Understanding Economic Systems and Business CHAPTER 1 The Future of Business The Essentials 4 th Edition Gitman & McDaniel Prepared by Deborah Baker ©

UnderstandingEconomic

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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

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Learning Goals

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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?

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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.

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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.

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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.

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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.

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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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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

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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.

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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.

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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

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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?

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Global Economic Systems

Free Market / CapitalismFree Market / Capitalism

Mixed EconomiesMixed Economies

Planned EconomiesPlanned Economies CommunismSocialism

CommunismSocialism

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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

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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

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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

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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

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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

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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.

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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?

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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

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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

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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

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recession

A decline in GDP that lasts for at least two consecutive quarters.

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Business Cycles

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full employment

The condition when all people who want to work and can work have jobs.

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Keeping People on the Job

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unemployment rate

The percentage of the total labor force that is not working but is actively looking for work.

4

Measuring Unemployment

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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

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inflation

The situation in which the average of all prices of goods and services is rising.

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Keeping Prices Steady

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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

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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?

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Achieving Macroeconomic Goals

5

How does the government use monetary policy and fiscal policy to achieve its macroeconomic goals?

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Federal Reserve System (the Fed)

The central banking system of the United States.

Monetary Policy

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crowding out

The situation that occurs when government spending replaces spending by the private sector.

Fiscal Policy

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Fiscal Policy

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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

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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

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supply

The quantity of a good or service that businesses will make available at various prices.

The Nature of Supply

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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

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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?

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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

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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?

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618

Which trends are reshaping the micro- and macroeconomic environments and the competitive arena?

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Trends in the Business Environment and Competition

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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

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Meeting Competitive Challenges

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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.

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