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Chapter 1

Understanding the U.S. Business System

Outline

The Concept of Business and the Concept of Profit

Economic Systems Around the World

The U.S. Economic System

Evaluating Economic Systems

The Concept of Business and the Concept of Profit

Business

An organization that provides goods or services to earn profits

Profits

The difference between a business’s revenues and its expenses

Economic Systems Around the World

Economic System

A nation’s system for allocating its resources among its citizens

Factors of Production

Resources used in the production of goods and services

Resources used in the production of goods and services

Four traditional factors of production:

1. Natural Resources

2. Labor

3. Capital

4. Entrepreneurs

Newer perspectives include:

5. Physical Resources

6. Information Resources

Newer perspectives include:

5. Physical Resources

6. Information Resources

Factors of ProductionNatural Resources

Materials supplied by nature (such as land, water, mineral deposits, and trees)

Labor (or Human Resources)

Physical and mental capabilities of people as they contribute to economic production

Capital

Funds needed to create and operate a business enterprise

Factors of ProductionEntrepreneur

Person who starts a new business or makes the decisions that expand a small business

Physical Resources 

Tangible things organizations use in the conduct of their business

Information Resources

Data and other information used by a business

Types of Economic Systems

Planned Economy

Centralized government controls all or most factors of production and makes all or most production and allocation decisions

Market Economy

Individuals control production and allocation decisions through supply and demand

Planned Economies

Communism

Planned economic system in which the government owns and operates all major sources of production

Socialism

Planned economic system in which the government owns and operates selected major sources of production

Market EconomiesMarket 

Mechanism for exchange between buyers and sellers of a particular good or service

Input Market 

Firms buy resources from supplier households

Output Market 

Firms supply goods and services in response to demand on the part of households

Capitalism

Market economy that provides for private ownership of production and encourages entrepreneurship by offering profits as an incentive

“Pure Market Economy”

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OUTPUT MARKETSGoods

Services

INPUT MARKETSLabor

CapitalEntrepreneurs

Physical ResourcesInformation Resources

HOUSEHOLDS• Demand products in

output markets• Supply resources in

input markets

FIRMS• Supply products in

output markets• Demand resources

in input markets

DEMANDDEMAND

DEMANDDEMAND SUPPLYSUPPLY

SUPPLYSUPPLY

Mixed Market Economies

Privatization

Process of converting government enterprises into privately owned companies

Socialism

Planned economic system in which the government owns and operates only selected major sources of production

Economic system featuring characteristics of both planned and market economies Economic system featuring characteristics of both planned and market economies

The U.S. Economic System

Understanding the complex nature of the U.S. economic system is essential to understanding the

environment in which U.S. businesses operate.

Understanding the complex nature of the U.S. economic system is essential to understanding the

environment in which U.S. businesses operate.

Markets, Demand, & Supply

Demand

The willingness and ability of buyers to purchase a good or service

Supply

The willingness and ability of producers to offer a good or service for sale

The Laws of Demand & Supply

Law of Demand

Principle that buyers will purchase (demand) more of a product as its price drops and less as its price increases

Law of Supply

Principle that producers will offer (supply) more of a product for sale as its price rises and less as its price drops

The Laws of Demand & Supply Demand and Supply Schedule

Assessment of the relationships between different levels of demand and supply at different price levels

Demand CurveGraph showing how many units of a product will be demanded (bought) at different prices

Supply CurveGraph showing how many units of a product will be supplied (offered for sale) at different prices

The Laws of Demand & Supply Market Price (or Equilibrium Price)

Profit-maximizing price at which the quantity of goods demanded and the quantity of goods supplied are equal

SurplusSituation in which quantity supplied exceeds quantity demanded

ShortageSituation in which quantity demanded exceeds quantity supplied

Demand and Supply Schedules

Quantity of Quantity ofPrice Pizzas Demanded Pizzas Supplied

$2 2000 100$4 1900 400$6 1600 600$8 1200 800

$10 1000 1000$12 800 1200$14 600 1300$16 400 1600$18 200 1800$20 100 2000

Demand & Supply

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Demand & Supply

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Demand & Supply

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Demand & Supply

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Private Enterprise

Economic system that allows individuals to pursue their own interests without

undue governmental restriction

Economic system that allows individuals to pursue their own interests without

undue governmental restriction

Four elements of private enterprise:

1. Private Property Rights

2. Freedom of Choice

3. Profits

4. Competition

Private EnterprisePrivate Property Rights

The right to buy, own, use, and sell almost any form of property

Freedom of ChoiceThe right to sell your labor to the employer you choose, purchase products you want to buy, choose what to produce or who to hire, etc.

ProfitsAnticipated profits play a large part in individuals’ choices of what goods or services to produce

CompetitionVying among businesses for the same resources or customers

Degrees of CompetitionPure Competition

Market or industry characterized by numerous small firms producing an identical product

Monopolistic Competition

Market or industry characterized by numerous buyers and relatively numerous sellers trying to differentiate their products from those of competitors

Oligopoly 

Market or industry characterized by a handful of (generally large) sellers with the power to influence the prices of their products

Degrees of Competition

Monopoly

Market or industry in which there is only one producer, which can therefore set the prices of its products

Natural Monopoly

Industry in which one company can most efficiently supply all needed goods or services

Natural Monopoly

Industry in which one company can most efficiently supply all needed goods or services

Evaluating Economic Systems

Nearly every economic system has three broad goals:

– Stability

– Full Employment

– Growth

Economic GoalsStability

Condition in which the balance between the money available in an economy and the goods produced in it are growing at about the same rate

InflationPhenomenon of widespread price increases throughout an economic system

RecessionPeriod characterized by decreases in employment, income, and production

DepressionParticularly severe and long-lasting recession

Economic GoalsFull Employment

Everyone who wants to work has an opportunity to do so

UnemploymentLevel of joblessness among people actively seeking work

Knowledge WorkersSkilled employees in high-tech industries

GrowthIncrease in the amount of goods and services produced by a nation’s resources

Assessing Economic PerformanceGross National Product (GNP)

The value of all goods and services produced by an economic system in a year regardless of where the factors of production are located

Real Gross National Product (real GNP)Gross national product adjusted for inflation and changes in the value of a country’s currency

Gross Domestic Product (GDP)The value of all goods and services produced in a year by a nation’s economy through domestic factors of production

Assessing Economic PerformanceProductivity

Measure of economic growth that compares how much a system produces with the resources needed to produce it

Balance of TradeThe difference between a country’s exports to and imports from other counties

Budget DeficitSituation in which a government body spends more money than it takes in

National DebtTotal amount that a nation owes its creditors

Managing the U.S. Economy

Fiscal PoliciesGovernment economic policies that determine how the government collects and spends its revenues

Monetary PoliciesGovernment economic policies that determine the size of a nation’s money supply

The Global Economy in the 21st Century

The United States was riding the crest of a long-term economic boom. Growth has been strong, and unemployment and inflation remain low. Now are we in a recession?

The United States was riding the crest of a long-term economic boom. Growth has been strong, and unemployment and inflation remain low. Now are we in a recession?

What forces will drive the economy for the next decade?What forces will drive the economy for the next decade?

Three Major Forces1. The information revolution will continue to

enhance productivity across all sectors of the economy, but most notably in such information-dependent industries as finance, media, and wholesale and retail trade.

2. New technological breakthroughs in such areas as biotechnology will create entirely new industries.

3. Increasing globalization will create much larger markets while also fostering tougher competition among global businesses; as a result, companies will need to focus even more on innovation and cost cutting.

Projected Trends & Patterns1. The economy will maintain strong and consistent

growth rates, perhaps exceeding 3 percent per year. New technological breakthroughs in such areas as biotechnology will create entirely new industries.

2. Inflationary surges and large budget deficits will become less likely.

3. Countries that encourage free trade, innovation, and open financial systems will prosper.

4. The most successful businesses will be those that are able most effectively to master new technologies and keep abreast of their competitors.