Exploring the World of Business and Economics

Introduction Free enterprise Individuals are free to decide what to produce, how to produce it, and at what price to sell it © TYLER OLSON/SHUTTERSTOCK

Your Future in the Changing World of Business Know what you want. Adapt. One of the few certainties of today’s business environment is that it never stands still. Only one approach to this unsteady state of affairs makes sense: perpetual innovation – the constant shifting of strategies and tactics to reshape the business and take competitors by surprise. The winners will be the companies that find ways to release their innovative potential and apply it to the way they think and the way they work.”  --Stephen Shapiro success, /səkˈses/ (n) ? Additional Resources A great video to show would be Richard St. John’s Secrets to Success http://www.ted.com/talks/richard_st_john_s_8_secrets_of_success.html Ask: What is your definition of success?

Why Study Business? For help in choosing a career To be a successful employee To improve your management skills To start your own business To become a better informed consumer and investor

Tips for Studying Business Prepare before you go to class. Read the chapter. Underline or highlight important concepts. Take notes. Apply the concepts. Practice critical thinking. Prepare for exams.

What Is Business? The organized effort of individuals to produce and sell, for a profit, the goods and services that satisfy society’s needs

Classification of Businesses Manufacturing Businesses Goods-producing (keyboards) Service Businesses Service-providing (health care) Additional Resources Here are links to some great videos you might use to show the differences between types of companies, in this case service businesses. Working at Google http://www.youtube.com/watch?v=aOZhbOhEunY Working at Beth Israel Deconess Medical Center http://www.pbs.org/newshour/businessdesk/2009/04/the-share-economy-at-work.html © HE YUAN/EPA/LANDOV © ANTON GVZDOKOV/SHUTTERSTOCK

The Importance of Manufacturing “. . . Not only the wealth, but the independence and security of a country, appear to be materially connected with the prosperity of manufactures. Every nation, with a view to those great objects, ought to endeavor to possess within itself all the essentials of national supply. These comprise the means of subsistence, habitation, clothing, and defence… .” © PANDAPAW/SHUTTERSTOCK --Alexander Hamilton, A Report to Congress on the Subject of Manufactures, 1791

The Importance of Manufacturing Is it important to have a strong domestic manufacturing industry? Why? Is it more important to you to buy products made in America or to get the best deal? Should we be more concerned with jobs and workers’ wages, or with affordable products for consumers? NOTE: These are questions to spark debate, not questions for which the text offers answers.

Classification of Businesses Marketing intermediaries Buy products from manufacturers and resell Manufacturer Marketing Intermediary Consumer

The Relationship Between Sales Revenue and Profit Profit is what remains after all business expenses have been deducted from sales revenue. A loss (negative profit) results when a firm’s expenses are greater than its revenues. Sales Revenue Expenses Profit

$ The Function of Profit PROFIT Reward for producing goods and services people want PROFIT Compensation for assuming the risks of ownership Risk of not receiving payment Risk of losing investment

Paths to E-Profits Amazon eBay Google Free shipping Outside merchants = commission eBay Online auction Commission Online telephone communications Google Search engine Paid advertising links 13

Stakeholders Stakeholders are all the different people or groups of people who are affected by the policies and decisions made by an organization. Stakeholders include consumers, marketing intermediaries, stockholders, and employees.

Economics Economics is the study of how wealth (anything of value) is created and distributed. Microeconomics Macroeconomics The study of the decisions made by individuals and businesses The study of the national and global economies © MANGOSTOCK/SHUTTERSTOCK © KK-ARTWORKS/SHUTTERSTOCK

Types of Economic Systems WHAT goods and services will be produced? HOW will they be produced? FOR WHOM will they be produced? WHO owns and controls the major factors of production? Economy The system through which a society creates and distributes wealth

Types of Economic Systems (cont’d) WHO owns and controls the major factors of production? Land and natural resources Labor Capital Entrepreneurship

Capitalism Individuals: Own and operate the majority of businesses that provide goods and services. Privately own resources. Decide what to buy. The market drives supply and price. Role of government is limited. © NEVENA RADONIA/SHUTTERSTOCK © KEKO-KA/SHUTTERSTOCK

Basic Assumptions for Adam Smith’s Laissez-Faire Capitalism Laissez-faire = “let them do”

The U.S. economy is a mixed economy. Businesses: Produce goods and services to exchange for revenues (money). Use revenues to purchase factors of production. Households: Consume goods and services. Own resources of some factors of production. Government: Provides public services in exchange for taxes. © NEVENA RADONIA/SHUTTERSTOCK © NEVENA RADONIA/SHUTTERSTOCK

The Circular Flow in Our Mixed Economy

Command Economy: Socialism Government: Decides what will be produced, how it will be produced, and who owns and controls the factors of production. Owns and controls key industries. Workers may choose their own occupations. Goal is to equally distribute income, eliminate poverty, provide social services, and eliminate economic waste. Small-scale private businesses may be permitted. © NEVENA RADONIA/SHUTTERSTOCK © KEKO-KA/SHUTTERSTOCK

Command Economy: Communism Government: Owns and controls all factors of production. Plans production to meet the needs of the state. Dictates occupations, wages, and prices. The goal is to create a classless society where all contribute according to their ability and receive benefits according to their needs. No private businesses are allowed. © NEVENA RADONIA/SHUTTERSTOCK

Measuring Economic Performance Productivity: The average level of output per worker per hour Gross Domestic Product (GDP): The total value of all goods and services produced by all people within the boundaries of a country during a one-year period © TRIBALIUM/SHUTTERSTOCK © JELICA VIDENOVIC/SHUTTERSTOCK

Measuring Economic Performance (cont’d) Consumer Price Index CPI A monthly index that measures the changes in prices of a fixed basket of goods purchased by a typical consumer in an urban area Producer Price Index PPI An index that measures prices that producers receive for their finished goods Differs from CPI due to: Government subsidies Sales and excise taxes Distribution costs Additional Resources CPI FAQ http://www.bls.gov/cpi/cpifaq.htm PPI FAQ http://www.bls.gov/ppi/ppifaq.htm PPI news release 9/13/2012 http://www.bls.gov/news.release/pdf/ppi.pdf CPI news release 9/13/2012 http://www.bls.gov/news.release/pdf/cpi.pdf Bureau of Labor Statistics: Difference between CPI and PPI http://www.bls.gov/ppi/ppicpippi.htm © SUPRISUHARJOTO/SHUTTERSTOCK

Measuring Economic Performance (cont’d)

Balance of Trade The total value of a nation’s exports minus the total value of its imports over a specific period of time Additional Resources United States Balance of Trade, 1980–2011, based on March 2012 data. Data Source: US Census Bureau Foreign Trade Division: http://www.census.gov/foreign-trade/statistics/historical/gands.txt Bloomberg TV (1:39) http://www.bloomberg.com/video/92337699-tomorrow-today-china-trade-balance-sony-earnings.html PBS: the.News Balance of Trade http://www.pbs.org/newshour/thenews/thedollar/story.php?id=3044&package_id=631 The Economist Topics Index  Balance of Trade http://www.economist.com/topics/balance-trade What does trade balance say about the health of an economy? Is a surplus or a deficit desirable?

The value of a dollar goes down. Inflation Inflation The value of a dollar goes down. Demand rises. © TIBALIUM/SHUTTERSTOCK Prices go up. $$$ $

Inflation Rate An economic statistic that tracks the increase in prices of goods and services over a period of time; usually calculated on a monthly or annual basis 2012: 2.1% 2011: 3.1% 42nd in the world Additional Resources Some interesting links about deflation: PBS: Food prices could signal deflation ahead 2:53 PBS: Japan Deflation http://www.youtube.com/watch?v=jwcNT74zEAU 4:12 PBS Blog: The Rundown Deflation: Inflation’s Evil Twin http://www.pbs.org/newshour/rundown/2011/03/deflation-inflations-evil-twin.html ©ILDOGESTO/SHUTTERSTOCK Statistics from the CIA World Factbook

Unemployment Rate The percentage of a nation’s labor force unemployed from January 2002 Additional Resources Macroeconomics: Unemployment http://www.youtube.com/watch?v=_CdTu1pk06w 2:51 Bureau of Labor Statistics, Data extracted on: September 26, 2012

Corporate Profits The total amount of profits made by corporations over selected time periods http://research.stlouisfed.org/fred2/series/CP/

The Business Cycle Time Output (GDP) Peak Contraction Recovery Trough Additional Resources YouTube video 1:08 min Explains with graph: peak, recession, trough, expansion and ends with the question of whether or not government should be involved in trying to “correct” the economy. (part of a series on Economics: http://www.youtube.com/playlist?list=PLF2A3693D8481F442)

Monetary Policies Monetary Policies are Federal Reserve decisions that determine the size of the supply of money in the nation and the level of interest rates. Should the Fed have the powers it has? Is it wise to try to manipulate the business cycle? Additional Resources PBS: Federal Reserve Launches Aggressive Stimulus Program to Move Economy Forward Federal Reserve chairman Ben Bernanke announced the Fed's third attempt to stimulate the economy by buying up mortgage-backed securities and bonds and keep borrowing rates low. Judy Woodruff talks to David Wessel, economics editor for The Wall Street Journal, to understand why the Fed chose this course of action. http://www.pbs.org/newshour/bb/business/july-dec12/fedaction_09-13.html

Federal Deficit and National Debt The Federal Deficit is a shortfall created when the federal government spends more in a fiscal year than it receives. The National Debt is the total amount the federal government owes. Federal DEFICIT for FY 2013 (estimated) $973,000,000,000 National DEBT as of Oct 2013 $16,738,158,460,000 Source of deficit figure: http://www.whitehouse.gov/omb/budget/Historicals Source of publicly held debt figure: http://www.treasurydirect.gov/NP/BPDLogin?application=np

Competition Competition is rivalry among businesses for sales to potential customers. In a capitalistic society, competition ensures only businesses that provide consumers with useful products and services at fair prices will survive.

Perfect Competition Conditions for Perfect Competition A single product is involved. There are no restrictions on firms entering the industry. All sellers offer basically the same product. All buyers and sellers know everything there is to know about the market. The overall market is not affected by the actions of any one buyer or seller. The going price is set by forces of supply and demand.

Supply Curve and Demand Curve FIGURE 1-7

Monopolistic Competition Conditions of Monopolistic Competition There are many buyers and a large number of sellers. Products are similar in nature and intended to satisfy the same need. Sellers try to gain a competitive edge through product differentiation – unique features, attention-getting brand name, unique packaging, special services.

Oligopoly Conditions of Oligopoly There are few, large sellers. Considerable investment is required to enter market. Market actions of each seller have a considerable effect on competitors’ sales and prices.

Monopoly Conditions of Monopoly One seller and no close substitute for the product or service sold Barriers to keep others from entering the market Seller must set its price based on the demand

Early Business Development Barter System © DIANA TALLIUN/SHUTTERSTOCK © AFRICA STUDIO/SHUTTERSTOCK Goods and services are directly exchanged.

Early Business Development Domestic System © MEXRIX/SHUTTERSTOCK © LOSEVSKY PHOTO AND VIDEO/SHUTTERSTOCK © NOPPHARAT/SHUTTERSTOCK Entrepreneur distributes raw materials to homes. Families process materials into a finished good. Entrepreneur sells finished goods.

Early Business Development Factory System All the materials, machinery, and workers required to manufacture a product are assembled in one place.

Early Business Development Specialization The separation of a manufacturing process into distinct tasks and the assignment of the different tasks to different individuals

Business Development in the 1900s Rapid growth of industries 1929 Stock Market Crash Government intervention was necessary to get the economy moving again. © DENIS BARBULAT/SHUTTERSTOCK © STEVE BROER/SHUTTERSTOCK

Business Development in the 1900s Prosperity and higher standards of living in the 1950s and 1960s Oil shortages and higher prices in the 1980s © JAMES STEIDL/SHUTTERSTOCK © PATRICIA MARROQUIN/SHUTTERSTOCK © CHRISTOPHER ELWELL/SHUTTERSTOCK © RETROCLIPART/SHUTTERSTOCK

Business Development in the 1900s e-Business The organized effort of individuals to produce and sell through the Internet, for a profit, products and services that satisfy society’s needs

American Business Today A New Century: 2000 and Beyond Technology becomes more affordable. Growth of the service economy - economy in which more effort is devoted to the production of services than to the production of goods