Chapter Seventeen

The American Economy

The Economic System

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Making Business Decisions

Economic Decisions• nations and governments must decide

• what are we going to produce?• how are we going to produce it?• for whom are we producing?

Factors of Production• business organizations

• sole proprietorships• partnerships• corporations

• business success• depends mainly on decisions about the use of four factors of

production, or available resources• factors of production

• natural resources• capital• labor• entrepreneurship

• items provided by nature that can be used to produce goods and to provide services• found on or in Earth, or in Earth's atmosphere

• land, water, raw materials• considered a factor of production only when it is scarce

and some payment is necessary for its use• every business enterprise needs land

1. a place to locate a store, factory, or office• rent or purchase property

2. source of raw materials• from mines, fields, forests, rivers, lakes, oceans

• business decisions• rent or buy property?• where to locate?• quality of raw materials?• quantity of raw materials?• cost of raw materials?

Natural Resources

• money invested in a business• property and equipment used to produce goods or services

• capital goods• tools, vehicles, machines, office equipment

• every business enterprise needs money• many operation costs

• business decisions• rent or buy tools and equipment?• how to raise money?

• sole proprietorship• savings• bank loans

• partnership• more people to invest• bank loans

• corporation• sell stock• issue bonds

Capital

• all human effort used to produce goods and services• workers

• every business enterprise needs workers• sell their labor in exchange for money

• wages• earnings that are paid on an hourly basis

• salaries• fixed yearly earnings that are paid on a biweekly or monthly basis

• productivity• the amount of work produced by a worker per hour

• business decisions• number of workers?• pay for workers?• benefits for workers?

Labor

Entrepreneurship• entrepreneurs

• business owners• every business enterprise needs someone to make

decisions• determines whether the business will succeed or fail

• wise decisions = prosper• wrong decisions = closure

• when entrepreneurs make decisions they take risks• managers

• entrepreneurs who run businesses• management

• group of people who manage a single business• business decisions

• must manage the three other factors of production• how to distribute the product?• how much to charge for the product?• whether to hire more people?

Profits• gross income

• total amount of money a firm receives from the sale of its goods or services• must pay the costs of making and distributing its product• must pay cost of materials and supplies used• must pay rent or property taxes• must set aside money for savings• must pay interest on borrowed money• must pay employees• must pay utilities• must pay insurance

• net income• amount of money left over after all the costs have been paid

• must pay income taxes• profit

• sole proprietorship = salary• partnership = salaries• corporation = distributed among the stockholders as dividends

Government’s Role• government influences business in many ways

• ensures that big corporations do not destroy competition from small businesses

• protects a person's rights to own private property and to buy and sell in a free market

• many agencies of the federal government help businesses• Small Business Administration

• helps small businesses as they compete in the economy

• government plays many other roles in business• provides information and statistics useful in planning business activities• provides loans and other types of assistance to businesses• tries to keep the economy running smoothly• protects workers' health and safety (OSHA)• prevents pollution of the environment (EPA)• protects buyers from dishonest practices and harmful products (CPSC)• ensures that employers cannot discriminate against workers or job

applicants (EEOC)• too much government involvement?

• tens of thousands business regulations issued by the federal government• may add to the cost of doing business • costs can be passed on to consumers as higher prices