2. Chapter One What is Business? © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved. McGraw-Hill/Irwin Introduction to Business

3. 1 - 3 Learning Objectives 1.Differentiate the three meanings of business as commerce, business as occupation and business as organization and identify the four main kinds of productive resources. 2.Understand how the forces of supply and demand determine fair, or market, prices. 3.Appreciate how a company’s business model is the source of its competitive advantage and can mean the difference between merely making a profit and profitability

4. 1 - 4 Learning Objectives 4.Recognize the way specialization and the division of labor lead to increasing profit and wealth via the market’s “invisible hand”. 5.List the reasons why business organizations are created and how they facilitate commerce and lower transaction costs.

5. 1 - 5 What is Business? Business -goal-directed behavior aimed at getting and using productive resources to buy, make, trade, and sell goods and services that can be sold at a profit

6. 1 - 6 Key Business Terms Productive resources -the four crucial ingredients – land, labor, capital, and enterprise – that are needed to profit from business Operating costs -the cost of acquiring and using the four productive resources to make and sell goods and services

7. 1 - 7 Productive Resources and Operating Costs Figure 1.1

8. 1 - 8 Key Business Terms Product -any kind of good or service that other people value and want to buy Value -how much utility a product gives customers, how well it satisfies their desires or needs Price -a way of measuring the value of a product by how much customers are willing to pay for it

9. 1 - 9 Products What products are found at thinkgeek.com? thinkgeek.com What competitive advantage does ThinkGeek have? ™

10. 1 - 10 Key Business Terms Business Model -a company’s plan of action to use resources to create a product that will give it a competitive advantage Competitive advantage -a company’s ability to offer customers a product that has more value to them than similar products offered by other companies

11. 1 - 11 Question? What is the amount of money or income that a company generates from the sale of the product? A.Net income B.Profit C.Sales revenue D.IBIT

12. 1 - 12 Key Business Terms Sales revenue -the amount of money or income that a company generates from the sale of the product Profit -the total amount of money left over after operating costs have been deducted from sales revenues

13. 1 - 13 Key Business Terms Capital -profit that is kept in a company and invested in its business Wealth -the sum total of the resources, assets, riches, and material possessions owned by people and groups in society

14. 1 - 14 Key Business Terms Franchising -a business practice whereby investors are allowed to purchase the right to own and operate a business using a company’s name and business model

15. 1 - 15 Key Business Terms Nonprofit organization -an organization that is not in business to make profit but to provide value to the people and groups it serves

16. 1 - 16 The Three Meanings of Business Business system -the combination of commerce, occupations, and organizations that result in the production and distribution of goods and services people value

17. 1 - 17 The Business System: Commerce, Occupation, Organization Figure 1.2

18. 1 - 18 Business as Commerce Business commerce -the process by which people produce and exchange valuable goods and services that fulfill their wants and needs Trade -the exchange of products through the use of money Barter -the exchange of one product for another product

19. 1 - 19 Demand, Supply, and the Market Price Diminishing marginal utility -the principle that the value people receive from an additional unit of a product declines as they obtain more of a product

20. 1 - 20 Demand, Supply, and the Market Price Law of demand -the principle that states as the price of a product rises, consumers will buy less of it, and as the price of it falls, consumers will buy more of it

21. 1 - 21 Demand, Supply, and the Market Price Law of supply -the principle that states that as the price of a product rises, producers will supply more of it, and that as the price of it falls, producers will supply less of it

22. 1 - 22 Demand, Supply, and the Market Price Figure 1.3

23. 1 - 23 Determining the Market Price Market -buyers and sellers for a particular product

24. 1 - 24 Question? What is a group of companies that makes similar products and competes for the same customers? A.Industry B.Factory set C.Trade group D.NSCA cluster

25. 1 - 25 The Business Model and Profitability Industry -a group of companies that makes similar products and competes for the same customers

26. 1 - 26 Profit and Profitability Profitability -a measurement of how well a company is making use of its resources relative to its competitors

27. 1 - 27 Increasing Profitability Companies are in competition to: 1.Develop new and improved products to attract customers 2.Use their resources more productively in order to reduce their operating costs

28. 1 - 28 Increasing Profitability Premium price -the higher price a seller is able to charge versus what its competitors can charge

29. 1 - 29 Positive and Negative Effects of Self-Interested Behavior Figure 1.5

30. 1 - 30 Business as an Occupation Specialization -the process by which people become more skilled and productive when they perform a narrowly defined range of tasks specific to an occupation or job

31. 1 - 31 Business as an Occupation Business occupation -the acquired set of skills that enable a person to create valuable goods and service that can be traded at a profit

32. 1 - 32 How Specialization and the Division of Labor Increase Capital and Wealth Figure 1.6

33. 1 - 33 The Invisible Hand of the Market Invisible hand -the principle that the pursuit of self-interest in the marketplace naturally leads to the improved well-being of society in general

34. 1 - 34 The Invisible Hand of the Market Monopoly -a situation in which one company controls the supply of a product and can charge an artificially high price for it Human capital -a person’s stock of knowledge, skills, experience, judgment, personality, and abilities

35. 1 - 35 Transaction Costs Related to Business Transaction Costs -the costs of bargaining, negotiating, monitoring, and regulating exchanges between people in business Teamwork -a phenomenon that occurs when people pool their skills to create more valuable products than they could create alone

36. 1 - 36 How Business Organizations Lower Transaction Costs Business organizations -a tool that empowers people to shape and control the behavior of other people to produce goods and services Organizational structure -the framework of task and authority relationships that coordinates people so they work towards a common goal

37. 1 - 37 How Business Creates Value for People Functional activities -the task-specific operations needed to convert resources into finished goods and services sold to customers Value chain -the coordinated series or sequence of functional activities necessary to transform resources into the products customers want to buy

38. 1 - 38 How Business Creates Value for People Primary functions -functions directly responsible for utilizing scarce resources most efficiently and effectively to create goods and services Secondary functions -functions not directly responsible for getting products to customers but whose activities contribute to the efficiency and effectiveness of other functions

39. 1 - 39 Primary and Secondary Value- Chain Functions Figure 1.9

40. 1 - 40 Video - Todd McFarlane This video features a discussion with Todd McFarlane, CEO of McFarlane Companies in Tempe Arizona. 1.From Todd McFarlane’s perspective, what is the key element of his business model? 2.What are the four main productive factors in business organizations? 3.What influences people to buy or not buy a product such as the comic book Spawn created by McFarlane?