chapter 1

CHAPTER 1FUNDAMENTALS OF BUSINESS AND ECONOMICS

Learning Objectives Explain how the study of business will help you meet your

career goals. Define what business is and identify four key social and

economic roles that businesses serve. Differentiate between goods-producing and service businesses

and list five factors that are contributing to the increase in the number of service businesses.

Identify the factors that affect demand and those that affect supply.

Compare supply and demand curves and explain how they interact to affect price.

Discuss the four major economic roles of the U.S. government. Explain how a free-market system monitors its economic

performance. Identify five challenges you’ll face as a business professional in

today’s global economy.

Why Study Business?

Learn what it takes to run a business Build your business vocabulary Develop your workplace skills Learn about various occupations Appreciate today’s business careers

Business majors are in demand Business is a practical major There are many opportunities for

specialization

• Four of the top ten most profitable college majors are business related

Average Starting Salary

– Accounting $49,671– Economics/Finance

$53,906– Business Administration $44,825– Marketing $35,000

What is a Business?

Business - an organized, profit-seeking activity that provides goods and services that are designed to satisfy the needs of its customers

Profit - money left over after all expenses have been paid out of the sales revenues of the business

For-Profit

• Goods• Services• Job creation• Tax-base• Investments

Non-Profit

• Education• Libraries• Museums• Social services• Charities

Categories of Business Goods-producing

businesses produce tangible goods by engaging in activities such as manufacturing, construction, mining, and agriculture. Capital-intensive

businesses - require large amounts of money or equipment to get started and to operate.

Service businesses produce intangible products and include those whose principal product is finance, insurance, transportation, utilities, wholesale and retail trade, banking, entertainment, health care, repairs, or information. Labor-intensive

businesses - rely more on human resources than buildings, machinery and equipment to prosper.

Reasons for Service Sector Growth ( 70-80% of US economy)More disposable incomeLifestyle and demographic changesComplex goods and technologiesNeed for professional adviceLow barriers to entry

What is Economics? Economics - the study of how a

society uses its scarce resources to produce and distribute goods and services.

Microeconomics - the study of economic behavior among consumers, businesses, and industries (study small individual items in economy)

Macroeconomics - the study of a country’s larger economic issues such as how firms compete, the effect of government policies, and how an economy maintains and allocates its scarce resources (study big picture)

Economic System

– the basic set of rules for allocating a society’s resources to satisfy its citizens’ needs.

Must Address Three Questions:

What to produce? How to produce? How to distribute

resources among system’s members?

Factors of Production

Excellence in Business, 3e

© Prentice Hall, 2007Chapter 1 - 12

Economic Systems

Capitalism MixedCapitalism Socialism Communism

Privatization

Free-MarketSystem

PlannedSystem

Free-market system – private individuals determine what to produce,

how and when to produce, for whom, and at what price

Capitalism or private enterprise – individuals own and operate the majority of businesses; where competition, supply and demand determine which goods and services are produced

philosophy originated by Adam Smith – in 18th century indicated that the market serves as an “invisible hand” to ensure that production mirrors the wants of society

Mixed capitalism - the government sometimes intervenes

to accomplish goals that are deemed socially or economically desirable tax incentives price controls

Planned System – government controls all or part of a society’s

resources and limits the freedom of choice in order to accomplish government goals

Communism is the most restrictive planned economy

exists in Cuba and North Korea almost all resources are under government control private ownership is restricted to personal items resource allocation is handled through rigid

centralized planning by a handful of government officials

Socialism - lies somewhere between capitalism and

communism in the degree of economic freedom that it permits. Socialism involves: a relatively high degree of government planning government ownership of land and capital

resources limited to industries considered vital to common welfare

private ownership and profit restricted to industries less vital to common welfare

high taxes for extensive coverage of social services

Privatization – a trend towards free-market enterprise

systems that allows governments to unload unprofitable businesses for needed cash and to experiment with free-market capitalism

MicroeconomicsThe Forces of Supply and Demand In a free-market system, the

marketplace (composed of individuals, firms, and industries) and the forces of demand and supply determine the quantity of goods and services produced and the prices at which they are sold.

Demand - the quantity of a good or service that consumers will buy at a given time at various prices.

Supply - the quantity of a good or service that the

producers will provide on a particular date.

Demand curve – a graph of the relationship between the prices charged and the number of units that buyers will purchase.

Supply curve – the graph of the relationship between different prices and the number of units that sellers will offer for sale.

Equilibrium price – the point at which the supply curve and the demand curve intersect.



Advertising andPromotion Spending

Consumer Income Consumer Preferences

Price ofSubstitute Products

Price of Complementary Goods

Expectations AboutFuture Prices

Price

High

erLo

wer

Demand

LowerHigher

Understanding Demand



Demand Curve for Airline Tickets



Expected Shifts in Demand Curve

Consumer Income

Consumer Preferences

Price of Substitutes

Price of Complementary Goods

Advertising-Promotion

Consumer Expectations

Number of Buyers

Variable Shifts Right When:

Increases

More Favorable

Increases

Decreases

Increases

Optimistic

Increases

Shifts Left When:

Decreases

Less Favorable

Decreases

Increases

Decreases

Pessimistic

Decreases



Demand Curve for Airline Tickets



Understanding Supply

Goods andServices

Supply

Price

Variables Variables

Higher

MoreLess

Lower



Supply Curve for Airline Tickets



Expected Shifts in Supply Curve

Costs of Inputs

Number of Competitors

New Technology

Suppliers Expect ThatFuture Sales Prices

Variable Shifts Right When:

Decreases

Decreases

Decreases Production Costs

Will Decline

Shifts Left When:

Increases

Increases

Increases Production Costs

Will Increase



Supply Curve for Airline Tickets



How Demand and Supply Interact

http://www.economist.com/encyclopedia/dictionary.cfm?id=ID8A47F549-2F3F-11D5-8496-00508B2CCA66

http://www.economist.com/encyclopedia/dictionary.cfm?id=ID8A47F549-2F3F-11D5-8496-00508B2CCA66

MacroeconomicsIssues for the Entire Economy

Competition - the situation in which two or more suppliers of a product are rivals in the pursuit of the same customers.

Pure competition – the ideal situation in theory

characterized by many buyers and sellers, very similar products, and low barriers to entry.

Monopoly - there is only one producer of a product

in a given market, and thus the producer is able to determine the price.

MacroeconomicsIssues for the Entire Economy

Oligopoly - A situation in which an industry (such as commercial aircraft manufacturing) is dominated by only a few producers (in this case Boeing and Airbus Industries)

Monopolistic competition - a large number of sellers (none of which dominates the market) offer products that can be distinguished from competing products in at least some small way.

Competitive advantage – – anything that

makes one company’s product better than its competitors’ products.

Businesses compete based on: Price Speed Quality Service Innovation



The Role of GovernmentFostering competitionRegulating industriesDeregulating industriesProtecting stakeholders’ rightsContributing to economic stability

Fostering Competition Anti-trust legislation

- limit what businesses can and cannot do to ensure that all competitors have an equal chance of producing a product, reaching the market, and making a profit.

Mergers and acquisitions – government may prohibit two companies in the same industry from combining

Regulating and Deregulating Industries Regulated industry –

close government control is substituted for free competition, and competition is either limited or eliminated

Deregulation – allows new industry competitors to enter the market, creates more choices for consumers and keeps prices in check



Regulating and Deregulating Industries

GovernmentRegulation

FreeCompetition

Fair Competition

Business Ethics

Working Conditions

Public Safety

Protecting Stakeholders

Stakeholders – groups affected by a business’ operations

Regulatory agencies have been established to encourage businesses to behave ethically and to be socially responsible



Protecting StakeholdersAgency or Commission Areas of Responsibility

Consumer Product Safety Commission (CPSC)

Environmental Protection Agency (EPA)

Equal Employment Opportunity Commission (EEOC)

Federal Communications Commission (FCC)

Federal Energy Regulatory Commission (FERC)

•Safety of consumer products

•Environmental protection

•Employment discrimination

• Telephone, telegraph, radio, television

•Commercial airline industry

•Electric power and natural gas

Federal Aviation Administration (FAA)



Protecting StakeholdersAgency or Commission Areas of Responsibility

Federal Highway Administration (FHA)

Federal Trade Commission (FTC)

Food and Drug Administration (FDA)

Interstate Commerce Commission (ICC)

Securities and Exchange Commission (SEC)

•Vehicle safety requirements

•Business practices and advertising

•Foods, drugs, medical devices, cosmetics

• Interstate transportation

•Safety and health of workers

•Investors and securities markets

Occupational Safety and Health Administration (OSHA)

Contributing to Economic StabilityEconomic expansion – occurs when the economy is growing and people are spending more moneyb. Economic contraction – when spending declinesc. Recession – a sever downward swingd. Recovery – when the recession is over, the economy enters this period



Contributing to Economic Stability

EconomicExpansion

EconomicContraction

Recovery

Recession

BusinessCycle

BusinessCycle

MonetaryPolicy

FiscalPolicy

InterestRates

Revenue andSpending

Business cycle

Recurrent up-and-down swings, which are natural and to some degree predictable; although do cause hardship

To reduce hardship, government actions have two facets:

Monetary policy

Fiscal policy

Monetary Policy - controlled by the Federal Reserve Board – a group of

government officials who oversee the country’s central banking system

involves increasing or decreasing the nation’s money supply to regulate the economy changing the reserve requirement changing the discount rate – the interest rate charges to

commercial banks to borrow money conducting open-market operations establishing selective credit controls multiplier effect – making a change in one aspect of the

system may eventually affect other portions of the system Circular flow of money – links all economic system

elements of U.S. economy

Circular Flow of the Economy

Fiscal Policy changes in government’s revenues and

expenditures focuses on taxes and government spending

Measuring Price Changes

Inflation – a steady rise in the prices of goods and services throughout the economy

Deflation – the sustained fall in the general price level for all goods and services

Price indexes – measure inflation or deflation

Consumer price index (CPI) – measures the rate of inflation by comparing the change in prices of a representative basket of goods and services.

Producer price index (PPI) – measures the change in prices at the producer or wholesale level.

Measuring National Output

Gross domestic product (GDP) – a country’s output based on production, distribution, and use of goods and services for a specific time period (broadest measure; considers who is responsible)

Gross national product (GNP) – excludes

goods produced by foreign-owned businesses in the US, but includes sales from the overseas operation of US companies (less popular measure; considers where made)



Measuring National Output

Gross NationalProduct (GNP)

Gross DomesticProduct (GDP)Dollar Value

YesYesFinal Goods and Services

YesYesDomestic Businesses

NoYesForeign-Owned Businesses

YesNoOverseas Operations

http://www.auburn.edu/~johnspm/gloss/index.html?http://www.auburn.edu/~johnspm/gloss/GNP.html

http://www.auburn.edu/~johnspm/gloss/index.html?http://www.auburn.edu/~johnspm/gloss/GNP.html

http://www.bea.doc.gov/bea/dn1.htm

http://www.bea.doc.gov/bea/dn1.htm



Ten Economic Performance Indicators

Prime Interest Rate

Housing Starts

Labor Productivity Rate

Rate of Inflation

Consumer Price Index

Unemployment Rate

Durable-Goods Orders

Balance of Trade

Producer Price Index

Gross Domestic Product



U.S. Economic Growth Age of Industrialization (1900-1944) Postwar Golden Era (1945-1969) Turbulent Years (1970-1979) Rise of Global Competition (1980-1989) New Economy and Beyond (1990 to Today)


© Prentice Hall, 2007Chapter 1 - 50Challenges of Globalization

Quality products and servicesChanging needs of customersManaging a small businessGlobalization and workforce diversityEthics and social responsibilityTechnology and electronic commerce

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