What is Business? © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved. McGraw-Hill/Irwin Introduction to Business Chapter One

What is Business?

© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.

McGraw-Hill/IrwinIntroduction to Business

Chapter One

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Chapter 1 What is Business?

1. Differentiate the three meanings of business as commerce, occupation and organization and identify the four main kinds of productive resources.

2. Understand the forces of supply and demand determine fair or market price.

3. Appreciate how a company’s business model is the source of its competitive advantage and the difference between profit and profitability

4. Recognize the way specialization and the division of labor through the “invisible had of the market” lead to increasing profit and wealth.

5. List the reasons why business organizations are created to structure business exchanges and facilitate business commerce.

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Definitions of Business

• Business has three dimensions of a meaning

- A commerce- An occupation - An organization

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Definitions of Business• Business as a commerce is the process that people

produce, exchange and trade goods and services

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Definitions of Business• Business as an occupation is the acquired set of

specialized skills and abilities that allows people to create valuable goods and services

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Definitions of Business• Business as an organization is the system of task and

authority relationship that coordinates and controls the interactions between people so that they work toward a common goal

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Definitions of Business• Business as a system is a combination of business

commerce, occupations, and organizations that produces and distributes the goods and services that create value for people in a society

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Factors of Production• Regardless of meaning there are four crucial

ingredients or productive factors or resources of land, labor, capital and enterprise that are needed to profit from business

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Factors of Production• These four productive factors or resources of land,

labor, capital and enterprise that are needed to profit from business and are limited in supply (scarcity)

• A company must use them efficiently and effectively to produce goods and services

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• Together, the cost of acquiring and using these four resources to make and sell goods and services determines a company’s operating costs

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• Owners/managers are the enterprise of the business, while the people are the labor and the capital buys materials, machinery

• The land may provide a specific location or a URL in cyberspace. The land may provide a specific location or a URL in cyberspace

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• These resources allow for the creation of a product and/or service that customers value a price

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Chapter 1

What is Business?

• The company’s business model not only outlines the plan for these resources but creates a competitive advantage in the value of its product and generates profitable sales revenue

• By reinvesting the profits the business increases its capital and contributes to the wealth of the owners

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• All business activity is self-interested and competitive, and this competition may benefit people and society when it leads resources to be employed in their most profitable use

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Chapter 1

What is Business?

Supply and Demand• The forces of supply and demand determine a

product’s market price

• In turn, supply and demand are the result of peoples’ subjective judgment of the value or utility they will receive from supplying or consuming a particular product

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Law of Demand• Reflects the usefulness or utility from that product

• Given the price of a product or service, we generally demand less quantity of it as the price increases and demand more of it as the prices decreases

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Law of Supply• Sellers are more willing to supply a product as the

price increases and less willing to supply as the price decreases

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• There is no rule of business that says all people need profit from business commerce, nor they will profit equally from the business system

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• Some people or companies will always ruthlessly pursue their self-interest and try to cheat and defraud others

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• Through the process of specialization and the division of labor, business occupations develop and increase the amount of goods and services people can produce and trade

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• Increasing specialization, through the invisible hand of the market, leads to increasing profitability and the generating of more capital and wealth

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• Through this “invisible hand” of the market, the interaction of business commerce and occupation determines the standard of living, wealth, and prosperity of people, groups, and society

• It also determines how profit will be shared between people and groups in a society

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• Business organizations are created to reduce transaction costs, the costs that arise from business commerce and from the process of specialization and the division of labor

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• Business organizations develop an organizational structure, a set of task and authority relationships, to reduce transaction costs and increase profitability

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• No rules exist that specify how the profit created from business commerce or occupations will be distributed or even who will receive it

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• Your chance of pursuing a profitable occupation that allows you to accumulate capital depends on your ability to take part in the “great game of business”

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What is Business? © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved. McGraw-Hill/Irwin Introduction to Business Chapter One