2. Fourth Edition Copyright ©2003 Prentice Hall, Inc. PART 1........................ Understanding the Contemporary Business Environment

3. Copyright ©2003 Prentice Hall, Inc. 1 - 2 Chapter 1 Understanding the U.S. Business System

4. Copyright ©2003 Prentice Hall, Inc. 1 - 3 “ In business you get what you want by giving other people what they want. ” ~ Alice Foote MacDougall

5. Copyright ©2003 Prentice Hall, Inc. 1 - 4 Key Topics Nature and goals of US business Global economic systems Supply and demand Private enterprise and competition Evaluating economic performance Status and outlook for the US economy

6. Copyright ©2003 Prentice Hall, Inc. 1 - 5 What Is Business? An organization that provides goods and services to earn profits Profits: The positive difference between revenues and expenses

7. Copyright ©2003 Prentice Hall, Inc. 1 - 6 Physical Resources LaborCapital Entrepreneurs Factors of Production Information Resources

8. Copyright ©2003 Prentice Hall, Inc. 1 - 7 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

9. “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. 1 - 8

10. Copyright ©2003 Prentice Hall, Inc. 1 - 9 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

11. Copyright ©2003 Prentice Hall, Inc. 1 - 10 Mixed Economies Planned and Market The economies of most countries include both planned and market elements Worldwide trend toward more market elements

12. Copyright ©2003 Prentice Hall, Inc. 1 - 11 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

13. Copyright ©2003 Prentice Hall, Inc. 1 - 12 Supply & Demand Drive the US Economic System Supply: 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

14. Copyright ©2003 Prentice Hall, Inc. 1 - 13 Law of Demand: Buyers will demand (purchase) more of a product as its price drops and less as its price increases Supply & Demand Drive the US Economic System Demand: The willingness and ability of buyers to purchase a good or service

15. Demand and Supply SchedulesQuantity of PricePizzas DemandedPizzas Supplied $22000100 $41900400 $61600600 $81200800 $1010001000 $128001200 $146001300 $164001600 $182001800 $201002000 Demand & Supply Copyright ©2003 Prentice Hall, Inc. 1 - 14

16. Demand & Supply 200 -400 -600 -800 - 1000 -1200 -1400 -1600 -1800 -2000 - $20 - 18 - 16 - 14 - 12 - 10 - 8 - 6 - 4 - 2 - Quantity of Pizzas Demanded Price of Pizzas Demand Curve  Copyright ©2003 Prentice Hall, Inc. 1 - 15

17. Demand & Supply Quantity of Pizzas Supplied 200 -400 -600 -800 - 1000 -1200 -1400 -1600 -1800 -2000 - $20 - 18 - 16 - 14 - 12 - 10 - 8 - 6 - 4 - 2 - Price of Pizzas Supply Curve  Copyright ©2003 Prentice Hall, Inc. 1 - 16

18. Demand & Supply Quantity of Pizzas per Week 200 -400 -600 -800 - 1000 -1200 -1400 -1600 -1800 -2000 - $20 - 18 - 16 - 14 - 12 - 10 - 8 - 6 - 4 - 2 - Price of Pizzas Demand Curve Supply Curve Equilibrium Price Copyright ©2003 Prentice Hall, Inc. 1 - 17

19. Copyright ©2003 Prentice Hall, Inc. 1 - 18 The US 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:

20. Copyright ©2003 Prentice Hall, Inc. 1 - 19 Competition Competition motivates businesses to produce their products better or cheaper

21. Characteristic Perfect Competition Monopolistic CompetitionOligopolyMonopoly Degrees of Competition SampleLocal farmerStationery storeSteel industryPublic utility Number of competitors ManyMany, but fewer than in perfect competition FewNone Ease of entry into industry EasyFairly easyDifficultRegulated by government Similarity of goods or services offered by competing firms IdenticalSimilarCan be similar or different No directly competing goods/services Level of control over price by individual firms NoneSome Considerable Copyright ©2003 Prentice Hall, Inc. 1 - 20

22. Copyright ©2003 Prentice Hall, Inc. 1 - 21 Understanding Economic Performance KEY CONCEPTS Business Cycle Aggregate Output Standard of Living Gross Domestic Product (GDP) Gross National Product (GNP)

23. Copyright ©2003 Prentice Hall, Inc. 1 - 22 PRODUCTIVITY is impacted by: National Debt Understanding Economic Performance KEY CONCEPTS Productivity: The amount a system produces compared to the resources needed to produce it Balance of Trade

24. Copyright ©2003 Prentice Hall, Inc. 1 - 23 Economic Stability Balanced Growth of Money & Goods Two related factors threaten stability: INFLATION UNEMPLOYMENT

25. The CPI is a Tool to Measure Inflation Source: Westegg.com/inflation/infl.cgi 200019801930 House $250,000 $109,000$25,696 Car $18,000 $7,871$1,850 Hamburger & Fries $5.00 $2.19$.51 Copyright ©2003 Prentice Hall, Inc. 1 - 24

26. Copyright ©2003 Prentice Hall, Inc. 1 - 25 Recessions & Depressions Recession: Aggregate output declines, unemployment increases Depression: Severe and long-lasting recession

27. Copyright ©2003 Prentice Hall, Inc. 1 - 26 Managing the US Economy Stabilization Policy: Government policy designed to smooth out fluctuations in the economy Fiscal Policies Monetary Policies

28. Copyright ©2003 Prentice Hall, Inc. 1 - 27 Looking to the Future Three Major Forces: 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

29. Copyright ©2003 Prentice Hall, Inc. 1 - 28 Projections and Implications for the US Economy Opportunities… Steady economic growth Fewer inflationary surges and lower budget deficits Countries with free trade, innovation, and open financial systems will thrive Successful businesses will be those that quickly master new technology

30. Copyright ©2003 Prentice Hall, Inc. 1 - 29 Projections and Implications for the US Economy Challenges… Growing US trade deficit Disturbing income inequality Steadily increasing consumer debt Limited health insurance

31. Copyright ©2003 Prentice Hall, Inc. 1 - 30 Chapter Review Describe the nature and goals of US business Define the key global economic systems and describe how they control the factors of production Show how demand and supply affect the distribution of resources in the US Identify the elements of private enterprise and the various degrees of competition Explain how to evaluate an economic system Describe the key projections for the US economy