CHAPTER 1

1. CHAPTER 1 FUNDAMENTALS OF BUSINESS AND ECONOMICS

2. 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.

3. 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

4. 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

5. 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

6. For-Profit Non-Profit • Goods • Services • Job creation • Tax-base • Investments • Education • Libraries • Museums • Social services • Charities

7. 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.

8. Reasons for Service Sector Growth ( 70-80% of US economy) • More disposable income • Lifestyle and demographic changes • Complex goods and technologies • Need for professional advice • Low barriers to entry

9. 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)

10. 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?

11. Factors of Production

12. Free-Market System Planned System Mixed Capitalism Capitalism Socialism Communism Privatization Economic Systems Excellence in Business, 3e

13. 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 marketserves as an “invisible hand” to ensure that production mirrors the wants of society

14. Mixed capitalism • - the government sometimes intervenes to accomplish goals that are deemed socially or economically desirable • tax incentives • price controls

15. Planned System • – government controls all or part of a society’s resources and limits the freedom of choice in order to accomplish government goals • Communismis 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

16. 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

17. 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

18. 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.

19. 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.

20. Consumer Income Consumer Preferences Price of Substitute Products Price of Complementary Goods Advertising and Promotion Spending Expectations About Future Prices Understanding Demand Higher Lower Price Demand Higher Lower Excellence in Business, 3e

21. Demand Curve for Airline Tickets Excellence in Business, 3e

22. Variable Shifts Right When: Shifts Left When: Consumer Income Increases Decreases More Favorable Consumer Preferences Less Favorable Price of Substitutes Increases Decreases Decreases Increases Price of Complementary Goods Increases Decreases Advertising-Promotion Consumer Expectations Pessimistic Optimistic Decreases Number of Buyers Increases Expected Shifts in Demand Curve Excellence in Business, 3e

23. Demand Curve for Airline Tickets Excellence in Business, 3e

24. Less More Supply Goods and Services Variables Variables Lower Higher Price Understanding Supply Excellence in Business, 3e

25. Supply Curve for Airline Tickets Excellence in Business, 3e

26. Variable Shifts Right When: Shifts Left When: Costs of Inputs Decreases Increases Number of Competitors Decreases Increases New Technology Decreases Production Costs Increases Production Costs Suppliers Expect That Future Sales Prices Will Decline Will Increase Expected Shifts in Supply Curve Excellence in Business, 3e

27. Supply Curve for Airline Tickets Excellence in Business, 3e

28. How Demand and Supply Interact Excellence in Business, 3e

29. 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 theorycharacterized 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.

30. 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.

31. Competitive advantage – • – anything that makes one company’s product better than its competitors’ products. • Businesses compete based on: • Price • Speed • Quality • Service • Innovation

32. Fostering competition Regulating industries Deregulating industries Protecting stakeholders’ rights Contributing to economic stability The Role of Government Excellence in Business, 3e

33. 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

34. Regulating and Deregulating Industries Fair Competition Business Ethics Government Regulation Free Competition Working Conditions Public Safety Excellence in Business, 3e

35. 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

36. Protecting Stakeholders Agency or Commission Areas of Responsibility Consumer Product Safety Commission (CPSC) • Safety of consumer products Environmental Protection Agency (EPA) • Environmental protection Equal Employment Opportunity Commission (EEOC) • Employment discrimination Federal Communications Commission (FCC) • Telephone, telegraph, radio, television Federal Aviation Administration (FAA) • Commercial airline industry Federal Energy Regulatory Commission (FERC) • Electric power and natural gas Excellence in Business, 3e

37. Protecting Stakeholders Agency or Commission Areas of Responsibility Federal Highway Administration (FHA) • Vehicle safety requirements Federal Trade Commission (FTC) • Business practices and advertising Food and Drug Administration (FDA) • Foods, drugs, medical devices, cosmetics Interstate Commerce Commission (ICC) • Interstate transportation Occupational Safety and Health Administration (OSHA) • Safety and health of workers Securities and Exchange Commission (SEC) • Investors and securities markets Excellence in Business, 3e

38. Contributing to Economic Stability Economic expansion – occurs when the economy is growing and people are spending more money b. Economic contraction – when spending declines c. Recession – a sever downward swing d. Recovery – when the recession is over, the economy enters this period

39. Contributing to Economic Stability Economic Expansion Recovery Fiscal Policy Business Cycle Business Cycle Monetary Policy Recession Revenue and Spending Interest Rates Economic Contraction Excellence in Business, 3e

40. 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

41. 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

42. Circular Flow of the Economy

43. Fiscal Policy • changes in government’s revenues and expenditures • focuses on taxes and government spending

44. Excellence in Business, 3e

45. 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.

46. 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)

47. Measuring National Output Dollar Value Gross Domestic Product (GDP) Gross National Product (GNP) Final Goods and Services Yes Yes Domestic Businesses Yes Yes Foreign-Owned Businesses Yes No Overseas Operations No Yes Excellence in Business, 3e

48. Prime Interest Rate Unemployment Rate Housing Starts Durable-Goods Orders Labor Productivity Rate Balance of Trade Rate of Inflation Producer Price Index Consumer Price Index Gross Domestic Product Ten Economic Performance Indicators Excellence in Business, 3e

49. 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) Excellence in Business, 3e

50. 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 Excellence in Business, 3e