The U. S.

Business Environment

Business Essentials, 7th Edition

Ebert/Griffin

Instructor Lecture PowerPoints

PowerPoint Presentation prepared by
2009 Pearson Education, Inc. Carol Vollmer Pope Alverno College
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 LEARNING OBJECTIVES
After reading this chapter, you should be able to:
1. Define the nature of U.S. business and identify its main goals and
functions.
2. Describe the external environments of business and discuss how these
environments affect the success or failure of any organization.
3. Describe the different types of global economic systems according to
the means by which they control the factors of production.
4. Show how markets, demand, and supply affect resource distribution in
the United States.
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 LEARNING OBJECTIVES
(contd)
After reading this chapter, you should be able to:
5. Identify the elements of private enterprise and
explain the various degrees of competition in the
U.S. economic system.
6. Explain the importance of the economic
environment to business and identify the factors
used to evaluate the performance of an economic
system.

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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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FIGURE 1.2 Demand and Supply

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FIGURE 1.2 Demand and Supply (Cont.)

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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 (:level of wealth)
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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FIGURE 1.3 Purchasing Power Parity
Big Mac Index

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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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FIGURE 1.4 Balance of Trade

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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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 Key Terms
aggregate output economic environment
balance of trade economic indicators
business economic system
business cycle entrepreneur
capital external environment
capitalism factors of production
communism fiscal policies
competition global business environment
consumer price index gross domestic product (GDP)
demand gross national product (GNP)
demand and supply schedule inflation
demand curve information resources
depression labor (human resources)
domestic business environment law of demand

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 Key Terms (cont.)
law of supply planned economy
market political-legal environment
market economy private enterprise
market price (equilibrium price) privatization
mixed market economy productivity
monetary policies profits
monopolistic competition purchasing power parity
monopoly real GDP
national debt recession
natural monopoly shortage
nominal GDP socialism
oligopoly sociological environment
perfect competition stability
physical resources stabilization policy

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 Key Terms (cont.)
standard of living
supply
supply curve
surplus
technological
environment
unemployment

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