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Chapter One

Exploring the World of


Business and Economics

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Learning Objectives
1. Discuss your future in the world of business.
2. Define business and identify potential risks and
rewards.
3. Define economics and describe two types of
economic systems: capitalism and command
economy.
4. Identify the ways to measure economic
performance.
5. Outline the four types of competition.
6. Summarize the factors that affect the business
environment and the challenges that American
businesses will encounter in the future.

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Your Future in the Changing
World of Business
• Free enterprise
– Individuals are free to decide what to
produce, how to produce it, and at
what price to sell it
• What does it take to succeed in
business?
– Have a dream—know what you want
– Adapt to changes in the
environment—work hard to turn your
dreams into reality

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Why Study Business?

• For help in choosing a career


• To be a successful employee
• To start your own business
• To become a better informed consumer
and investor

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Business: A Definition

• The organized effort of individuals to


produce and sell, for a profit, the goods
and services that satisfy society’s
needs

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The Organized Effort of Individuals

Combining Resources

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Classification of Businesses

• Manufacturing businesses
– Process various materials

• Service businesses
– Produce services (e.g., haircuts, legal
advice, tax preparation)

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Classification of Businesses

• Marketing intermediaries
– Buy products from manufacturers and resell

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Satisfying Needs

• People buy goods and services not just


to own them, but to satisfy particular
needs
• Businesses that understand customer
needs, and work to satisfy those needs,
are usually successful

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The Relationship Between Sales
Revenue and Profit
• Profit is what remains after all business
expenses have been deducted from
sales revenue. A loss (negative profit)
results when a firm’s expenses are
greater than its revenues.

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Business Profit

• The purposes of profit


– To reward business owners for producing goods
and services consumers want
– As payment for business owners assuming the
risks of ownership
• Stakeholders
– All of the different people or groups or people who
are affected by the policies and decisions made by
an organization

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Economic Systems
• Economics
– The study of how wealth (anything of value) is
created and distributed
• Microeconomics
– The study of the decisions made by individuals
and businesses
• Macroeconomics
– The study of the national economy and the global
economy
• Economy
– The system through which a society creates and
distributes wealth

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Economic Systems (cont’d)

• Factors of production
– Land and natural resources
– Labor
– Capital
– Entrepreneurship
• Entrepreneur
– A person who risks time, effort, and money
to start and operate a business

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Economic Systems (cont’d)

• Differences in economic systems


– How they answer the four basic economic questions
• What goods and services will be produced?
• How will they be produced?
• For whom will they be produced?
• Who owns and controls the major factors of
production?

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Types of Economic Systems
• Capitalism
– An economic system in which individuals own and
operate the majority of businesses that provide
goods and services
– Derived from Adam Smith’s laissez-faire
capitalism in which a society’s best interests are
served by individuals pursuing their own self-
interest
• Creation of wealth is the concern of private individuals
• Resources used to create wealth must be privately
owned
• Economic freedom ensures the existence of a free
market economy
– Businesses and individuals decide what to produce and
buy; the market determines quantities sold and prices
• Limited role of government
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Basic Assumptions for Adam Smith’s
Laissez-Faire Capitalism

Insert Figure 1.3, p. XX

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Types of Economic Systems (cont’d)

• Capitalism in the United States


– Mixed economy with elements of capitalism and
socialism
– Households
• Consumers of goods and services
• Resource owners of some factors of production
– Businesses
• Produce goods and services to exchange for revenues
(money)
• Use revenues to purchase factors of production
– Governments
• In exchange for taxes, governments provide public
services that would not be provided by business or would
be produced only for those who could afford them

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The Circular Flow in Our Mixed Economy

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Types of Economies (cont’d)
• Command economies
– Economic systems in which the government
decides what will be produced, how it will be
produced, who gets what is produced, and who
owns and controls the major factors of production
– Socialism
• Key industries (e.g., transportation, utilities, and banking)
are owned and controlled by the government
• Small-scale private businesses may be permitted and
workers may choose their own occupations
• Production is based on national goals, and distribution is
controlled by the state
• Intent is the equitable distribution of income, elimination
of poverty, social services to all who need them,
elimination of the economic waste of capitalistic
competition
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Types of Economies (cont’d)

• Command economies (cont’d)


– Communism
• All factors of production are owned and controlled by the
government as proxy for ownership by all citizens
• Production is based on centralized state planning to
meet the needs of the state and not necessarily the
needs of its citizens
• The state dictates occupational choices and sets prices
and wages
• Intent is to create Karl Marx’s concept of a classless
society where all contribute according to their ability and
receive benefits according to their needs.

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Debate Issue: Should There Be Less Government
Involvement in the United States Economic System?

YES NO
• Today, there are too many • Without adequate
government controls that government controls,
inhibit business owners. business would take
• The added costs of adhering advantage of consumers.
to government regulations
• While government rules and
are passed on to consumers
regulations cost money, the
in the form of higher prices.
added safety and protection
• There is no need for all the are well worth the money.
government rules and
regulations because • While the majority of
business owners are socially business owners may be
responsible. socially responsible, there
are some who need the
encouragement provided by
government regulations.
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Measuring Economic Performance

• Productivity
– The average level of output per worker per
hour
• Economic indicators
– Gross domestic product (GDP)
• The total value of all goods and services
produced by all people within the boundaries of
a country during a one-year period
– Inflation
• A general rise in the level of prices

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Consumer Price Index

1982 – 1984 = 100


Year Annual Average Percent Change

2000 172.2 +3.4%


2001 177.1 +2.8%
2002 179.9 +1.6%
2003 184.0 +2.3%
2004 188.9 +2.7%
2005 195.3 +3.4%
2006 201.6 +3.2%
2007 207.3 +2.8%
2008 215.4 +3.8%
Source: Bureau of Labor Statistics, ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt, accessed February 17, 2009.

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GDP in Current and
Inflation-Adjusted Dollars

Source: U.S. Bureau of Economic Analysis website at www.bea.gov, accessed September 14, 2008.

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Common Measures Used to Evaluate a
Nation’s Economic Health
• Balance of trade
– The total value of a nation’s exports minus
the total value of its imports over a specific
period of time
• Bank credit
– A statistics that measures the lending
activity of commercial financial institutions
• Corporate profits
– The total amount of profits made by
corporations over selected time periods
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Common Measures Used to Evaluate a
Nation’s Economic Health (cont’d)
• Inflation rate
– An economic statistic that tracks the increase in
prices of goods and services over a period of time;
usually calculated on a monthly or annual basis
• National income
– The total income earned by various segments of
the population, including employees, self-
employed individuals, corporations, and other type
of income
• New housing starts
– The total number of new homes started during a
specific time period.
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Common Measures Used to Evaluate a
Nation’s Economic Health (cont’d)
• Prime interest rate
– The lowest interest rate that banks charge
their most creditworthy customers
• Productivity rate
– An economic measure that tracks the
increase and decrease in the average level
of output per worker
• Unemployment rate
– The percentage of a nation’s labor force
unemployed at any time
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The Business Cycle

• The recurrence of periods of growth and


recession in a nation’s economic activity
– Recession
• Two consecutive three-month periods of
decline in a country’s gross domestic product
– Depression
• A severe recession that lasts longer than a
recession
– Monetary policies
• Federal Reserve decisions that determine the
size of the supply of money in the nation and
the level of interest rates

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The Business Cycle (cont’d)

• Fiscal policy
– Government influence on the amount of
savings and expenditures; accomplished by
altering the tax structure and by changing the
levels of government spending
• Federal deficit
– A shortfall created when the federal
government spends more in a fiscal year than
it receives
• National debt
– The total of all federal deficits
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Types of Competition
• Rivalry among businesses for sales to
potential customers
• Perfect (or pure) competition
– The market situation in which there are many
buyers and sellers of a product, and no single
buyer or seller is powerful enough to affect the
price of that product
• Supply: The quantity of a product that producers are
willing to sell at each of various prices
• Demand: The quantity of a product that buyers are
willing to purchase at each of various prices
• Market Price (Equilibrium): The price at which the
quantity demanded is exactly equal to the quantity
supplied

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Supply Curve and Demand Curve

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Types of Competition (cont’d)

• Monopolistic competition
– A market situation where there are many
buyers along with a relatively larger
number of sellers who differentiate their
products from the products of competitors
– Product differentiation
• The process of developing and promoting
differences between one’s products and all
similar products

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Types of Competition (cont’d)
• Oligopoly
– A market situation (or industry) in which there are few
sellers
• E.g., automobile manufacturers, car rental agencies, and farm
implement industries
– Sizable investments are required to enter into the
market
– Each seller has considerable control over price
– The market actions of one seller can have a strong
effect on competitors

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Types of Competition (cont’d)

• Monopoly
– A market (or industry) with only one seller

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American Business Today

• Standard of living
– A loose, subjective measure of how well off
an individual or a society is mainly in terms
of want satisfaction through goods and
services.

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American Business Today (cont’d)

• Early Business Development (cont’d)


– Specialization
• The separation of a manufacturing process into
distinct tasks and the assignment of different tasks
to different individuals

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A Few of the Fastest Growing
Occupations 2006-2016
Job Title 2006 2016 Percent
Change
Network systems and data 262,000 402,000 +53.4%
communications analysts
Personal and home care aides 767,000 1,156,000 +50.6%
Computer software engineers 507,000 733,000 +44.6%
Personal financial advisors 176,000 248,000 +41.0%
Veterinarians 62,000 84,000 +35.0%
Physical therapists assistants 60,000 80,000 +32.4%
Pharmacy technicians 285,000 376,000 +32.0%
Database administrators 119,000 154,000 +28.6%
Physician assistants 66,000 83,000 +27.0%

Source: Bureau of Labor Statistics, www.bls.gov/emp/emptab21.htm, accessed February 17, 2009.

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American Business Today (cont’d)
• The Late Twentieth Century
– A shortage of crude oil in the mid-1970s increased
the cost of energy, causing increases in the
annual rate of inflation to beyond 10% through the
early 1980s.
– The U.S. economy in the early 1990s was a period
of economic improvement and growth fueled by
introduction of information technologies, cost
cutting, and the increased efficiency and flexibility
of business.
– E-Business—the organized effort of individuals to
produce and sell through the Internet for a profit
products and services that satisfy society’s needs-
-became an accepted method of conducting
business.
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American Business Today (cont’d)

• A New Century: 2000 and Beyond


– Technology becomes affordable.
– Growth in services industries and global trade.
– Although many economic indicators are strong, there
is a feeling of pessimism, a large number of
business failures, high unemployment, and terrorist
threats.
– The competitive, global, technological, and
economic environments affect business today.

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The Challenges Ahead
• How can we create a more stable economy and
create new jobs?
• As a nation, how can we develop a disaster crisis
management program that will help people in times of
peril?
• How can we meet the challenges of managing
culturally diverse work forces to address the needs of
a culturally diverse marketplace?
• How can we make American manufacturers more
productive and more competitive with foreign
producers who have lower labor costs?

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The Challenges Ahead (cont’d)

• How can we preserve the benefits of


competition in our American economic
system?
• How can we encourage economic growth and
at the same time continue to conserve natural
resources and protect our environment?
• How can we best market American-made
products in foreign nations?
• How can we meet the needs of two-income
families, single parents, older Americans, and
the less fortunate?

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Chapter Quiz
1. General Motors and Toyota are both examples of
a) marketing intermediaries.
b) manufacturers.
c) wholesalers.
d) international agents.
e) service businesses.
2. What remains after all business expenses have been
deducted from sales revenues is referred to as
a) cash.
b) excess return.
c) profit.
d) gross return.
e) operating revenue.

Copyright © Cengage Learning. All rights reserved. 1 | 42


Chapter Quiz (cont’d)
3. The total dollar value of all goods and services produced by all people
within the boundaries of a country during a one-year period is called
a) gross manufacturing output.
b) gross domestic product.
c) real gross national product.
d) economic product.
e) national production report.
4. __________ is an economic system in which individuals own and
operate the majority of businesses that provide goods and services.
a) Bureaucratic economy
b) Command economy
c) Communism
d) Capitalism
e) Socialism

Copyright © Cengage Learning. All rights reserved. 1 | 43


Chapter Quiz (cont’d)
5. __________ is a loose subjective measure of how well
off an individual or society is.
a) Standard of living
b) Consumer price index
c) Personal economic index
d) Individual consumption standard
e) Employee producer index

Copyright © Cengage Learning. All rights reserved. 1 | 44


Answers to Chapter Quiz
1. General Motors and Toyota are both examples of
a) marketing intermediaries.
b) manufacturers. (Correct)
c) wholesalers.
d) international agents.
e) service businesses.
2. What remains after all business expenses have been
deducted from sales revenues is referred to as
a) cash.
b) excess return.
c) profit. (Correct)
d) gross return.
e) operating revenue.

Copyright © Cengage Learning. All rights reserved. 1 | 45


Answers to Chapter Quiz (cont’d)
3. The total dollar value of all goods and services produced by all
people within the boundaries of a country during a one-year period is
called
a) gross manufacturing output.
b) gross domestic product. (Correct)
c) real gross national product.
d) economic product.
e) national production report.
4. __________ is an economic system in which individuals own and
operate the majority of businesses that provide goods and services.
a) Bureaucratic economy
b) Command economy
c) Communism
d) Capitalism (Correct)
e) Socialism

Copyright © Cengage Learning. All rights reserved. 1 | 46


Answers to Chapter Quiz (cont’d)
5. __________ is a loose subjective measure of how well
off an individual or society is.
a) Standard of living (Correct)
b) Consumer price index
c) Personal economic index
d) Individual consumption standard
e) Employee producer index

Copyright © Cengage Learning. All rights reserved. 1 | 47