Business Studies

1. Business Studies Chapter 2: Understanding Basic Economics

2. The economy • The sum total of all the economic activity within a given region • For example, a city, province, country, region (EU)

3. Economics • Economics is the study of how individuals, companies, and governments use scarce resources to produce the goods and services that meet the society’s needs • Scarcity is a key concept in economics because it creates competition and forces everyone to make trade-offs (decisions about what alternative to choose) in the use of resources • Scarcity means that a resource has a finite (limited) supply • In economics, scarcity does not mean a shortage • Opportunity cost – the value of the most appealing alternative not taken

4. The 2 main divisions of economics • Microeconomics – the study of how small units (individuals, businesses, etc.) collectively determine the quantity of gods and services demanded and supplied at different prices. • Macroeconomics – the study of the “big picture” issues in the economy, including: • competitive behavior among firms • Effect of government policies • Overall resource allocation issues

5. Factors of production • How societies deal with scarce resources • Key divisions: • Natural resources – land, forests, minerals, water and other tangible assets usable in their natural state • Human resources – all the people who work in an organization • Capital – the physical, human-made elements used to produce goods and services (factories, machines) • Also refers to funds needed to finance the operations of an organization

6. Factors of production • Entrepreneurship – the combination of innovation, initiative, and willingness to take the risks required to create and operate a new business • Knowledge – expertise gained through experience or association

7. Economic systems • The means by which a society distributes its resources to satisfy its people’s needs • Free-market system – decisions about what to produce and in what quantities are decided by the market’s buyers and sellers • Success or failure are left to your own efforts • Capitalism or free enterprise – a system based on economic freedom and competition • Mixed economy • High risk, but high rewards

8. Economic systems • Planned system – the government controls most of the factors of production and regulates their allocation • Socialism – public ownership and operation of key industries combined with private ownership and operation of less vital industries. • A system that lies between capitalism and communism

9. Nationalization & Privatization • Nationalizing—government takeover of selected companies or industries • U.S. takeover of GM 2009 • U.K. takeover of the Royal Bank of Scotland • Privatization—turning over services by government to private businesses • U.S. prisons, some infrastructure projects, military support • The belief that private firms motivated by profit will operate the projects more efficiently

10. The forces of supply & demand • Demand—buyers’ willingness and ability to purchase products • Supply—specific quantity of a product that the seller is able and willing to provide

11. What effects demand? • Customer income • Customer preferences • The price of substitute products – what can be purchased instead of a particular product • Airplane ticket • Train ticket • Automobile • Bus ticket

12. What effects demand? • The price for complementary products – what can be purchased along with the product • Airline ticket + hotel reservation • iPhone 4 + Apps • HP printer + ink cartridges • Marketing expenses • Customer expectations about future prices and their own well-being

13. When supply = demand • Equilibrium point—the point at which quantity supplied equals quantity demanded • The equilibrium price is established when the amount of a product that suppliers are willing to sell at a given price equals the amount that consumers are willing to buy at that price.

14. The interaction of demand & supply • How demand and supply affects price • When the price goes up, demand goes down, but the suppliers incentive to produce more goes up • When the price goes down, demand goes up, but the quantity supplied may or may not go down • When point at which demand and supply are equal is the equilibrium point. • Can a manager predict supply, demand, and equilibrium price?

15. Competition in a free-market • Competition—rivalry among businesses for the same customers • Pure competition—there are so many buyers and sellers that no single buyer or seller can individually influence market prices (toothpaste) • Monopoly—one company dominates a market so that it controls prices (Xerox) • Monopolistic competition—many sellers compete in at least a small way (Google Chrome)

16. Business cycle • Business cycle—fluctuations in the growth of an economy over the period of several years • Recession—two consecutive quarters of decline in GDP (2007) • Depression—collapse of the financial markets (1920’s) • Recovery—rise in employment, income, production, spending

17. Business cycle indicators • Inflation—prices rise steadily throughout the economy • Deflation—prices fall steadily throughout the economy

18. Government’s role in the business cycle • Regulation and deregulation to foster competition and protect stakeholders • Stabilize and stimulate the economy through monetary and fiscal policy • Monetary policy—regulation of the money supply • Fiscal policy--use of taxation and spending to influence the business cycle