INTRODUCTION TO BUSINESS

Fourth EditionFourth Edition

PART 1 . . . . . . . . . . . . . . . . . . . . . . . .PART 1 . . . . . . . . . . . . . . . . . . . . . . . .Understanding the Contemporary Understanding the Contemporary Business EnvironmentBusiness Environment

Chapter 1Chapter 1

Understanding the U.S. Business System

“In business you get what

you want by giving other

people what they want.”

~ Alice Foote MacDougall

Key Topics

Nature and goals of US business

Global economic systems

Supply and demand

Private enterprise and competition

Evaluating economic performance

Status and outlook for the US economy

What Is Business?

An organization that provides goods and services to earn profits

Profits:

The positive difference between revenues and expenses

Physical Resources

Labor Capital

Entrepreneurs

Factors of Production

InformationResources

How Are Factors of Production Allocated?

Planned Economy:

An economic system in which the government owns and operates all sources of production

Market Economy:

An economic system in which buyers and sellers interact based on freedom of choice

“Circular Flow in Market Economy”

OUTPUT MARKETSGoods

Services

INPUT MARKETSLabor

CapitalEntrepreneurs

Physical ResourcesInformation Resources

HOUSEHOLDS• Demand products

in output markets• Supply resources in

input markets

FIRMS• Supply products in

output markets• Demand resources

in input markets

DEMANDDEMAND

DEMANDDEMAND SUPPLYSUPPLY

SUPPLYSUPPLY

CapitalismA Fundamentally Market-Based Economy

Individuals Choose:

Where to work

What to buy

How much to pay

Producers Choose:

Who to hire

What to produce

How much to charge

Government supports private ownership and encourages entrepreneurship

Mixed EconomiesPlanned and Market

The economies of most countries include both planned and market elements

Worldwide trend toward more market elements

SocialismA Mixed Economy

Socialism is a planned economic system in which the government owns and operates selected sources of production

Privatization:

Process of converting government enterprises into privately owned companies

Supply & DemandDrive the US Economic System

Supply:

The willingness and ability of producers to offer a good or service for sale

Law of Supply:

Producers will supply (offer) more of a product for sale as its price rises and less as its price drops

Law of Demand:

Buyers will demand (purchase) more of a product as its price drops and less as its price increases

Supply & DemandDrive the US Economic System

Demand:

The willingness and ability of buyers to purchase a good or service

Demand and Supply Schedules

Quantity of Quantity ofPrice Pizzas Demanded Pizzas Supplied

$2 2000 100$4 1900 400$6 1600 600$8 1200 800

$10 1000 1000$12 800 1200$14 600 1300$16 400 1600$18 200 1800$20 100 2000

Demand & Supply

Quantity of Pizzas Demanded

sDemand Curve

Demand & Supply

Quantity of Pizzas Supplied

sSupply Curve

Demand & Supply

Quantity of Pizzas per Week

sDemand Curve Supply Curve

Equilibrium Price

The US Economy is aPrivate Enterprise System

1. Private Property Rights

2. Freedom of Choice

3. Profits

4. Competition

Individuals are free to pursue their own interests without government restriction

Four Key Elements:Four Key Elements:

Competition

Competition motivates

businesses to produce

their products better or

cheaper

CharacteristicPerfect

CompetitionMonopolistic Competition Oligopoly Monopoly

Degrees of Competition

Sample Local farmer Stationery store Steel industry Public utility

Number of competitors

Many Many, but fewer than in perfect

competition

Few None

Ease of entry into industry

Easy Fairly easy Difficult Regulated by government

Similarity of goods or services offered by competing firms

Identical Similar Can be similar or different

No directly competing

goods/services

Level of control over price by individual firms

None Some Some Considerable

Understanding Economic PerformanceKEY CONCEPTS

Business Cycle

Aggregate Output

Standard of Living

Gross Domestic Product (GDP)

Gross National Product (GNP)

PRODUCTIVITY is impacted by:

National Debt

Understanding Economic PerformanceKEY CONCEPTS

Productivity:

The amount a system produces compared to the resources needed to produce it

Balance of Trade

Economic StabilityBalanced Growth of Money & Goods

Two related factors threaten stability:Two related factors threaten stability:

INFLATION

UNEMPLOYMENT

The CPI is a Tool to Measure Inflation

Source: Westegg.com/inflation/infl.cgiSource: Westegg.com/inflation/infl.cgi

2000 1980 1930

House $250,000 $109,000 $25,696

Car $18,000 $7,871 $1,850

Hamburger & Fries

$5.00 $2.19 $.51

Recessions & Depressions

Recession:

Aggregate output declines, unemployment increases

Depression:

Severe and long-lasting recession

Managing the US Economy

Stabilization Policy:

Government policy designed to smooth out fluctuations in the economy

Fiscal Policies

Monetary Policies

Looking to the Future

Three Major Forces:

1. The information revolution will continue to boost productivity

2. Technological breakthroughs will create new industries

3. Increasing globalization will create larger markets and tougher competition

Projections and Implications for the US Economy

Opportunities…

Steady economic growth

Fewer inflationary surges and lower budget deficits

Countries with free trade, innovation, and open financial systems will thrive

Successful businesses will be those that quickly master new technology

Projections and Implications for the US Economy

Challenges…

Growing US trade deficit

Disturbing income inequality

Steadily increasing consumer debt

Limited health insurance

Chapter Review

Describe the nature and goals of US business

Define the key global economic systems and describe how they control the factors of production

Show how demand and supply affect the distribution of resources in the US

Identify the elements of private enterprise and the various degrees of competition

Explain how to evaluate an economic system

Describe the key projections for the US economy

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