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UnderstandingEconomic
Systems andBusiness C
HA
PT
ER
1
The Future of BusinessThe Essentials 4th EditionGitman & McDaniel
Prepared byDeborah Baker
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Chapter 1Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved
2
Learning Goals
CH
AP
TE
R 11 How do businesses and not-for-profit organizations
help create our standard of living?
2 What are the sectors of the business environment, and how do changes in them influence business decisions?
3 What are the primary features of the world’s economic systems, and how are the three sectors of the U.S. economy linked?
4 How do economic growth, full employment, price stability, and inflation indicate a nation’s economic health?
3
Learning Goals (continued)
CH
AP
TE
R 15 How does the government use monetary policy and
fiscal policy to achieve its macroeconomic goals?
6 What are the basic microeconomic concepts of demand and supply, and how do they establish prices?
7 What are the four types of market structure?
8 Which trends are reshaping the business, micro-, and macroeconomic environments and competitive arena?
4
Goods and services that are the basis of our
standard of living
Goods and services that are the basis of our
standard of living
Jobs, goods and services that help
determine our quality of life
Jobs, goods and services that help
determine our quality of life
The Nature of Business
1
A business is an organization that strives for a profit by providing goods and services desired by its customers.
Businesses provide…
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The Nature of Business
standard of living
A country’s output of goods and services that people can buy with the money they have.
1
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The Nature of Business
quality of life
The general level of human happiness based on such things as life expectancy, educational standards, health, sanitation, and leisure time.
1
7
The Nature of Business
RevenueRevenue
less
CostsCosts
ProfitProfit
equals
The money a company earns from providing services or selling goods to customers.
Expenses that a company incurs from creating and selling goods and services.
The money left over afterall expenses are paid.
1
8
Not-for-Profit Organizations
Government is the largest
not-for-profit group.
Government is the largest
not-for-profit group.
Not-for-profit organizations account for more than 28% of economic activityIn the U.S.
Not-for-profit organizations account for more than 28% of economic activityIn the U.S.
A not-for-profit organization is an organization
that exists to achieve some other goal than the
usual business goal of profit.
A not-for-profit organization is an organization
that exists to achieve some other goal than the
usual business goal of profit.
1
9
Not-for-Profit Organizations
Develop strategyDevelop strategy
Measure performanceMeasure performance
Improve productivityImprove productivity
Create budgetsCreate budgets
Encourage innovationEncourage innovation
Demonstrate accountabilityDemonstrate accountability
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101
Factors of Production
1. Natural resources
2. Labor
3. Capital
4. Entrepreneurship
5. Knowledge
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CONCEPT check
1
Explain the concepts of revenue, costs, and profit.
What are the five factors of production?
What is the role of the entrepreneur in society?
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Understanding the Business Environment
2
What are the sectors of the business environment, and how do changes in them influence business decisions?
2
13
External Environment
Economic
Political and legal
Demographic
Social
Competitive
Global
Technological
2
14
Economic Influences
2
Fluctuations in economic activity create business cycles.
Government can impact the level of economic activity through taxes and interest rate levels.
Forces of supply and demand determine how prices and quantities of goods and services behave in a free market.
15
Political and Legal Influences
2
Amount of government activity
Types of laws passed
General political stability of government
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Demographic Factors
demography
The study of people’s vital statistics, such as their age, race and ethnicity, and location.
2
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Demographic Factors
GenderGender
RaceRace
EthnicityEthnicity
LocationLocation
AgeAge
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Demographic Factors
Generation YGeneration Y
Generation XGeneration X
Baby BoomersBaby Boomers
Born between 1979-1997Born between 1979-1997
Born between 1964-1977Born between 1964-1977
Born between 1946-1964Born between 1946-1964
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Social Factors
AttitudesAttitudes
ValuesValues
LifestylesLifestyles
2
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Technology
technology
The application of science and engineering skills and knowledge to solve production and organizational problems.
2
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CONCEPT check
Define the components of the internal and external business environments.
What factors within the economic environment affect businesses?
Why do demographic shifts and technological developments create both challenges and new opportunities for business?
2
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How Business and Economics Work
3
What are the primary features of the world’s economic system, and how are the three sectors of the economy linked?
3
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economics
Economics is the study of how a society uses scarce resources to produce and distribute goods and services.
3
How Business and Economics Work
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Economic Concerns
What is produced?
How much is produced?
How is it produced?
For whom is it produced?
3
253
Global Economic Systems
Free Market / CapitalismFree Market / Capitalism
Mixed EconomiesMixed Economies
Planned EconomiesPlanned Economies CommunismSocialism
CommunismSocialism
26
Differentiation among Economic Systems
Allocating limited resources
Choosing goods and services to produce
Determining how and by whom to produce goods
Distributing goods and services
Global Economic Systems
3
27
capitalism
An economic system based on competition in the marketplace and private ownership of the factors of production; also known as the private enterprise system.
3
Global Economic Systems
28
communism
An economic system characterized by government ownership of virtually all resources, government control of all markets, and economic decision-making by central-government planning.
3
Global Economic Systems
29
socialism
An economic system in which the basic industries are owned either by the government itself or by the private sector under strong government control.
3
Global Economic Systems
30
mixed economies
Economies that combine several systems; for example, an economy where the government owns certain industries but others are owned by the private sector.
3
Global Economic Systems
31
Macroeconomics and Microeconomics
macroeconomics
The subarea of economics that focuses on the economy as a whole by looking at aggregate data for large groups of people, companies or products.
microeconomics
The subarea of economics that focuses on individual parts of the economy, such as households or firms.
3
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CONCEPT check
What is economics, and how can you benefit fromUnderstanding basic economic concepts?
Compare and contrast the world’s major economic systems. Why is capitalism growing, communism declining, and socialism still popular?
What is the difference between macroeconomics and microeconomics?
3
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Understanding the Business Environment
4
How do economic growth, full employment, and price stability indicate a nation’s economic health?
4
34
economic growth
An increase in a nation’s output of goods and services.
The more a nation produces, the higher its standard of living.
Economic Growth
4
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gross domestic product
The total market value of final goods and services produced within a nation’s borders each year.
Economic Growth
4
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recession
A decline in GDP that lasts for at least two consecutive quarters.
4
Business Cycles
37
full employment
The condition when all people who want to work and can work have jobs.
4
Keeping People on the Job
38
unemployment rate
The percentage of the total labor force that is not working but is actively looking for work.
4
Measuring Unemployment
394
Types of Unemployment
FrictionalFrictional
StructuralStructural
CyclicalCyclical
SeasonalSeasonal
Short-term unemployment that is notrelated to the business cycle
Short-term unemployment that is notrelated to the business cycle
Unemployment that is caused by a mismatch between jobs and workers skills
Unemployment that is caused by a mismatch between jobs and workers skills
Unemployment that occurs when a downturn in the business cycle reduces demand for labor
Unemployment that occurs when a downturn in the business cycle reduces demand for labor
Unemployment that occurs duringspecific seasons in certain industries
Unemployment that occurs duringspecific seasons in certain industries
40
inflation
The situation in which the average of all prices of goods and services is rising.
4
Keeping Prices Steady
414
Types of Inflation
Demand-Pull Inflation
Demand-Pull Inflation
Cost-PushInflation
Cost-PushInflation
Demand for goods and services is greater than the supply
Demand for goods and services is greater than the supply
Increases in production costs push up prices
Increases in production costs push up prices
42
CONCEPT check
What is a business cycle? How do businesses adapt to periods of contraction and expansion?
Why is full employment usually defined as a target percentage below 100 percent?
What is the difference between demand-pull and cost-push inflation?
4
43
Achieving Macroeconomic Goals
5
How does the government use monetary policy and fiscal policy to achieve its macroeconomic goals?
5
44
Federal Reserve System (the Fed)
The central banking system of the United States.
Monetary Policy
5
45
crowding out
The situation that occurs when government spending replaces spending by the private sector.
Fiscal Policy
5
46
Fiscal Policy
5
Federal BudgetDeficit
Federal BudgetDeficit
NationalDebt
NationalDebt
The condition that occurs when the federal government spends more for programs than it collects in taxes.
The condition that occurs when the federal government spends more for programs than it collects in taxes.
The accumulated total of all of the federal government’s annual budgetdeficits.
The accumulated total of all of the federal government’s annual budgetdeficits.
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A High National Debt
Cons:
Not everyone holds the debt
Crowding out private investment
Pros:
Contributes to: Economic growth High employment Price stability
5
48
CONCEPT check
What are the two kinds of monetary policy?
What fiscal policy tools can the government use to achieve its macroeconomic goals?
What problems can a large national debt present?
5
49
Microeconomics
6
What are the basic microeconomic concepts of demand and supply, and how do they establish prices?
6
50
demand
The quantity of a good or service that people are willing to buy at various prices.
The Nature of Demand
6
51
supply
The quantity of a good or service that businesses will make available at various prices.
The Nature of Supply
6
52
Factors Causing Demand and Supply Curve Shifts
6
Buyers’ incomes
Buyers’ preferences/tastes
Prices of substitute products
Expectations about future prices
Number of buyers
Technology
Resource prices
Changes in prices of other products that can be produced with the same resources
Number of suppliers
Taxes
Shift Demand Shift Supply
Exhibit 1.9
53
CONCEPT check
What is the relationship between prices and demand for a product?
How is market equilibrium achieved? Describe the circumstances under which the price for gasoline would have returned to equilibrium in the U.S. after Hurricane Katrina.
Draw a graph that shows an equilibrium point for supply and demand.
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Competing in a Free Market
7
What are the four types ofmarket structure?
7
55
MonopolisticCompetition
PerfectCompetition
PureMonopoly
Oligopoly
Four Types of Market Structures
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Perfect Competition
7
A large number of small firms are in the market
The firms sell similar products Buyers and sellers have good
information about prices, sources of supply, etc.
It is easy to open a new business or close an existing one
577
Pure Monopoly
A single firm accounts for all industry sales
The firm is the industry Barriers to entry prevent new firms
from competing with the existing firm
587
Monopolistic Competition
Many firms are in the market The firms offer products that are close
substitutes but still differ It is relatively easy to enter the market
597
Oligopoly
A few firms produce most or all of the output
Large capital requirements or other factors limit the number of firms
60
CONCEPT check
What is meant by market structure?
Compare and contrast perfect competition and pure monopoly. Why is it rare to find perfect competition?
How does an oligopoly differ from monopolistic competition?
7
618
Which trends are reshaping the micro- and macroeconomic environments and the competitive arena?
8
Trends in the Business Environment and Competition
62
Not Over the Hill Yet
Baby boomers make up 42 percent of the workforce.
By 2010, 25 percent of all employments will be of retirement age. Many will work beyond the traditional retirement age of 65.
Today’s workforce spans four generations.
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Not Over the Hill Yet
Challenges from the aging population include:
Health care
Financial services
Government
Society
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relationship management
The practice of building, maintaining, and enhancing interactions with customers to develop long-term satisfaction through mutually beneficial partnerships.
Includes:• Supply Chain Management• Relationship Marketing
8
Meeting Competitive Challenges
65
CONCEPT check
What steps can companies take to benefit from the aging of its workers and to effectively manage a multigenerational workforce?
Why is the increasing demand for energy worldwide a cause for concern?
Describe several strategies that companies use to remain competitive in the global economy.
8
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