Fourth Edition Copyright ©2003 Prentice Hall, Inc. PART Understanding the Contemporary Business Environment

Copyright ©2003 Prentice Hall, Inc Chapter 1 Understanding the Business System

Copyright ©2003 Prentice Hall, Inc “ In business you get what you want by giving other people what they want. ” ~ Alice Foote MacDougall

Copyright ©2003 Prentice Hall, Inc Key Topics Nature and goals of business Global economic systems Private enterprise and competition Evaluating economic performance

Copyright ©2003 Prentice Hall, Inc Exercise Write four things do you know about business. Write 4 things you would like to know?

Copyright ©2003 Prentice Hall, Inc What Is Business? An organization that provides goods and services to earn profits Profits: The positive difference between revenues and expenses

Copyright ©2003 Prentice Hall, Inc Difference between business and non- profit organizations? goals are quite different, the same skills (management, marketing, finance, etc.) are needed to be successful in both arenas. Discussion: What benefits do businesses offer society? (goods, services, employment, tax revenue, technological advances, etc.)

Copyright ©2003 Prentice Hall, Inc Physical Resources LaborCapital Entrepreneurs Factors of Production Information Resources

Copyright ©2003 Prentice Hall, Inc Exercise pick a specific product or service that interests them, and to list the factors of production that were used to produce it. (Encourage them to make imaginative choices,

Copyright ©2003 Prentice Hall, Inc How Are Factors of Production Allocated? Planned Economy: An economic system in which the government owns and operates all sources of production Market Economy: An economic system in which buyers and sellers interact based on freedom of choice

“Circular Flow in Market Economy” OUTPUT MARKETS Goods Services INPUT MARKETS Labor Capital Entrepreneurs Physical Resources Information Resources HOUSEHOLDS Demand products in output markets Supply resources in input markets FIRMS Supply products in output markets Demand resources in input markets DEMAND DEMANDSUPPLY SUPPLY Copyright ©2003 Prentice Hall, Inc

Copyright ©2003 Prentice Hall, Inc Capitalism A Fundamentally Market-Based Economy Individuals Choose: Where to work What to buy How much to pay Producers Choose: Who to hire What to produce How much to charge Government supports private ownership and encourages entrepreneurship

Copyright ©2003 Prentice Hall, Inc Mixed Economies Planned and Market The economies of most countries include both planned and market elements Worldwide trend toward more market elements

Copyright ©2003 Prentice Hall, Inc Socialism A Mixed Economy Socialism is a planned economic system in which the government owns and operates selected sources of production Privatization: Process of converting government enterprises into privately owned companies

Copyright ©2003 Prentice Hall, Inc exercise Guess the 4 key elements of free enterprise?

Copyright ©2003 Prentice Hall, Inc The Palestinian Economy is a Private Enterprise System 1.Private Property Rights 2.Freedom of Choice 3.Profits 4.Competition Individuals are free to pursue their own interests without government restriction Four Key Elements:

Copyright ©2003 Prentice Hall, Inc Competition Competition motivates businesses to produce their products better or cheaper

Copyright ©2003 Prentice Hall, Inc Exercise What is the relationship between standard of living and quality of life? How is quality of life evaluated in different countries

Copyright ©2003 Prentice Hall, Inc Recessions & Depressions Recession: Aggregate output declines, unemployment increases Depression: Severe and long-lasting recession

Copyright ©2003 Prentice Hall, Inc Managing the Economy Stabilization Policy: Government policy designed to smooth out fluctuations in the economy Fiscal Policies Monetary Policies

Copyright ©2003 Prentice Hall, Inc Types of Policies Monetary Policy: Designed to control the amount of money flowing around the economy (the money supply). This policy is used to tackle inflation and balance of payments. Methods under this policy: 1. Interest rates: 2. The government may impose restrictions on financial institutions to affect borrowing. 3. The central bank can control bank assets and the amount of lending. Fiscal policy: Aims to control the total spending in the economy. 1. Government spending. 2. Change in direct taxation. 3. Change in indirect taxation.

Copyright ©2003 Prentice Hall, Inc Looking to the Future Three Major Forces will drive the global economy for the next decade what are they? 1.The information revolution will continue to boost productivity 2.Technological breakthroughs will create new industries 3.Increasing globalization will create larger markets and tougher competition