Introduction to Business Exploring Business Chapter 1 Thursday 9/1/11

Exploring Business © 2009 FlatWorld Knowledge 1-2 Chapter Objectives 1.Identify participants, functions and external forces of business 2.Define economics & explain key questions of economics 3.Describe perfect competition & explain supply/demand interaction with price 4.Describe monopolistic competition, oligopoly, and monopoly 5.Understand criteria to assess economy 6.Discuss government’s role in the economy

Identify participants, functions and external forces of business forces of business Section 1

Exploring Business © 2009 FlatWorld Knowledge 1-4Business “ …any activity that provides goods or services for the purpose of making a profit. ”“ …any activity that provides goods or services for the purpose of making a profit. ”

Exploring Business © 2009 FlatWorld Knowledge 1-5 For Profit Vs. Not-for-profit and Non-Profit

Exploring Business © 2009 FlatWorld Knowledge 1-6 Business Participants Owners Employees Customers

Exploring Business © 2009 FlatWorld Knowledge 1-7 Functional Areas of Business  Management  Operations  Marketing  Accounting  Finance

Exploring Business © 2009 FlatWorld Knowledge 1-8 Management “ …planning, organizing, staffing, directing, and controlling a company ’ s resources so it can achieve its goals. ”“ …planning, organizing, staffing, directing, and controlling a company ’ s resources so it can achieve its goals. ”

Exploring Business © 2009 FlatWorld Knowledge 1-9Operations “ …convert(s) resources…into goods or services…to ensur(e)...products are...high quality. ”“ …convert(s) resources…into goods or services…to ensur(e)...products are...high quality. ”

Exploring Business © 2009 FlatWorld Knowledge 1-10 Marketing “...everything that a company does to identify customers ’ needs and design products to meet those needs. ”“...everything that a company does to identify customers ’ needs and design products to meet those needs. ”

Exploring Business © 2009 FlatWorld Knowledge 1-11 Accounting “…measure(s), summarize(s), and communicate(s) financial and managerial information...and advise other managers on financial matters.”

Exploring Business © 2009 FlatWorld Knowledge 1-12 Fields of Accounting  Financial Accountants 1)Prepare financial statements 2)Assess financial strength  Managerial Accountants-Prepare internal reports

Exploring Business © 2009 FlatWorld Knowledge 1-13Finance “ …planning for, obtaining, and managing a company ’ s funds. ” “ …planning for, obtaining, and managing a company ’ s funds. ”

Typical Company Organization Chart Structure President / CEO Operations Manufacturing Quality Assurance EngineeringSales/MarketingHRFinance Accounting

Exploring Business © 2009 FlatWorld Knowledge 1-15 Business and Its Environment

Section 3 Define economics & explain key questions of economics

Exploring Business © 2009 FlatWorld Knowledge 1-17 Economics Study of how scarce resources are used to produce outputs...to be distributed among people. Economists ’ Questions 1. What Goods & Services should be produced to meet consumer needs? 2. How should Goods & Services be produced, who should produce them, with what resources? 3. Who should receive Goods & Services produced and how should they be allocated?

Exploring Business © 2009 FlatWorld Knowledge 1-18 Resources are the Inputs Used to Produce Outputs Land & Other Natural Resources Labor (physical & mental) Labor (physical & mental) Capital (money & assets) Entrepreneurship Business Outputs GoodsServices

Exploring Business © 2009 FlatWorld Knowledge 1-19 Circular Flow Of Inputs & Outputs

Exploring Business © 2009 FlatWorld Knowledge 1-20 Spectrum of Economic Systems

Comparison of Communism, Socialism, and Capitalism

The Free-Enterprise System Individuals have the right to own property and pass it on to their heirs. People and businesses have the right to earn profits and use them as they wish. Individuals and businesses have the right to determine how their businesses operate. Individuals have the right to choose their career, where to live, and what to buy.

The Forces of Supply and Demand Supply The number of products that businesses are willing to sell at different prices at a specific time Consumers are usually willing to buy more of an item as its price falls because they want to save money. Demand The number of goods and services that consumers are willing to buy at different prices at a specific time. Businesses are willing to supply more of a good or service at higher prices because the potential for profits is higher.

Exploring Business © 2009 FlatWorld Knowledge 1-24 Privatization “…converting previously government-owned businesses to private ownership...”

Exploring Business © 2009 FlatWorld Knowledge 1-25 Adam Smith  Wealth of Nations (1776)  “ Invisible Hand ”  Laissez-faire

Describe perfect competition & explain supply/demand interaction with price Section 4

The Nature of Competition Four Competitive Environments Pure Competition - Many small businesses sell one standardized product to many consumers. Monopolistic Competition - There are fewer businesses than in a pure competition system, and the differences between the goods they sell are small. Oligopoly - Very few businesses sell a product or service; each business supplies a large portion of the products or Services sold in the marketplace. Monopoly - There is only one producer of a product in a given market.

CharacteristicsPerfect Monopolistic Competition CompetitionOligopoly Monopol y # of competitorsManyFew to manyVery few No direct competition Ease of entry or EasySomewhat Difficult Regulated by exit from industrydifficult U.S. Gov’t Similarity of SameSeemingly Similar or No direct offerings or same different competition Firm's control None (set by SomeSome Considerable over price the market) (in true monopoly; Little in Reg.Mkt ExamplesFarmerFast-food Automotive Power restaurantmanufacturer company Types of Competition

Exploring Business © 2009 FlatWorld Knowledge 1-29 Perfect Competition Exists Standardized Product Numerous Sellers Many Consumers

Examples of Pure Competition Agricultural Industry: Growers – All types Farmers

Exploring Business © 2009 FlatWorld Knowledge 1-31 Supply & Demand Price Units $0.00 $0.10 $0.20 $0.30 $0.40 $0.50 $0.60 $0.70 EquilibriumPoint

Exploring Business © 2009 FlatWorld Knowledge 1-32 Monopolistic Competition Differentiated Product Many Sellers Consumers Group A Consumers Group B Consumers Group C

Examples of Monopolistic Companies Exists when a large number of sellers produce a product or service that is perceived by consumers as being different from that of a competitor, but is actually quite similar. Examples: Fast-food restaurants Soap & detergent manufacturers Cosmetics Soap Oil changes Extermination services

Exploring Business © 2009 FlatWorld Knowledge 1-34 Oligopoly Similar Product Seller A Consumer Group A Consumer Group B Consumer Group C Seller B

Examples of Oligopolies Homogeneous – Identical products, prices fairly uniform: SteelCell Phones AluminumGas FilmAirlines Television Differentiated – Similar, but not identical products produced: Automobile Companies Cigarettes Manufacturers Soft Drink Manufacturers

Exploring Business © 2009 FlatWorld Knowledge 1-36 Monopoly Seller Consumer A Consumer D Consumer B Consumer E Consumer C

Examples of Monopolies Regulated Monopolies Private Utilities: PG & E Soquel Creek Water GreenWaste Disposal Government Run Entities Municipal Power Plants Comcast

Understand criteria to assess economy Section 5

Growth of The American Economy The Early Economy - Primarily agricultural; the use of natural resources The Industrial Revolution - The development of new technology and factories The Manufacturing and Marketing Economies - Devoted to manufacturing goods and providing services rather than producing agricultural products The Service and Internet-based Economy - Devoted to the production of services that make life easier for busy consumers

Exploring Business © 2009 FlatWorld Knowledge 1-40 World ’ s Main Economic Goals & Measures 1) Growth- Gross Domestic Product 2) High Employment- Unemployment Rate 3) Price Stability- Consumer Price Index

Exploring Business © 2009 FlatWorld Knowledge 1-41 Gross Domestic Product “ …market value of all goods and services produced by...economy in a given year…includes only...goods and services produced domestically. ”“ …market value of all goods and services produced by...economy in a given year…includes only...goods and services produced domestically. ”

Exploring Business © 2009 FlatWorld Knowledge 1-42 Business Cycle Prosperity Depression Recession Recovery

Exploring Business © 2009 FlatWorld Knowledge 1-43 U.S. Unemployment Rate

Current US Unemployment Rate

Exploring Business © 2009 FlatWorld Knowledge 1-45 Price Stability Inflation Inflation Deflation Deflation Stagflation Stagflation Consumer Price Index (CPI) Consumer Price Index (CPI)

Definitions Inflation – A price increase for the same output Deflation – A price decrease for the same output Stagflation – Persistent high inflation, high unemployment, and weak economic growth. CPI – A “market basket” of selected goods and services in various cities across the country. Components include housing costs, food, clothing, medical, transportation, etc.

Exploring Business © 2009 FlatWorld Knowledge 1-47 U.S. Inflation Rate

Exploring Business © 2009 FlatWorld Knowledge 1-48 Economic Indicators “ …statistic(s) that provide valuable information about the economy. ”“ …statistic(s) that provide valuable information about the economy. ”

Business Cycle Indicators Leading - predict what’s ahead in the business cycle. The 10 Index of Leading Indicators predict future economic activity, i.e., a upcoming expansion or recession. Coincident – establish the current phase of the cycle Lagging – show where the economy was in the past month(s)

Exploring Business © 2009 FlatWorld Knowledge Leading Economic Indicators predicts the status of the economy three to twelve months in the future 1)New Consumer Goods Orders 2)Unemployment Claims 3)Average Weekly Manufacturing Hours 4)Delivery Delays by Vendors 5)Building Permits 6)Contracts for plant and equipment 7)Consumer Confidence Index 8)Money Supply (M-2) 9)Stock Prices per S&P )Spread between 10-year Treasury Yield and Fed Funds

Exploring Business © 2009 FlatWorld Knowledge 1-51 Lagging Economic Indicators “ Statistics that report the status of the economy a few months in the past.... ”

Discuss government’s role in economy Section 6

Exploring Business © 2009 FlatWorld Knowledge 1-53 Government & Economic Management  Monetary Policy Control = Federal Reserve Control = Federal Reserve Contractionary Contractionary Expansionary Expansionary Fiscal Policy Control = government Control = government Taxation Taxation Spending Spending National Debt National Debt

Role of the Federal Reserve - Monetary Is the Central Bank for the US Provides supply of credit in the economy Controls the Money Supply Growth Can tighten or loosen credit QE1, QE2, and beyond

Tools of the Federal Reserve Sets Reserve Requirements : [level of reserves that member banks must maintain]. E.G., 10% / 90% What happens if reserve is raised? Sets Discount Rate [rate Fed charges member banks to borrow reserves]. Sets Margins on Non-Exempt Securities Conducts Open Market Operations – adjusts credit daily through repurchase and reverse-repurchase agreements with government dealers

Fed’s Impact on Interest Rates Fed Funds Rate – rate of interst member banks charge each other for overnight loans. Lowest rate currently fluctuating between 0.00 % and 0.25% Discount Rate – rate at which member banks can borrow from Fed. Generally 1% higher than FFR. Currently at 0.75% Prime Rate – Rate at which banks make unsecured loans to their best commercial customers. It is the most widely used benchmarks in setting home equity lines of credit and credit card rates. Currently 3.25%

Role of the Goverment - Fiscal Taxation – revenue genration Spending – All government programs [national defense, social, grants to state and local governments, “pork projects”, interst on the money borrowed National Debt - National Debt - The U.S. debt is over $14.5 trillion, and is the sum of all outstanding debt owed by the Federal Government. Nearly two-thirds is the public debt, which is owed to the people, businesses and foreign governments who bought Treasury bills, notes and bonds.

Percentage of Federal Outlays 1956 Source: OMB/Historical Tables/Table 6.1

Percentage of Federal Outlays 2006 Source: OMB/Historical Tables/Table 6.1

Exploring Business © 2009 FlatWorld Knowledge 1-60 National Debt

Federal Debt

Exploring Business © 2009 FlatWorld Knowledge 1-62 Areas of Economics Macroeconomics- Study of the economy as a whole Macroeconomics- Study of the economy as a whole Microeconomics- Study of the economic choices of individual consumers & businesses