1 The Scope of Business

What Is Business? An organization that provides goods and/or services to earn profits Profits: The positive difference between revenues and expenses

The Nature of Business To earn profits by providing products: Tangible Cars, food, clothing Intangible A service An idea Go to 16 Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved

Business vs. Nonprofit Organization An individual or organization that tries to earn a profit by providing products that satisfy people’s needs, ex. IBM, Coca-Cola. Nonprofit Organization Provides products, especially services, for some purpose other than profits, ex. The Salvation Army, 4300 American colleges & universities. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved

The Goals of Business For-Profit Sector: Nonprofit Sector: Profit The difference between what it costs to make and sell a product and what the customer pays for it. Nonprofit Sector: Goals May provide goods or services but not for the purpose of earning profits. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved

Overview of the Business World Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved

The People and Activities of Business Management Marketing Finance People: Owners Employees Customers Other stakeholders: Investors Regulatory Agencies Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved

Management Hiring Issues Issues Considered by Job Seekers Before Switching Jobs Source: Survey of 970 job seekers by CareerEngine.com, New York in Kemba J. Dunham, “The Jungle,” Wall Street Journal, July 3, 2001, p. B6.

Why Study Business? To develop skills and acquire knowledge to prepare for your future career To help you better understand the many business activities that are necessary to provide satisfying goods and services To help you become a well-informed consumer and member of society Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved

Education Pays Average Annual Salary By Education Level Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved

Factors of Production Labor Capital Information Resources Entrepreneurs Physical Resources Go to 16

Types of Resources Used by Business Natural Land, forests, etc. (not made by people) Human Physical/mental abilities used by people to produce goods and services Financial Funds necessary to acquire needed natural and human resources Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved

What Is An Economic System? The way a society distributes its resources to produce goods and services Addresses the issue of how to fulfill unlimited demand with limited supply of resources Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved

What is an Economic System? A nation’s system for allocating resources among citizens. Assumes resources are scarce thus requiring allocation. Market is mechanism for exchange between Buyer/Seller

Types of Economic Systems Planned Economies Socialism (Mixed Market) Communism Capitalism vs. Market

Circular Flow of Economics Supply Output (Goods & Services) Demand Input (Factors of Production) Demand Supply

Basic Questions to Be Asked of Economic Systems What goods and services and what quantity will satisfy the needs of the consumer? How will the goods and services be produced? Who will produce them and with what resources? How are the goods and services to be distributed to the consumer? Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved

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

Types of Economic Systems Capitalism Communism Socialism Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved

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

Capitalism Private Ownership of Factors of Production Economic Decisions Made by Owners Freedom of Decisions/Choices

Mixed Economies: Planned and Market The economies of most countries include both planned and market elements. Worldwide trend is toward more market elements.

Communism Planned Economic System Government Owns All Production Facilities All Citizens Are Employees of Government All Capital All Economic Decisions Controlled By Government

Mixed Market Economies “Pure” Planned “Pure” Market

Socialism: Mixed Economy A planned economic system in which the government owns and operates selected sources of production Privatization: The process of converting government enterprises into privately owned companies

Privatization vs. Socialism

Comparison of Communism, Socialism, and Capitalism Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved

Economic Systems and Where They Occur Communism Socialism Capitalism China Sweden United States North Korea India Canada Cuba Israel Japan Australia Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved

Mixed Economies Most countries of the world have elements of more than one economic system. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved

Supply & Demand Demand- Comes From Buyers As Price Drops Buyers Purchase More Supply- Producers’ Willingness As Price Increase Producers Offer More Buyers & Suppliers Work Towards Equilibrium = Profit Maximization Surplus vs. Shortage

Supply and Demand Drive the U.S. Economic System The willingness and ability of producers to offer a good or service for sale Law of Supply: Producers will supply (offer) more of a product for sale as its price rises and less as its price drops.

Supply and Demand Drive the U.S. Economic System (cont’d) The willingness and ability of buyers to purchase a good or service Law of Demand: Buyers will demand (purchase) more of a product as its price drops and less as its price increases.

U.S. Hot Dog Consumption Hot dogs consumed between Memorial Day & Labor: 7 billion Average number of hot dogs eaten/person from Memorial Day to Labor Day: 24 Rate of consumption during this time: 818 hot dogs/second Source: National Hot Dog and Sausage Council, as reported in American Demographics, July/August 2004, p. 48.

Demand and Supply Schedules Quantity of Quantity of Price Pizzas Demanded Pizzas Supplied $2 2000 100 $4 1900 400 $6 1600 600 $8 1200 800 $10 1000 1000 $12 800 1200 $14 600 1300 $16 400 1600 $18 200 1800 $20 100 2000

Pizza Supply At Given Price High Low High

Pizza Demand At Given Price High D Low High

Equilibrium (Market Price) High Surplus D S Market Equilibrium Shortage Low High

The Forces of Supply and Demand 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. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved

The U.S. Economy is a Private Enterprise System Individuals are free to pursue their own interests without government restriction. Four Key Elements: Private Property Rights Freedom of Choice Profits Competition

The Free-Enterprise System Individuals must have the right to own property and pass it on to their heirs. People and businesses must have the right to earn profits and use them as they wish. Individuals and businesses must have the right to determine how their businesses operate. Individuals must have the right to choose their career, where to live, and what to buy. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved

Competition Competition motivates businesses to produce their products better or cheaper

The Nature of Competition Four Competitive Environments Pure Competition Many small businesses sell one standardized product. 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; each business supplies a large portion of the products sold in the marketplace. Monopoly There is only one producer of a product in a given market. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved

Private Enterprise Private Property Freedom of Choice Profits Competition

Degrees of Competition Monopolistic Competition Oligopoly One Many Monopoly Perfect Competition Sellers

Perfect/Pure Competition Competition- 2+ Businesses Vie For Same Resources/Customers Condition- No Single Firm Dominant Principles Buyers View Products As Similar Buyers/Sellers Know Each Others’ Prices/Costs Easy To Enter/Leave Marketplace Prices Set By Supply/Demand & Accepted by Sellers/Buyers

Monopolistic Competition Many Buyers Fewer Sellers Than Perfect/Pure Competition Buyer Perception of Product/Brand Differentiation

Oligopoly Few Large Sellers Market Entry Difficult- High Capital Investment Sellers Control Strategies

Monopoly Characteristics Natural Monopoly Only One Producer Controls Industry Pricing Natural Monopoly One Producer Can Efficiently Supply All Goods/Services

Economic Cycles and Productivity Economic expansion occurs when an economy is growing and people are spending more money. Economic contraction occurs when spending declines. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved

Measuring the Economy One commonly used measure is gross domestic product. GDP is the sum of all goods and services produced by a national economy in a country during a year. GNP is is the sum of all goods and services produced by a national economy regardless of where the factor of production are located during a year Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved

Overall Unemployment Rate in the U.S. Civilian Labor Force Source: “Overall Unemployment Rate in the Civilian Labor Force, 1920–2002,” InfoPlease (n.d.), www.infoplease.com/ipa/ A0104719.html (accessed February 16, 2004).

Growth in U.S. Gross Domestic Product Dollars Source: “Gross Domestic Product or Expenditure, 1930–2002,” InfoPlease (n.d.), www.infoplease.com/ipa/ A0104575.html (accessed February 16, 2004). 8000 10000

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 Did You Know? 60 percent of adult women work. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved

Understanding Economic Performance KEY CONCEPTS Productivity: The amount a system produces compared to the resources needed to produce it PRODUCTIVITY is impacted by: Balance of Trade National Debt

Economic Stability: Balanced Growth of Money and Goods Two related factors threaten stability: INFLATION UNEMPLOYMENT

The Role of the Entrepreneur An entrepreneur is an individual who risks his or her wealth, time, and effort to develop for profit an innovative product or way of doing something. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved

The Role of Government in the American Economy Federal, state, and local governments intervene in the economy with laws and regulations designed to: Promote competition Protect consumers, employees, and the environment Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved

Recessions and Depressions Aggregate output declines, unemployment increases Depression: Severe and long-lasting recession

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