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The U. S. Business Environment

Business Essentials, 7th Edition
Ebert/Griffin

Instructor Lecture
PowerPoints
2009 Pearson Education, Inc.

PowerPoint Presentation prepared by

Carol Vollmer Pope Alverno College

The Concept of Business and Profit

Business
An organization that provides goods or services that are then
sold to earn profits.

Profits
The difference between a businesss revenues and its
expenses. The rewards owners get for risking their money and
time.

Consumer Choice and Demand

The freedom of consumers to choose how to satisfy their
wants and needs.
The freedom of business owners to decide how to meet those
wants and needs.

Opportunity and Enterprise

Success in business requires spotting a promising opportunity
and then developing a good plan for capitalizing on it.
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The Concept of Business and Profit

(cont.)
The Benefits of Business
Provision of goods and services
Employment of workers
Innovation and opportunities
Increased quality of life and standard of living
Enhanced personal incomes of owners and
stockholders
Tax payments support government
Support for charities and community leadership
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The External Environments of Business

External Environment
Everything outside an organizations
boundaries that might affect it
The domestic business environment
The global business environment
The technological environment
The political-legal environment
The sociocultural environment
The economic environment
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The External Environments of Business

(cont.)
Domestic Business Environment
The environment in which a firm
conducts its operations and derives its
revenues by:
Seeking to be close to its customers
Establishing strong relationships with its suppliers
Distinguishing itself from its competitors

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The External Environments of Business

(cont.)
Global Business Environment
The international forces that affect a
business:
International trade agreements
International economic conditions
Political unrest
International market opportunities
Suppliers
Cultures
Competitors
Currency values
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The External Environments of Business

(cont.)
Technological Environment
All the ways by which firms create value
for their constituents:
Human knowledge
Work methods
Physical equipment
Electronics and telecommunications
Various business activity processing systems

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The External Environments of Business

(cont.)
Political-Legal Environment
The regulatory relationship between business and the
government (legal system) and its agencies that define
what organizations can and cant do:
Product identification laws
Local zoning requirements
Advertising practices
Safety and health considerations
Acceptable standards of business conduct
Pro- or anti-business sentiment in government and
political stability are also important considerations,
especially for international firms.

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The External Environments of Business

(cont.)
Sociocultural Environment
The customs, mores, values, and
demographic characteristics of the
society in which an organization
functions
Sociocultural processes determine the
goods, services, and standards of
business conduct a society is likely to
accept
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The External Environments of Business

(cont.)
Economic Environment
The relevant conditions that exist in the
economic system in which a company operates
Examples:
If an economy is doing well enough that most people
have jobs, a growing company may find it necessary
to pay higher wages and offer more benefits in order
to attract workers from other companies.
If many people in an economy are looking for jobs, a
firm may be able to pay less and offer fewer benefits.
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Economic Systems
Economic System
A nations system for allocating its resources
among its citizens, both individuals and
organizations

Factors of Production

Labor: Human resources

Capital: Financial resources
Entrepreneurs: Persons who risk starting a business
Physical resources: Tangible things used to conduct
business
Information resources: Data and other information
used by businesses
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Types of Economic Systems

Planned Economy
A centralized government controls all or most
factors of production and makes all or most
production and allocation decisions for the
economy.

Market Economy
Individual producers and consumers control
production and allocation by creating
combinations of supply and demand.

Market
A mechanism of exchange between buyers and
sellers of a good or service.
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Planned Economies
Communism
A system Karl Marx envisioned in which
individuals would contribute according to
their abilities and receive benefits
according to their needs.
The government owns and operates all
factors of production.
The government assigns people to jobs and
owns all businesses and controls business
decisions.
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Market Economics
Capitalism
The government supports private ownership and encourages
entrepreneurship.
Individuals choose where to work, what to buy, and how much
to pay.
Producers choose who to hire, what to produce, and how much
to charge.

Mixed Market Economy

Features characteristics of both planned and market economies.
Privatization: The process of converting government
enterprises into privately owned companies.
Socialism: The government owns and operates select major
industries such as banking and transportation. Smaller
businesses are privately owned.
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The Economics of Market Systems

Demand
The willingness and ability of buyers to purchase a product (a
good or a service).

Supply
The willingness and ability of producers to offer a good or
service for sale.

The Laws of Demand and Supply in a Market Economy

Demand: Buyers will purchase (demand) more of a product
as its price drops and less of a product as its price increases.
Supply: Producers will offer (supply) more of a product for
sale as its price rises and less of a product as its price drops.

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Demand and Supply in a Market

Economy
Demand and Supply Schedule
The relationships among different levels of
demand and supply at different price levels as
obtained from marketing research, historical
data, and other studies of the market.
Demand curve: How much product will be demanded
(bought) at different prices.
Supply curve: How much product will be supplied
(offered for sale) at different prices.
Market price (equilibrium price): The price at which the
quantity of goods demanded and the quantity of goods
supplied are equal.
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Surpluses and Shortages

Surplus
A situation in which the quantity supplied
exceeds the quantity demanded
Causes losses

Shortage
A situation in which the quantity demanded
will be greater than the quantity supplied
Causes lost profits
Invites increased competition
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Private Enterprise in a Market

Economy
Private Enterprise System
Allows individuals to pursue their own
interests with minimal government
restriction.

Elements of a Private Enterprise System

Private property rights
Freedom of choice
Profits
Competition
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Degrees of Competition
Perfect Competition
Prices are determined by supply and demand
because no single firm is powerful enough to
influence the price of its product.
All firms in an industry are small.
The number of firms in the industry is large.

Principles of perfect competition:

Buyers view all products as identical.
Buyers and sellers know the prices that others are
paying and receiving in the marketplace.
It is easy for firms to enter or leave the market.
Prices are set exclusively by supply and demand and
accepted by both sellers and buyers.
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Degrees of Competition (Cont.)

Monopolistic Competition
There are numerous sellers trying to
differentiate their products from those of
competitors so as to have some control over
price.
There are many sellers, though fewer than in
pure competition.
Sellers can enter or leave the market easily.
The large number of buyers relative to sellers
applies potential limits to prices.

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Degrees of Competition (Cont.)

Oligopoly
An industry with only a few large sellers.
Entry by new competitors is hard because large
capital investment is needed.
The actions of one firm can significantly affect
the sales of every other firm in the industry.
The prices of comparable products are usually
similar.
As the trend toward globalization continues,
most experts believe that oligopolies will
become increasingly prevalent.
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Degrees of Competition (Cont.)

Monopoly
An industry or market that has only one producer
(or else is so dominated by one producer that
other firms cannot compete with it).
The sole supplier enjoys complete control over the
prices of its products; its only constraint is a decrease in
consumer demand due to increased prices.

Natural monopolies: Industries in which one

firm can most efficiently supply all needed goods
or services; typically allowed and regulated by
legislated acts and governmental agencies.
Example: Electric company
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Economic Indicators
Economic Indicators
Statistics that show whether an economic system
is strengthening, weakening, or remaining stable
Measure key goals of the U.S. economic system:
economic growth and economic stability
Economic growth indicators
Aggregate output, standard of living, gross domestic
product, and productivity

Economic stability indicators

Inflation and unemployment

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Economic Growth, Aggregate Output,

and Standard of Living
Business Cycle
The pattern of short-term ups and downs (or,
better, expansions and contractions) in an
economy.

Aggregate Output
Growth during the business cycle is measured by
the total quantity of goods and services produced
by an economic system during a given period.

Standard of Living
The total quantity and quality of goods and
services that consumers can purchase with the
currency used in their economic system.
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Economic Indicators (cont.)

Gross Domestic Product (GDP)
An aggregate output measure of the total value
of all goods and services produced within a given
period by a national economy through domestic
factors of production.
If GDP is going up, aggregate output is going up; if
aggregate output is going up, the nation is experiencing
economic growth.

Gross National Product (GNP)

The total value of all goods and services
produced by a national economy within a given
period, regardless of where the factors of
production are located.
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Economic Indicators (cont.)

Real Growth Rate
The growth rate of GDP adjusted for
inflation and changes in the value of the
countrys currency
Growth depends on output increasing at a
faster rate than population.

Real GDP
GDP that has been adjusted to account for
changes in currency values and price
changes.
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Economic Indicators (cont.)

Nominal GDP
GDP measured in current dollars or with
all components valued at current prices.

GDP per Capita

A reflection of the standard of living:
GDP per capita means GDP per person.
It is a better measure of the economic
well-being of the average person than
GDP itself.
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Economic Indicators (cont.)

Purchasing Power Parity
The principle that exchange rates are set so
that the prices of similar products in different
countries are about the same.
Indicates what people can buy with the
financial resources allocated to them by their
respective economic systemsa better sense
of standards of living across the globe.

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Economic Growth
Productivity
A measure of economic growth that
compares how much product a system
produces with the resources needed to
produce that product.
If more product is produced with fewer
factors of production, the price of the
product decreases.
The standard of living in an economy
improves through increases in productivity.
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Economic Growth (cont.)

Balance of Trade
The economic value of all the products a
country exports minus the economic value of
its imported products.
Positive balance of trade: When a country exports
(sells to other countries) more than it imports (buys
from other countries).
Negative balance of trade: When a country
imports more than it exports. Commonly called a
trade deficit.

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Balance of Trade
How does a trade deficit affect
economic growth?
The deficit exists because the amount of
money spent on foreign products has not been
paid in full. In effect, therefore, it is borrowed
money, and borrowed money costs more
money in the form of interest.
The money that flows out of the country to pay
off the deficit cannot be used to invest in
productive enterprises, either at home or
overseas.

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Economic Growth (cont.)

National Debt
The amount of money that the government
owes its creditors.
Financed by borrowing in the form of bonds:
Securities through which the government promises to
pay buyers certain amounts of money by specified
future dates.
Government competition with potential borrowers for
available loan money reduces private borrowing for
investments that would increase productivity.

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Economic Growth (cont.)

Stability
A condition in which the amount of money
available in an economic system and the quantity
of goods and services produced in it are growing
at about the same rate.

Inflation
Inflation occurs when the amount of money
injected into an economy exceeds the increase in
actual output, resulting in price increases
exceeding purchasing power increases.
Inflation rate: The percentage change in a price index
such as the CPI.
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Economic Indicators
Consumer Price Index (CPI)
A measure of the prices of typical
products purchased by consumers living
in urban areas
Compared against base periodan
arbitrarily selected time period against
which other time periods are compared.

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Economic Growth (cont.)

Unemployment
The level of joblessness among people actively
seeking work in an economic system
Low unemploymenta shortage of labor available for
businesses to hire; results in higher wages.
Higher wages reduce hiring, which increases
unemployment; results in lower wages.

Cyclical Unemployment
Businesses continuing to eliminate jobs during
a business cycle downturn cause more reduced
revenues and further job losses.
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Economic Growth (cont.)

Recession
A period during which aggregate output,
as measured by real GDP, declines

Depression
A prolonged and deep recession

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Managing the U.S. Economy

Fiscal Policy
The ways in which a government collects and spends
revenues.
Tax rates can play an important role in fiscal policy.

Monetary Policy
The manner in which a government controls its money
supply.
Working mainly through the Federal Reserve System, the
government can influence banks willingness to lend
money and prompt interest rates to go up or down.

Stabilization Policy
Coordinating fiscal and monetary policies to smooth
fluctuations in output and unemployment and to stabilize
prices.
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