1 1 the scope of business. 2 what is business? an organization that provides goods and/or services...

11 The Scope of Business

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What Is Business? An organization that

provides goods and/or services to earn profitsProfits:The positive difference between revenues and expenses

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The Nature of Business

To earn profits by providing products: Tangible

Cars, food, clothing Intangible

A service An idea

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Business vs. NonprofitOrganization

Nonprofit Organization Provides products,

especially services, for some purpose other than profits, ex. The Salvation Army, 4300 American colleges & universities.

Business An individual or

organization that tries to earn a profit by providing products that satisfy people’s needs, ex. IBM, Coca-Cola.

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The Goals of Business

For-Profit Sector: Profit

The difference between what it costs to make and sell a product and what the customer pays for it.

Nonprofit Sector: Goals

May provide goods or services but not for the purpose of earning profits.

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Overview of the Business World

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7

The People andActivities of Business

Activities: Management Marketing Finance

People: Owners Employees Customers Other

stakeholders: Investors Regulatory

Agencies

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Why Study Business? To develop skills and acquire knowledge

to prepare for your future career

To help you better understand the many business activities that are necessary to provide satisfying goods and services

To help you become a well-informed consumer and member of society

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11

Physical Resources

Labor Capital

Entrepreneurs

Factors of Production

InformationResources

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Types of Resources Used by Business

Natural Land, forests, etc. (not made by people)

Human Physical/mental abilities used by people

to produce goods and services Financial

Funds necessary to acquire needed natural and human resources

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13

What Is An Economic System?

The way a society distributes its resources to produce goods and services

Addresses the issue of how to fulfill unlimited demand with limited supply of resources

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What is anEconomic System?

A nation’s system for allocating resources among citizens.

Assumes resources are scarce thus requiring allocation.

Market is mechanism for exchange between Buyer/Seller

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Types ofEconomic Systems

CommunismCommunism SocialismSocialism(Mixed(Mixed Market)Market)

Planned Planned EconomiesEconomies

Capitalism vs. Capitalism vs. MarketMarket

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Circular Flow of Economics

OutputOutput((Goods & Services)Goods & Services)

InputInput(Factors of Production(Factors of Production))

SupplySupply Dem

and

Dem

and

SupplySupplyDemandDemand

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Basic Questions to Be Asked of Economic Systems

1. What goods and services and what quantity will satisfy the needs of the consumer?

2. How will the goods and services be produced?

a. Who will produce them and with what resources?

3. How are the goods and services to be distributed to the consumer?

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18

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

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Types of Economic Systems Capitalism Communism Socialism

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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

chargeGovernment supports private ownership

and encourages entrepreneurship

Government supports private ownership and encourages entrepreneurship

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Capitalism Private Ownership of

Factors of Production

Economic Decisions

Made by Owners

Freedom of

Decisions/Choices

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Mixed Economies: Planned and Market

The economies of most countries include both planned and market elements.

Worldwide trend is toward more market elements.

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Communism Planned Economic System Government Owns

All Production Facilities All Citizens Are Employees of

Government All Capital

All Economic Decisions Controlled By Government

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Mixed Market Economies

““Pure” Pure” PlannedPlanned

““Pure” Pure” MarketMarket

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Socialism: Mixed Economy

Socialism A planned economic system in which

the government owns and operates selected sources of production

Privatization: The process of converting government

enterprises into privately owned companies

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Privatization vs. Socialism

Privatization

Socialism

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Comparison of Communism, Socialism, and Capitalism

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Economic Systems and Where They Occur

CommunisCommunismm

SocialismSocialism CapitalismCapitalism

China SwedenUnited States

North Korea India Canada

Cuba Israel Japan

AustraliaCopyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved

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Mixed Economies Most countries of the

world have elements of more than one economic system.

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Supply & Demand

Demand- Comes From Buyers As Price Drops Buyers Purchase More

Supply- Producers’ Willingness As Price Increase Producers Offer More

Buyers & Suppliers Work Towards Equilibrium = Profit Maximization Surplus vs. Shortage

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Supply and Demand Drive the U.S. 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.

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Supply and Demand Drive the U.S. Economic System (cont’d)

Demand: The willingness and ability

of buyers to purchase a good or service

Law of Demand: Buyers will demand

(purchase) more of a product as its price drops and less as its price increases.

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U.S. Hot Dog Consumption Hot dogs consumed between Memorial

Day & Labor: 7 billion

Average number of hot dogs eaten/person from Memorial Day to Labor Day: 24

Rate of consumption during this time: 818 hot dogs/second

Source: National Hot Dog and Sausage Council, as reported in American Demographics, July/August 2004, p. 48.

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Demand and Supply Schedules

Quantity of Quantity ofPrice Pizzas Demanded Pizzas Supplied

$2 2000 100$4 1900 400$6 1600 600$8 1200 800

$10 1000 1000$12 800 1200$14 600 1300$16 400 1600$18 200 1800$20 100 2000

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Pizza Supply At Given Price

0

5

10

15

20

25

100 400 600 800 1000 1200 1300 1600 1800 2000

Quantity (S)

Pri

ce o

f P

izza

SSHighHigh

HighHighLowLow

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Pizza Demand At Given Price

0

500

1000

1500

2000

2500

2 4 6 8 10 12 14 16 18 20

Quantity Demanded (D)

Piz

za P

rice

HighHigh

HighHighLowLow

DD

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Equilibrium (Market Price)

0

500

1000

1500

2000

2500

2 4 6 8 10 12 14 16 18 20

Quantity

Piz

za P

rice

HighHigh

HighHighLowLow

SSDD

Market EquilibriumMarket Equilibrium

SurplusSurplus

ShortageShortage

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The Forces of Supply and Demand

Supply The number of

products that businesses are willing to sell at different prices at a specific time

Consumers are usually willing to buy more of an item as its price falls because they want to save money.

Demand The number of goods

and services that consumers are willing to buy at different prices at a specific time.

Businesses are willing to supply more of a good or service at higher prices because the potential for profits is higher.

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The U.S. Economy is a Private Enterprise System

Individuals are free to pursue their own interests without government restriction.

Four Key Elements: Private Property

Rights Freedom of Choice Profits Competition

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The Free-Enterprise System Individuals must have the right to own

property and pass it on to their heirs. People and businesses must have the right

to earn profits and use them as they wish. Individuals and businesses must have the

right to determine how their businesses operate.

Individuals must have the right to choose their career, where to live, and what to buy.

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41

Competition

Competition motivates businesses to produce their products better or cheaper

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The Nature of CompetitionFour Competitive EnvironmentsFour Competitive Environments

Pure Competition

Many small businesses sell one standardized product.

Monopolistic Competition

There are fewer businesses than in a pure competition system, and the differences between the goods they sell are small.

Oligopoly Very few businesses sell a product; each business supplies a large portion of the products sold in the marketplace.

Monopoly There is only one producer of a product in a given market.

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Private Enterprise Private Property

Freedom of Choice

Profits

Competition

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Degrees of Competition

SellersSellers

OneOne ManyMany

MonopolyMonopoly

OligopolyOligopoly

Perfect Perfect CompetitionCompetition

Monopolistic Monopolistic CompetitionCompetition

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Perfect/Pure Competition

Competition- 2+ Businesses Vie For Same Resources/Customers

Condition- No Single Firm Dominant Principles

Buyers View Products As Similar Buyers/Sellers Know Each Others’ Prices/Costs Easy To Enter/Leave Marketplace Prices Set By Supply/Demand & Accepted by

Sellers/Buyers

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Monopolistic Competition

Many Buyers

Fewer Sellers Than Perfect/Pure Competition

Buyer Perception of Product/Brand Differentiation

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Oligopoly Few Large Sellers

Market Entry Difficult- High Capital Investment

Sellers Control Strategies

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Monopoly Characteristics

Only One Producer Controls Industry

Pricing Natural Monopoly

One Producer Can Efficiently Supply All

Goods/Services

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Economic Cycles and Productivity

Economic expansion occurs when an economy is growing and people are spending more money.

Economic contraction occurs when spending declines.

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Measuring the Economy One commonly used measure is gross

domestic product. GDP is the sum of all goods and services

produced by a national economy in a country during a year.

GNP is is the sum of all goods and services produced by a national economy regardless of where the factor of production are located during a year

Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved

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Overall Unemployment Rate in the U.S. Civilian Labor Force

Source: “Overall Unemployment Rate in the Civilian Labor Force, 1920–2002,” InfoPlease (n.d.), www.infoplease.com/ipa/ A0104719.html (accessed February 16, 2004).

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Growth in U.S. GrossDomestic Product Dollars

Source: “Gross Domestic Product or Expenditure, 1930–2002,” InfoPlease (n.d.), www.infoplease.com/ipa/ A0104575.html (accessed February 16, 2004). 8000 10000

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Growth of The American Economy The Early Economy

Primarily agricultural; the use of natural resources The Industrial Revolution

The development of new technology and factories The Manufacturing and Marketing Economies

Devoted to manufacturing goods and providing services rather than producing agricultural products

The Service and Internet-based Economy Devoted to the production of services that make life

easier for busy consumers

Did You Know? 60 percent of adult women work.

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PRODUCTIVITYPRODUCTIVITY

is impacted by:is impacted by:

National National DebtDebt

Understanding Economic Performance

KEY CONCEPTS Productivity:

The amount a system produces compared to the resources needed to produce it

Balance Balance of Tradeof Trade

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Economic Stability:Balanced Growth of Money and Goods

Two related factors Two related factors threaten stability:threaten stability:

INFLATIONINFLATIONINFLATIONINFLATION

UNEMPLOYMENTUNEMPLOYMENTUNEMPLOYMENTUNEMPLOYMENT

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The Role of the Entrepreneur

An entrepreneur is an individual who risks his or her wealth, time, and effort to develop for profit an innovative product or way of doing something.

Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved

57

The Role of Government in the American Economy

Federal, state, and local governments intervene in the economy with laws and regulations designed to: Promote competition Protect consumers, employees, and

the environment

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Recessions and Depressions Recession:

Aggregate output declines, unemployment increases

Depression: Severe and long-

lasting recession

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Satu