• For whom will they be produced?

• Who owns and controls the major factors of production?

o Types of economic systems

▪ Capitalism

• An economic system in which individuals own and operate the majority of businesses that provide goods and services

• Derived from Adam Smith’s laissez-faire capitalism (“invisible hands”)in which a society’s best interests are served by individuals pursuing their own self-interest

o Basic assumptions for laissez-faire capitalism

▪ Creation of wealth is the concern of private individuals (right to create wealth)

▪ Resources used to create wealth must be privately owned (right to own private property and resources)

▪ Economic freedom ensures the existence of a free market economy (right to economic freedom and freedom to compete)

• Businesses and individuals decide what to produce and buy; the market determines quantities sold and prices

▪ Limited role of government (right to limited government intervention)

o Regulations of government are there to protect the people, but not harbor the businesses

• Capitalism in the United States

o Mixed economy with elements of capitalism and socialism

o Households

▪ Consumers of goods and services

▪ Resource owners of some factors of production (labor, capital)

o Businesses

▪ Produce goods and services to exchange for revenues (money)

▪ Use revenues to purchase factors of production

o Governments

▪ In exchange for taxes, governments provide public services that would not be provided by business or would be produced only for those who could afford them

o Debate Issue: Should There Be Less Government Involvement in the United States Economic System?

▪ Yes

• Today, there are too many government controls that inhibit business owners.

• The added costs of adhering to government regulations are passed on to consumers in the form of higher prices.

• There is no need for all the government rules and regulations because business owners are socially responsible.

▪ No

• Without adequate government controls, business would take advantage of consumers.

• While government rules and regulations cost money, the added safety and protection are well worth the money.

• While the majority of business owners may be socially responsible, there are some that need the encouragement provided by government regulations.

•

▪ Command economies

• Can be corrupt economies

• Economic systems in which the government decides what will be produced, how it will be produced, who gets what is produced, and who owns and controls the major factors of production

• Socialism

o Key industries (e.g., transportation, utilities, and banking) are owned and controlled by the government

o Small-scale private businesses may be permitted and workers may choose their own occupations

o Production is based on national goals and distribution is controlled by the state

o Intent is the equitable distribution of income, elimination of poverty, social services to all who need them, elimination of the economic waste of capitalistic competition

• Communism

o All factors of production are owned and controlled by the government as proxy for ownership by all citizens

o Production is based on centralized state planning to meet the needs of the state and not necessarily the needs of its citizens

o The state dictates occupational choices and sets prices and wages

o Intent is to create Karl Marx’s concept of a classless society where all contribute according to their ability and receive benefits according to their needs.

o Measuring economic performances

▪ Productivity

• The average level of output per worker per hour

o Output per worker in manufacturing in the U.S. is increasing because of technology

▪ Economic indicators

• Gross domestic product (GDP)

o The total value of all goods and services produced by all people within the boundaries of a country during a one-year period

• Inflation

o A general rise in the level of prices

• Deflation

o A general decrease in the level of prices

• “Real” GDP

o The total dollar value, using inflation-adjusted figures, of all goods and services produced by a nation

o Common Measures Used to Evaluate a Nation’s Economic Health

▪ Balance of trade

• The total value of a nation’s exports minus the total value of its imports over a specific period of time

▪ Bank credit

• A statistics that measures the lending activity of commercial financial institutions

▪ Corporate profits

• The total amount of profits made by corporations over selected time periods

▪ Inflation rate

• An economic statistic that tracks the increase in prices of goods and services over a period of time; usually calculated on a monthly or annual basis

▪ National income

• The total income earned by various segments of the population, including employees, self-employed individuals, corporations, and other type of income

▪ New housing starts

• The total number of new homes started during a specific time period.

▪ Prime interest rates

• The lowest interest rate that banks charge their most creditworthy customers

▪ Productivity rate

• An economic measure that tracks the increase and decrease in the average level of output per worker

▪ Unemployment rate

• The percentage of a nation’s labor force unemployed at any time

• The business cycle

o The recurrence of periods of growth and recession in a nation’s economic activity

▪ The Peak (Prosperity)

• Unemployment is low, total income is relatively high, and consumers are willing to buy products and services

• Businesses often expand and offer new products and services

▪ Recession

• Two consecutive three-month periods of decline in a country’s gross domestic product

• Growth in unemployment

▪ Depression

• A severe recession that lasts longer than a recession

▪ The “Trough”

• The nation’s output and unemployment bottom out and reach their lowest levels

• To offset the effects of recession and depression, the federal government uses both monetary and fiscal policies

▪ Monetary policies

• Federal Reserve decisions that determine the size of the supply of money in the nation and the level of interest rates

▪ Fiscal Policy

• Government influence on the amount of savings and expenditures; accomplished by altering the tax structure and by changing the levels of government spending

▪ Federal Deficit

• A shortfall created when the federal government spends more in a fiscal year than it receives

▪ National debt

• The total of all federal deficits

▪ Recovery

• The movement of the economy from depression or recession to prosperity

• A greater demand for products and services results

• Types of competition

o Rivalry among businesses for sales to potential customers

o Perfect (or pure) competition

▪ The market situation in which there are many buyers and sellers of a product, and no single buyer or seller is powerful enough to affect the price of that product

• Supply: The quantity of a product that producers are willing to sell at each of various prices

• Demand: The quantity of a product that buyers are willing to purchase at each of various prices

• Market Price (Equilibrium): The price at which the quantity demanded is exactly equal to the quantity supplied

o Monopolistic competition

▪ A market situation where there are many buyers along with a relatively larger number of sellers who differentiate their products from the products of competitors

▪ Product differentiation

• The process of developing and promoting differences between one’s products and all similar products

o Oligopoly

▪ A market situation (or industry) in which there are few sellers

• E.g., automobile manufacturers, car rental agencies, and farm implement industries

▪ Sizable investments are required to enter into the market

▪ Each seller has considerable control over price

▪ The market actions of one seller can have a strong effect on competitors

o Monopoly

▪ A market (or industry) with only one seller

▪ Natural monopoly

• An industry requiring huge investments in capital and within which duplication of facilities would be wasteful and thus not in the public interest

▪ Legal monopoly (limited monopoly)

• A monopoly created when the federal government issues a copyright, patent, or trademark protecting the owners of written materials, ideas, or product brands from unauthorized use by competitors

• Timeline of American business

o 1700’s (50’s on)

▪ Events

• Sole proprietorship

• Domestic system

• Agricultural economy

• Revolutionary War

• Factory System

▪ Inventions

• Cotton gin

o 1800’s

▪ Events

• Industrial Revolution

• War of 1812

• Civil War

• Trusts

• Second Industrial Revolution

• Manufacturing economy

▪ Inventions

• Golden age of invention

• Erie Canal

• Steam locomotive

• Telephone

• Light bulb

o 1900’s

▪ Events

• World War I

• Large corporations

• Great Depression

• Modern Business

• World War II

• Service economy

• Oil Embargo

• Inflation

• Collapse of Soviet Union

• NAFTA

• Hong Cong to Chinese

▪ Inventions

• Airplane

• Model T Ford

• Satellite

• Fiber optics

• Laptop computer

• Artificial Intelligence

o 2000’s

▪ Events

• Low unemployment, interest rates, and inflation

• Dow Jones and NASDAQ values decline

• Terrorist attacks

• Increase in unemployment

• Economic downturn

▪ Inventions

• E-business

• Increased computer power

• Improved information technology

• American business today

o Standard of living

▪ A loose, subjective measure of how well off an individual or a society is mainly in terms of want satisfaction through goods and services.

o Early business development

▪ Barter system

• A system of exchange in which goods or services are traded directly for other goods and/or services without using money

▪ Domestic system

• A method of manufacturing in which an entrepreneur distributes raw materials to various homes, where families would process them into finished goods to be offered for sale by the merchant entrepreneur

▪ Factory system

• A system of manufacturing in which all the materials, machinery, and workers required to manufacture a product are assembled in one place

▪ Specialization

• The separation of a manufacturing process into distinct tasks and the assignment of different tasks to different individuals

o The twentieth century

▪ Rapid growth of large industries (automobiles, steel, oil, chemical) and the mass production of consumer goods

▪ No longer were the largest businesses owned by one individual; instead, ownership was in the hands of thousands of corporate shareholders.

▪ The Roaring Twenties ended with the 1929 stock market crash

▪ Government intervention became necessary to get the economy moving again (FDR)

▪ World War II spurred economic activity and technological growth that continued after the war

▪ The U.S. standard of living and the production of goods and services continued to rise through the 1960s

o The late twentieth century

▪ A shortage of crude oil in the mid-1970s increased the cost of energy, causing increases in the annual rate of inflation to beyond 10% through the early 1980s

▪ The U.S. economy in the early 1990s was a period of economic improvement and growth fueled by introduction of information technologies, cost cutting, and the increased efficiency and flexibility of business.

▪ E-Business—the organized effort of individuals to produce and sell through the Internet for a profit products and services that satisfy society’s needs--became an accepted method of conducting business

o A New Century: 2000 and Beyond

▪ Technology becomes affordable

▪ Growth in services industries and global trade

▪ Although many economic indicators are strong, there is a feeling of pessimism, a large number of business failures, high unemployment, terrorist threats

▪ The competitive, global, technological, and economic environments affect business today.

o The current business environment

▪ The Competitive Environment

• Successful firms compete with competitors by satisfying customer needs

▪ The Global Environment

• Globalization

o Consumers win because they have more product choices and lower prices

o Many people have and will lose their jobs because of lower offshore wages or to technological innovation

▪ The Technological Environment

• Changes in manufacturing equipment, communication with customers, and distribution of products are examples of how technology has changed business practices

▪ The Economic Environment

• Managers and business owners do not have unlimited resources to pay for all the business activities they want to fund

• Important if the nation’s economy drops precipitously or an individual firm’s sales and profits are declining

• The challenges ahead

o How can we encourage Iraq and Afghanistan to establish a democratic and free society and resolve possible conflict with North Korea and other countries throughout the world?

o How can we create a more stable economy and create new jobs?

o As a nation, how can we develop a disaster crisis management program that will help people in times of peril?

o How can we meet the challenges of managing culturally diverse work forces to address the needs of a culturally diverse marketplace?

o How can we make American manufacturers more productive and more competitive with foreign producers who have lower labor costs?

o How can we preserve the benefits of competition in our American economic system?

o How can we encourage economic growth and at the same time continue to conserve natural resources and protect our environment?

o How can we best market American-made products in foreign nations?

o How can we meet the needs of two-income families, single parents, older Americans and the less fortunate?