CHAPTER 1 FUNDAMENTALS OF BUSINESS AND ECONOMICS
Dec 19, 2015
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-ProfitFor-Profit
• Goods
• Services
• Job creation
• Tax-base
• Investments
• Goods
• Services
• Job creation
• Tax-base
• Investments
Non-ProfitNon-Profit
• Education
• Libraries
• Museums
• Social services
• Charities
• 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
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Economic Systems
CapitalismMixed
CapitalismSocialism 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.
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Advertising andPromotion Spending
Advertising andPromotion Spending
Consumer IncomeConsumer Income Consumer PreferencesConsumer Preferences
Price ofSubstitute Products
Price ofSubstitute Products
Price of Complementary Goods
Price of Complementary Goods
Expectations AboutFuture Prices
Expectations AboutFuture Prices
Price
High
erLo
wer
Demand
LowerHigher
Understanding Demand
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Demand Curve for Airline Tickets
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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
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Demand Curve for Airline Tickets
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Understanding Supply
Goods andServices
Supply
Price
Variables Variables
Higher
MoreLess
Lower
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Supply Curve for Airline Tickets
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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
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Supply Curve for Airline Tickets
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How Demand and Supply Interact
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
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The Role of GovernmentFostering competition
Regulating industries
Deregulating industries
Protecting stakeholders’ rights
Contributing 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
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Regulating and Deregulating Industries
GovernmentRegulation
FreeCompetition
Fair CompetitionFair Competition
Business EthicsBusiness Ethics
Working ConditionsWorking Conditions
Public SafetyPublic 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
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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)
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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
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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
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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)
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Measuring National Output
Gross NationalProduct (GNP)
Gross DomesticProduct (GDP)
Dollar Value
YesYesFinal Goods and Services
YesYesDomestic Businesses
NoYesForeign-Owned
Businesses
YesNoOverseas Operations
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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
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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)
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Challenges of Globalization
Quality products and services
Changing needs of customers
Managing a small business
Globalization and workforce diversity
Ethics and social responsibility
Technology and electronic commerce