© Prentice Hall, 2005Excellence in Business, Revised Edition Chapter 1 - 1 Fundamentals of Business and Economics.

© Prentice Hall, 2005 Excellence in Business, Revised Edition

Chapter 1 - 1

Fundamentals of Fundamentals of Business and Business and

EconomicsEconomics

© Prentice Hall, 2005 Excellence in Business, Revised Edition

Chapter 1 - 2

Why Study Business?Why Study Business?

• Learn what it takes to run a businessLearn what it takes to run a business

• Build business vocabularyBuild business vocabulary

• Develop workplace skillsDevelop workplace skills

• Learn about a various occupationsLearn about a various occupations

• Appreciate today’s business careersAppreciate today’s business careers

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What is a Business?What is a Business?Knowledge

Entrepreneurs

For-ProfitFor-ProfitFor-ProfitFor-Profit

• GoodsGoods

• ServicesServices

• Job creationJob creation

• Tax-baseTax-base

• InvestmentsInvestments

• GoodsGoods

• ServicesServices

• Job creationJob creation

• Tax-baseTax-base

• InvestmentsInvestments

Non-ProfitNon-ProfitNon-ProfitNon-Profit

• EducationEducation

• LibrariesLibraries

• MuseumsMuseums

• Social servicesSocial services

• CharitiesCharities

• EducationEducation

• LibrariesLibraries

• MuseumsMuseums

• Social servicesSocial services

• CharitiesCharities

Re

sou

rces C

ap

ital

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Chapter 1 - 4

Factors of ProductionFactors of Production

• Natural resources: commodities that are useful inputs in their natural state (land, forests, minerals, water)

• Human resources: anyone who works to produce goods & services

• Capital: resourcesthat a business needs to produce goods and services (money, computers, machines, buildings…)

• Entrepreneurs: people who are innovative and willing to take the risks

• Knowledge: the combined talents and skills of the workforce

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Categories of BusinessCategories of Business

Providing ServicesProviding ServicesProducing GoodsProducing Goods

Capital IntensiveLabor Intensive

Tangible goods…(Manufacturing, construction, mining, agriculture)

Intangible goods(finance, insurence, transportation, banking…)

BOTH

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Sectors of the U.S. Sectors of the U.S. EconomyEconomy

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Factors Effect the Factors Effect the GrowthGrowth of of Service SectorService Sector

• More disposable incomeMore disposable income

• Lifestyle and demographic changesLifestyle and demographic changes

• Complex goods and technologiesComplex goods and technologies

• Need for professional adviceNeed for professional advice

• Low barriers to entryLow barriers to entry

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Chapter 1 - 8

What is Economics?What is Economics?

Microeconomics Microeconomics

MacroeconomicsMacroeconomics

Economic SystemEconomic System

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Economics is the study of how a society uses its scarce resources to produce and distribute goods and services.

Microeconomics is the study of economic behaviour among consumers, businesses and industries who collectively determine the quantity of goods and services demanded and supplied at different prices.

Macroeconomics is 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.

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Chapter 1 - 10

Economic SystemsEconomic Systems

CapitalismMixed

CapitalismSocialism Communism

Privatization

Free-MarketSystem

PlannedSystem

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Chapter 1 - 11

Free market systemFree market system• Individuals are free to decide what

products to produce, how to produce them, whom to sell them to and what price to sell them.

• Capitalism is the term most often used to describe the free market system, in which individuals own and operate the majority of businesses and where competition, supply and demand determine which goods and services are produced.

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Planned SystemPlanned System

• Governments control all or part of the allocation of resources and limit the freedom of choice in order to accomplish government goals.

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MicroeconomicsMicroeconomicsMicroeconomicsMicroeconomics

The Forces of Supply and Demand

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Chapter 1 - 14

DemandDemand

• is the quantitiy of a good or service that consumers will buy at a given time at various prices.

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Chapter 1 - 15

Understanding DemandUnderstanding Demand

Advertising andAdvertising andPromotion SpendingPromotion Spending

Consumer IncomeConsumer Income Consumer PreferencesConsumer Preferences

Price ofPrice ofSubstitute ProductsSubstitute Products

Price of Price of Complementary GoodsComplementary Goods

Expectations AboutExpectations AboutFuture PricesFuture Prices

Price

High

erLo

wer

Demand

LowerHigher

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Chapter 1 - 16

Demand Curve for Airline TicketsDemand Curve for Airline Tickets

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Expected Shifts in Demand CurveExpected 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

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Demand Curve for Airline TicketsDemand Curve for Airline Tickets

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SupplySupply

• is the quantity of a good or service that producers will provide ona particular date.

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Understanding SupplyUnderstanding Supply

Goods andServices

Supply

Price

Variables Variables

Higher

MoreLess

Lower

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Supply Curve for Airline TicketsSupply Curve for Airline Tickets

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Chapter 1 - 22

Expected Shifts in Supply CurveExpected 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

© Prentice Hall, 2005 Excellence in Business, Revised Edition

Chapter 1 - 23

Supply Curve for Airline TicketsSupply Curve for Airline Tickets

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How Demand and Supply InteractHow Demand and Supply Interact

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MacroeconomicsMacroeconomicsMacroeconomicsMacroeconomics

Issues for the Entire Economy

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PurePureCompetitionCompetition

MonopolisticMonopolisticCompetitionCompetitionOligopolyOligopoly

MonopolyMonopoly

Free-Market CompetitionFree-Market Competition

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CompetitionCompetition

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

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Pure Competition is Pure Competition is characterized by;characterized by;

• a market place of multiple buyers and sellers

• a product or service with nearly identical features (such as wheat or cotton)

• low barriers to entry

When these 3 conditions exist no single firm or group can influence prices and workings of free market system.

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MonopolyMonopoly

• There is only one producer of a product in a given market, thus the producer is able to determine the price.

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OligopolyOligopoly

• A situation in which an industry is dominated by only a few producers. (e.g. Commercial aircraft manufacturing-Boing and Airbus Industries)

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Monopolistic Monopolistic CompetitionCompetition

• 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. (e.g. Toothpaste, soft drinks, cocmetics…etc.)

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Competitive Competitive AdvantageAdvantage

• Price

• Speed

• Quality

• Service

• Innovation

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The Role of The Role of GovernmentGovernment

• Fostering competitionFostering competition

• Regulating industriesRegulating industries

• Deregulating industriesDeregulating industries

• Protecting stakeholders’ rightsProtecting stakeholders’ rights

• Contributing to economic stabilityContributing to economic stability

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Chapter 1 - 34

Fostering CompetitionFostering Competition

AntitrustLegislation

(huge companies controlled enough of the supply and distribution in their

respective industries to muscle Smaller competitors out of the way.

Mergers andAcquisitions

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Regulating and Regulating and Deregulating IndustriesDeregulating Industries

GovernmentGovernmentRegulationRegulation

FreeFreeCompetitionCompetition

Fair CompetitionFair CompetitionFair CompetitionFair Competition

Business EthicsBusiness EthicsBusiness EthicsBusiness Ethics

Working ConditionsWorking ConditionsWorking ConditionsWorking Conditions

Public SafetyPublic SafetyPublic SafetyPublic Safety

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Chapter 1 - 36

Protecting StakeholdersProtecting 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)

© Prentice Hall, 2005 Excellence in Business, Revised Edition

Chapter 1 - 37

Protecting StakeholdersProtecting 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)

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Chapter 1 - 38

Contributing to Contributing to Economic StabilityEconomic Stability

EconomicEconomicExpansionExpansion

EconomicEconomicContractionContraction

RecoveryRecovery

RecessionRecession

BusinessBusinessCycleCycle

BusinessBusinessCycleCycle

MonetaryMonetaryPolicyPolicy

FiscalFiscalPolicyPolicy

Nations’ money Nations’ money Suppy, iSuppy, interestnterest

rratesates

Revenue andRevenue andSpendingSpending

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Chapter 1 - 39

Economic expansion occurs when the economy is growing and people are spending more money. Consumer purchases stimulate businesses to produce more goods and services which in turn stimulates employment.

Economic contraction, occurs when such spending declines. Businesses cut back on production employees are laid of and economy as a whole laid off.

If the period of downward swing is severe, the nation may entire into a recession.(2 consecutive quarters of decline in GDP)

When the downward swing or recession is over the economy enters the period of recovery, which companies buy more, factories produce more, employment is high…

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Chapter 1 - 40

These recurrent up-and down swings are known as the business cycle.

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How a free market system How a free market system monitors its economic monitors its economic

performance???performance???

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Chapter 1 - 42

Major Economic Major Economic

IndicatorsIndicatorsHousing StartsHousing Starts

Durable-GoodsDurable-GoodsOrdersOrders

Interest RatesInterest Rates

UnemploymentUnemploymentStatisticsStatistics

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Measuring Price ChangesMeasuring Price Changes

InflationInflation DeflationDeflation

Consumer Price Index (CPI)

Purchasing PowerPurchasing Power

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Measuring National Measuring National OutputOutput

Gross NationalGross NationalProduct (GNP)Product (GNP)

Gross DomesticGross DomesticProduct (GDP)Product (GDP)Dollar ValueDollar Value

YesYesYesYesFinal Goods Final Goods and Servicesand Services

YesYesYesYesDomestic BusinessesDomestic Businesses

NoNoYesYesForeign-Owned Foreign-Owned BusinessesBusinesses

YesYesNoNoOverseas OperationsOverseas Operations

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Gross Domestic ProductGross Domestic Product

• measures the country’s output- its production,distribution and use of goods and services- by computing the sum of all goods and services produced for final use in a market during a specified period.

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Gross National ProductGross National Product

• it excludes the value of production from foreign owned within a nation’s boundaries, but it includes receipts from the overseas operations of domestic companies.

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Ten Economic Ten Economic Performance IndicatorsPerformance Indicators

Prime Interest RatePrime Interest Rate

Housing StartsHousing Starts

Labor Productivity RateLabor Productivity Rate

Rate of InflationRate of Inflation

Consumer Price IndexConsumer Price Index

Unemployment RateUnemployment Rate

Durable-Goods OrdersDurable-Goods Orders

Balance of TradeBalance of Trade

Producer Price IndexProducer Price Index

Gross Domestic ProductGross Domestic Product

© Prentice Hall, 2005 Excellence in Business, Revised Edition

Chapter 1 - 48

U.S. Economic GrowthU.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)

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Challenges of Challenges of GlobalizationGlobalization

• Quality products and servicesQuality products and services

• Changing needs of customersChanging needs of customers

• Managing a small businessManaging a small business

• Globalization and workforce diversityGlobalization and workforce diversity

• Ethics and social responsibilityEthics and social responsibility

• Technology and electronic commerceTechnology and electronic commerce