Exploring the World of Business and Economics Chapter 1 Exploring the World of Business and Economics

Learning Objectives Discuss your future in the world of business. Define business and identify potential risks and rewards. Define economics and describe the two types of economic systems: capitalism and command economy. Identify the ways to measure economic performance. Examine the four different phases in the typical business cycle. Outline the four types of competition. Summarize the factors that affect the business environment and the challenges American businesses will encounter in the future.

Free Enterprise …the system of business in which individuals are free to decide what to produce, how to produce it, and at what price to sell it. “ “

Your Future in the Changing World of Business What do you want? Why do you want it? Write it down! “Success is a journey, not just a destination.” Joe Dudley

Median Yearly Income Who Makes the Most Money? Source: 2009 Statistical Abstract of the United States, p. 443

Cultural (Workplace) Diversity …differences among people in a workforce owing to race, ethnicity, and gender. “ “

Text Features Learning Objectives Inside Business Margin Notes Boxed Features Spotlight End-of-Chapter Materials

Pathway to Success in This Course 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.

Business …the organized effort of individuals to produce and sell, for a profit, the goods and services that satisfy society’s needs. “

Figure 1.1: Combining Resources A business must combine all four resources effectively to be successful.

Ultimate Objective of Every Firm “ …to satisfy the needs of its customers. “

Business Profit Sales Revenue - Business Expenses Profit (Loss)* *Profit becomes property of its owners

Stakeholders …all the different people or groups of people who are affected by the policies, decisions, and activities made by an organization. “ “

Business Ownership Risks Not being paid Loss of whatever is invested in the business

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

…the study of how wealth* is created and distributed.** Economics “ …the study of how wealth* is created and distributed.** “ * wealth is “anything of value, including products produced and sold by business” **distribution is “who gets what”

Economy …the way in which people deal with the creation and distribution of wealth. “

Economic Perspectives Microeconomics The study of decisions made by Individuals Businesses Macroeconomics The study of National economy Global economy

…resources used to produce goods and services. Factors of Production “ “ …resources used to produce goods and services. Land/natural resources Labor Capital Entrepreneurship

Types of Economic Systems Capitalism Free Enterprise Adam Smith (Wealth of Nations) The Invisible Hand Laissez-Faire Capitalism Command Socialism Communism (Karl Marx)

Economic Systems Differ Economic systems differ depending on the answers to four basic economic questions about nation’s economic activity What and how much will be produced? How will it be produced? For whom will it be produced? Who owns/controls factors of production?

Capitalism …individuals own and operate the majority of businesses that provide goods and services. “ “

Adam Smith Wealth of Nations (1776) Society pursues self-interest People work hard if Earn more pay Earn more profit Capitalism promotes good of community

Invisible Hand ...describes how an individual’s own personal gain benefits others and a nation’s economy. “

Figure 1.3: Assumptions for Laissez-Faire Capitalism

…an economy that exhibits elements of both capitalism and socialism. U.S. = Mixed Economy …an economy that exhibits elements of both capitalism and socialism. “

Figure 1.4: Circular Flow in Mixed Economy

Command Economy …government decides what goods and services will be produced, how they will be produced, for whom available goods and services will be produced, and who owns and controls the major factors of production. “

Command Economies Socialism Communism

Socialism Key industries owned/controlled by government Land, buildings, and raw materials may be property of state Private ownership permitted to varying degrees People choose own occupations National goals determine what/how produced Uses taxes, rents, and wages to control distribution

Communism Karl Marx ─ Father Examples ─ North Korea, China Advocated classless society Citizens own all economic resources Workers contribute based on ability and receive benefits based on need Examples ─ North Korea, China Centralized planning ─ sets prices and wages Emphasis on government needs ─ not consumers No job choice ─ professionals better off than factory workers

Measuring Economic Performance Economic Indicators Balance of Trade Corporate Profits Inflation Rate National Income New Housing Starts Prime Interest Rate Productivity Rate Unemployment Rate

…the average level of output per worker per hour. Productivity …the average level of output per worker per hour. “

Figure 1.5: GDP in Current Dollars and in Inflation-Adjusted Dollars Source: U.S. Bureau of Economic Analysis website at www.bea.gov, accessed September 14, 2008

Table 1.2: Common Measures Used to Evaluate a Nation’s Economic Health Balance of trade The total value of a nation’s exports minus the total value of its imports over a specific period of time Corporate profits The total amount of profits made by corporations over selected time periods 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 (cont.)

Table 1.2: Common Measures Used to Evaluate a Nation’s Economic Health (cont.) National income The total income earned by various segments of the population, including employees, self-employed individuals, corporations, and other types of income New housing starts The total number of new homes started during a specific time period Prime interest rate The lowest interest rate that banks charge their most credit-worthy customers (cont.)

Table 1.2: Common Measures Used to Evaluate a Nation’s Economic Health (cont.) Productivity rate An economic measure that tracks the increase and decrease in the average level of output per worker Unemployment rate The percentage of a nation’s labor force unemployed at any time

Business Cycle …the recurrence of periods of growth and recession in a nation’s economic activity. “

Government Actions in Recession/Depression Monetary Policy Determines size of money supply and interest rates Fiscal Policy Influences amount of savings and expenditures by altering tax structure and government spending

Federal Deficit …a shortfall created when the federal government spends more in a fiscal year than it receives. “

Figure 1.6: Supply Curve and Demand Curve

Table 1.3: Four Different Types of Competition The number of firms determines the degree of competition within an industry.

Product Differentiation …the process of developing and promoting differences between one’s products and all similar products. “

Standard of Living …a loose subjective measure of how well off an individual or a society is mainly in terms of want satisfaction through goods and services. “

Figure 1.7: Time Line of American Business

The Challenges Ahead How can we create a more stable economy and create new jobs? How can we restore the public’s confidence in the banking and financial industries? How can we regulate banks, savings and loan associations, credit unions, and other financial institutions to prevent the type of abuses that led to an economic crisis? How can we encourage Iraq and Afghanistan to establish a democratic and free society and resolve possible conflict with North Korea and other countries throughout the world? (cont.)

The Challenges Ahead (cont.) How can we meet the challenges of managing culturally diverse workforces to address the needs of a culturally diverse marketplace? How can we make American firms more productive and more competitive with foreign firms that have lower labor costs? How can we preserve the benefits of competition and small businesses in our American economic system? How can we encourage economic growth and at the same time continue to conserve natural resources and sustain our environment? (cont.)

The Challenges Ahead (cont.) How can we meet the needs of two-income families, single parents, older Americans, and the less fortunate who need health care and social programs to exist?