Chapter 1 Exploring the World of Business and Economics

Chapter 1

Exploring the Worldof Business and

Economics

Learning Objectives

1. Discuss your future in the world of business.2. Define business and identify potential risks and rewards.3. Define economics and describe the two types of economic

systems: capitalism and command economy.4. Identify the ways to measure economic performance.5. Examine the four different phases in the typical business

cycle.6. Outline the four types of competition.7. Summarize the factors that affect the business environment

and the challenges American businesses will encounter in the future.

Free Enterprise

…the system of business in which individuals are free to decide what

to produce, how to produce it,and at what price to sell it.

“ “

Your Future in theChanging World of Business

• What do you want?

• Why do you want it?

• Write it down!

“Success is a journey, not just a destination.”Joe Dudley

Why Study Business?

• To choose a career

• To be a successful employee

• To start your own business

• To become a better-informed consumerand investor

www.careerbuilder.comwww.careeronestop.orgwww.monster.comwww.hotjobs.yahoo.com

Here are some interesting sites:

Median Yearly Income

Who Makes the Most Money?

Source: 2009 Statistical Abstract of the United States, p. 443

Cultural (Workplace) Diversity

…differences among people in a workforce owing to race, ethnicity, and gender.“

Text Features

Learning Objectives Inside Business Margin Notes Boxed Features Spotlight End-of-Chapter

Materials

Pathway to Success in This Course

1. Prepare before you go to class. 2. Read the chapter.3. Underline or highlight important concepts.4. Take notes.5. Apply the concepts.6. Practice critical thinking.7. Prepare for exams.

Business

…the organized effort of individuals to produce and sell, for a profit, the goods and services that satisfy society’s needs.

“ “

Figure 1.1: Combining Resources

A business must combine all four resources effectively to be successful.

Ultimate Objective of Every Firm

…to satisfy the needs of its customers.“

Business Profit

Sales Revenue- Business Expenses

Profit (Loss)*

*Profit becomes property of its owners

Stakeholders

…all the different people or groupsof people who are affected by thepolicies, decisions, and activities

made by an organization.

Business Ownership Risks

Not being paid

Loss of whatever is invested in the business

Paths to E-Profits

$ Amazon Free shipping Outside merchants =

commission

$ eBay Online auction Commission Online telephone

communications

$ Google Search engine Paid advertising links

Economics

…the study of how wealth* iscreated and distributed.**

* wealth is “anything of value, including products produced and sold by business”

**distribution is “who gets what”

Economy

…the way in whichpeople deal with the creation and

distribution of wealth.“

Economic Perspectives

MicroeconomicsThe study of decisions made by Individuals Businesses

MacroeconomicsThe study of National economy Global economy

Factors of Production

…resources used to producegoods and services.“

Land/natural resources Labor Capital Entrepreneurship

Types of Economic Systems

Capitalism Free Enterprise Adam Smith (Wealth of Nations) The Invisible Hand Laissez-Faire Capitalism

Command Socialism Communism (Karl Marx)

Economic Systems Differ

• Economic systems differ depending on the answers to four basic economic questions about nation’s economic activity

1. What and how much will be produced?2. How will it be produced?3. For whom will it be produced?4. Who owns/controls factors of production?

Capitalism

…individuals own and operatethe majority of businesses thatprovide goods and services.

Adam SmithWealth of Nations (1776)

Society pursues self-interest People work hard if

• Earn more pay• Earn more profit

Capitalism promotes good of community

Invisible Hand

...describes how an individual’sown personal gain benefits others

and a nation’s economy.“

Figure 1.3: Assumptions forLaissez-Faire Capitalism

U.S. = Mixed Economy

…an economy that exhibits elementsof both capitalism and socialism.“

Figure 1.4: Circular Flowin Mixed Economy

Command Economy

…government decides what goodsand services will be produced, how

they will be produced, for whomavailable goods and services will be

produced, and who owns and controlsthe major factors of production.

Command Economies

Socialism

Communism

Socialism

Key industries owned/controlled by government Land, buildings, and raw materials may be

property of state Private ownership permitted to varying degrees People choose own occupations National goals determine what/how produced Uses taxes, rents, and wages to control distribution

Communism

Karl Marx ─ Father Advocated classless society Citizens own all economic resources Workers contribute based on ability and receive

benefits based on needExamples ─ North Korea, ChinaCentralized planning ─ sets prices and wagesEmphasis on government needs ─ not consumersNo job choice ─ professionals better off than

factory workers

MeasuringEconomic Performance

Economic Indicators Balance of Trade Corporate Profits Inflation Rate National Income New Housing Starts Prime Interest Rate Productivity Rate Unemployment Rate

Consumer Price Indexfor All Urban Consumers (CPI-U)

U.S. Department of Labor, Bureau of Labor Statistics, Inflation & Prices, All Urban Consumers, http://www.bls.gov/data , Table 24. Historical Consumer Price Index for All Urban Consumers (CPI-U): U. S. city average, accessed July 2009.

(1982–84=100, unless otherwise noted)

Productivity

…the average level ofoutput per worker per hour.“

Results ofIncreased Productivity

1. Owners make more profit and/or sell products for less

2. Can lead to higher unemployment

Figure 1.5: GDP in Current Dollars andin Inflation-Adjusted Dollars

Source: U.S. Bureau of Economic Analysis website at www.bea.gov, accessed September 14, 2008

Table 1.2: Common Measures Used to Evaluate a Nation’s Economic Health

Balance of tradeThe total value of a nation’s exports minus

the total value of its imports over a specific period of time

Corporate profitsThe total amount of profits made by corporations

over selected time periods

Inflation rateAn 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

(cont.)

Table 1.2: Common Measures Used to Evaluate a Nation’s Economic Health (cont.)

National incomeThe total income earned by various segments of the

population, including employees, self-employed individuals, corporations, and other types of income

New housing startsThe total number of new homes started during a

specific time period

Prime interest rateThe lowest interest rate that banks charge their most

credit-worthy customers

(cont.)

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

Table 1.2: Common Measures Used to Evaluate a Nation’s Economic Health (cont.)

Business Cycle

…the recurrence of periodsof growth and recession in anation’s economic activity.

“ “

States of Business Cycle

Depression

Recession

Trough

Depression

1 2 3 4 5 6 7 8 9 10 11

Quarters

Recovery

Dow Jones

Recession

Government Actions in Recession/Depression

Monetary Policy Determines size of money supply and interest rates

Fiscal Policy Influences amount of savings and expenditures by altering tax structure and government spending

Federal Deficit

…a shortfall created when thefederal government spends morein a fiscal year than it receives.“

Figure 1.6: Supply Curveand Demand Curve

Table 1.3: Four DifferentTypes of Competition

The number of firms determines the degree of competition within an industry.

Product Differentiation

…the process of developingand promoting differences between

one’s products and all similar products.

Standard of Living

…a loose subjective measure ofhow well off an individual or a society is

mainly in terms of want satisfactionthrough goods and services.

Figure 1.7:Time Line of

American Business

Environments of Business

Business

CompetitiveCompetitive TechnologicalTechnological

EconomicEconomicGlobalGlobal

The Challenges Ahead

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

2. How can we restore the public’s confidence in the banking and financial industries?

3. How can we regulate banks, savings and loan associations, credit unions, and other financial institutions to prevent the type of abuses that led to an economic crisis?

4. 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?

(cont.)

The Challenges Ahead (cont.)

5. How can we meet the challenges of managing culturally diverse workforces to address the needs of a culturally diverse marketplace?

6. How can we make American firms more productive and more competitive with foreign firms that have lower labor costs?

7. How can we preserve the benefits of competition and small businesses in our American economic system?

8. How can we encourage economic growth and at the same time continue to conserve natural resources and sustain our environment?

(cont.)

9. How can we meet the needs of two-income families, single parents, older Americans, and the less fortunate who need health care and social programs to exist?

The Challenges Ahead (cont.)

1. General Motors and Toyota are both examples of

a) marketing intermediaries. b) manufacturers. c) wholesalers. d) international agents. e) service businesses.

Chapter Quiz

2. What remains after all business expenses have been deducted from sales revenues is referred to as

a) cash. b) excess return. c) profit. d) gross return. e) operating revenue.

Chapter Quiz (cont.)

3. The total dollar value of all goods and services produced by all people within the boundaries of a country during a one-year period is called

a) gross manufacturing output.b) gross domestic product.c) real gross national product.d) economic product.e) national production report.

4. __________ is an economic system in which individuals own and operate the majority of businesses that provide goods and services.

a) Bureaucratic economyb) Command economyc) Communismd) Capitalisme) Socialism

5. __________ is a loose subjective measure of how well off an individual or society is.

a) Standard of livingb) Consumer price indexc) Personal economic indexd) Individual consumption standarde) Employee producer index

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