Foundations of Business PDF - Exploring the World of Business and Economics

PAR T 1 The Environment of Business Chapter 1...

PAR T 1 The Environment of Business Chapter 1 Exploring the World of Business and Economics Chapter 2 Ethics and Social Responsibility in Business Chapter 3 Global Business EONEREN/ISTOCK/GETTY IMAGES IPOPBA/ISTOCK/GETTY IMAGES In this part of Foundations of Business, we begin by examining the world of business and how the economy affects your life. Next, we discuss ethical and social responsibility issues that affect business firms and our society. Then we explore the increasing importance of international business. Chapter 1 17943_ch01_ptg01.indd 1 15/12/21 4:26 PM  C h a pte r 1 MONKEY BUSINESS IMAGES/SHUTTERSTOCK.COM Exploring the World of Business and Economics Why Learning Objectives Should Once you complete this chapter, you will be able to: You Care? 1-1 Discuss what you must do to be successful 1-5 Examine the different phases in the typical in today’s business world. business cycle. Studying business will help you choose a career, become 1-2 Identify the potential risks and rewards 1-6 Outline the four types of competition. of business. a successful employee or 1-7 Summarize the development of American manager, start your own 1-3 Describe the two types of economic business and the challenges that business, and become a more systems: capitalism and command economy. businesses and society will encounter informed consumer and better in the future. investor. 1-4 Identify the ways to measure economic performance. 2 Part 1 The Environment of Business 17943_ch01_ptg01.indd 2 09/12/21 3:17 PM  Inside Business Tesla Races Ahead of the Competition T oday Tesla is a household name around the world. Because the company is now the leader in electric vehicles (EVs), it has also become one of the most valuable companies in the giving it a longer driving range than other EVs on the market. With superior distance and speed and longer battery life, Tesla man- aged to make its products appealing to a wide range of custom- world. Although Tesla is relatively young compared to General ers. As Tesla makes record sales and expands globally, it’s clear Motors, Ford, Toyota, and other competitors, the car manufac- the company’s early bet on EVs has paid off. turer’s commitment to innovation and sustainability has propelled Tesla’s robust supply chain has driven down battery costs, it to the front of the pack. Even though Toyota is much larger making it even more challenging for other manufacturers to catch than Tesla in terms of sales, Tesla’s market capitalization has up. Even though other automakers including BMW, Ford, General surpassed the Japanese carmaker, demonstrating that inves- Motors, Mercedes Benz, Nissan, Volkswagen, and some compa- tors see a bright future ahead for the electric car company. For nies you probably don’t recognize are investing heavily in EVs, a any company traded on the stock exchange, market capitaliza- Tesla automobile is the one that customers want. It’s so popular tion is calculated by multiplying the current market value for a that customers often have to wait for delivery for popular models. share of the company’s stock by the total number of shares that While Tesla does face competition from traditional automakers as have been issued. At the time of publication, Tesla was valued well as electric car startups, the difference could be that other at almost $800 billion—not bad for a relative newcomer to the companies still think of EVs as an afterthought.1 automobile industry. While Tesla didn’t invent the electric car, it set the stan- Did you know? dard for what an EV should be. The Tesla Roadster was the first Tesla’s market capitalization is worth more than Ford and highway-legal production vehicle that used lithium-ion batteries, General Motors combined. Wow! What a challenging world we live in. Just for a moment, think about how the world has changed in the last few years. The United States has experienced a pandemic, non-essential businesses were closed in many states, the unemployment rate increased, and the stock market took a nosedive and then recovered all in a short period of time. Even though the economy has shown signs of improvement, there are still problems and many people worry about the future of the nation and the economy. Simply put, many individuals, business leaders, and politicians worry that the future of the nation’s economy could be a bumpy road that leads to another recession. Regardless of the current state of the economy, keep in mind that our economy continues to adapt and change to meet the challenges of an ever-changing world and to provide opportunities for those who want to achieve success. Our economic system also provides an amazing amount of freedom that allows businesses like Tesla—the company profiled in the Inside Business opening case for this chapter—to adapt to satisfy the needs of customers. To meet increased consumer demands for an electric automobile, the company’s managers, engineers, and employees were able to design and build an automobile that consumers really wanted. After initial success, Tesla—a newcomer in the automobile industry—continues to innovate and create new models with self-driving capability. As a result, the company is now profitable and is one of the most valuable companies in the world. Within certain limits, imposed mainly to ensure public safety, the owners of a business can produce any legal good or service they choose and attempt to sell it at the price they set. This system of business, in which individuals decide what to produce, Chapter 1 Exploring the World of Business and Economics 3 17943_ch01_ptg01.indd 3 09/12/21 11:14 AM  how to produce it, and at what price to sell it, is called free enterprise. Our free- enterprise system ensures, for example, that Amazon.com can sell everything from books, televisions, and toys to computers, cameras, and clothing. Our system gives Amazon’s owners and stockholders the right to make a profit from the company’s success. It gives Amazon’s management the right to compete with bookstore rival Barnes & Noble and retailers Walmart, Best Buy, and Macy’s. It also gives you—the consumer—the right to choose. In this chapter, we look briefly at what business is and how it became that way. First, we discuss what you must do to be successful in the world of business and explore some important reasons for studying business. Second, we define business, noting how business organizations satisfy their customers’ needs and earn profits. Third, we examine how capitalism and command economies answer four basic economic questions. Next, our focus shifts to how the nations of the world measure economic performance, the phases in a typical business cycle, and the four types of competitive situations. Finally, we look at the events that helped shape today’s business system, the current business environment, and the challenges that businesses face. 1-1 Your Future in the Changing World of Business Learning Objective The key word in this heading is changing. When faced with the COVID-19 pandemic 1-1 Discuss what you must that raced through the world, small business owners, employees, managers, and do to be successful in today’s investors began to ask the question: What effect will non-essential business closures business world. and record high unemployment rates have on the economy? More specifically, many people wanted to know, how does this affect me both now and in the future? Although this is a fair question, it is difficult to answer. For an employee just starting a career or for a college student preparing for a career, the question is even more difficult to answer. Now, as the United States and the world adjust to life after the COVID-19 pandemic and the economy shows signs of recovery, there are opportunities out there for people who are willing to work hard, continue to learn, and possess the ability to adapt to change. Let’s begin this course with three basic concepts. What do you want? Why do you want it? Write it down! Joe Dudley, one of the world’s most respected Black business owners, offers the preceding advice to anyone who wants to succeed in business. His advice can help you achieve success. What is so amazing about Dudley’s success is that he started a manufacturing business in his own kitchen, with his wife and children serving as the new firm’s only employees. He went on to develop his own line of haircare and cosmetic products sold directly to cosmetologists, barbers, beauty schools, and consumers in the United States and in foreign countries. Today, after a lot of hard work and a strong work ethic, Mr. Dudley has built a well-recognized and respected company in the competitive cosmetics industry. He is not only a successful business owner but also a winner of the Horatio Alger Award—an award given to outstanding individuals who have succeeded in the face of adversity.2 Although many people would say that Joe Dudley was just lucky or happened to be in the right place at the right time, the truth is that he became a success because he had a dream and worked to turn the dream into a reality. He would be the first free enterprise the system of to tell you that you have the same opportunities he had. According to Mr. Dudley, business in which individuals are free to decide what to produce, “Success is a journey, not just a destination.”3 how to produce it, and at what Whether you want to obtain part-time employment to pay college and living price to sell it expenses, begin your career as a full-time employee, or start a business, you must 4 Part 1 The Environment of Business 17943_ch01_ptg01.indd 4 09/12/21 11:14 AM  bring something to the table that makes you different from the next person. Employers and our economic system are more demanding than ever before. Ask yourself: What can I do that will make employers want to pay me a salary? What skills do I have that employers need? With these two questions in mind, we begin the next section with another basic question: Why study business? 1-1a Why Study Business? The potential benefits of higher education are enormous. To begin with, there are economic benefits. Over their lifetimes, college graduates on average earn much more than high school graduates. Although lifetime earnings are substantially higher for college graduates, so are annual income amounts (refer to Figure 1-1). In addition to higher income, you will find at least four compelling reasons for studying business. For Help in Choosing a Career What do you want to do with the rest of your life? Like many people, you may find it a difficult question to answer. This business course will introduce you to a wide array of employment opportunities. In private enterprise, these range from small, local businesses owned by one individual to large companies such as American Express and Microsoft owned by thousands of stockholders. There are also employment opportunities with federal, state, county, and local governments and with charitable organizations such as Habitat for Humanity, the Red Cross, and Save the Children. For help in deciding which career might be right for you, read Appendix A “Careers in Business,” which appears on the text website. In addition to career information in Appendix A, a number of websites provide information about career development. To click your career into high gear, you can also use online networking. Websites like Facebook, Twitter, LinkedIn, and other social media sites can help you locate job openings and help prospective employers to find you. To make the most of online networking, begin by identifying and joining sites where you can connect with potential employers, former classmates, and others who may have or may hear of job openings. Next, be sure your online profile, photographs, and posts communicate your abilities and interests. Finally, be ready to respond quickly when you spot a job opening. One thing to remember as you think about what your ideal career might be is that people often choose a career that is a reflection of what they value and consider most important. What will give one individual personal satisfaction may not satisfy another. For example, one person may dream of a career as a successful corporate executive with a large salary and job security in marketing or technology or financial services. Another person may choose a career that has more modest monetary rewards but that provides the opportunity to help others. What you choose to do with your life will be based on what you feel is most important. And you are a very important part of that decision. Figure 1-1 Who Makes the Most Money? Education makes a difference. Dollar amounts represent the average annual salary for full-time workers in each household. High school graduate $62,308 Some college, no degree $74,952 Associate’s degree $82,820 Bachelor’s degree or more $134,566 Source: “Educational Attainment of Householder—Households with Householder 25 Years Old and Over by Median and Mean Income,” The U.S. Census Bureau at www.census.gov (accessed January 7, 2021). Chapter 1 Exploring the World of Business and Economics 5 17943_ch01_ptg01.indd 5 09/12/21 11:14 AM  Exploring Careers Gen Z Seeks Workplace Diversity When it comes to finding the perfect employer, Generation Z the workplace are already felt by companies around the (people born between 1997 and 2012) prioritizes work- world. Diversity for Gen Z goes beyond race and gender to place diversity. According to a survey by Tallo, an online encompass gender identity and orientation. Nearly 90 per- platform for students and job seekers, nearly 70 percent cent of those surveyed said they believe employers should say they would be more likely to accept a job offer if the ask potential employees about their identified pronouns, a recruiters and materials representing the company were practice that is not yet widespread. ethnically and racially diverse. In fact, some would even Companies that reflect diversity, equity, and inclusion in decline a job offer if the firm fell their branding and marketing materials will be more likely short on these factors. Workplace to attract fresh talent. Firms should be prepared to embed diversity—the differences among these values at the heart of the organization rather than people in a workforce owing to fac- making surface-level claims. With Gen Z on the hunt for tors such as age, race, ethnicity, organizations that reflect their values and beliefs, the bur- gender, sexual orientation, and den is on employers to prioritize diversity issues. ability—is a top priority for Gen Z. Sources: Based on information in Tamara E. Holmes, “Diverse Workforce a Top Draw Gen Z—the most diverse genera- for Nearly 7 in 10 Members of Generation Z,” Yahoo Finance, November 4, 2020, tion ever—has surpassed Millennials finance.yahoo.com/news/diverse-workforce-top-draw-nearly-175929234.html; Deloitte, “Understanding Generation Z in the Workplace,” www2.deloitte.com/us/en/pages (people born between 1981 and /consumer-business/articles/understanding-generation-z-in-the-workplace.html; Sheryl 1996) to become the largest genera- Estrada, “Workplace D&I in 2021 Will Keep External Community in Mind,” HR Dive, January 13, 2021, www.hrdive.com/news/workplace-di-in-2021-will-keep-external tion. The effects of their entry into -community-in-mind/593297/. To Be a Successful Employee Deciding on the type of career you want is only the first step. To get a job in your chosen field and to be successful at it, you will have to develop a plan, or a road map, that ensures you have the skills and knowledge the job requires. Think about what you’d look for if you were hiring an employee and strive to be that kind of person. You will also be expected to have the ability to work well with many types of people in a culturally diverse workforce. Cultural (or workplace) diversity refers to a system that recognizes and respects the differences among people because of their age, race, ethnicity, gender, sexual orientation, and ability. This course and the other college courses you take, your instructors, and all of the resources available at your college or university can help you acquire the skills and knowledge you will need for a successful career. But don’t underestimate your part in making your dream a reality. In addition to job-related skills and knowledge, employers will also look for the following characteristics when hiring a new employee or promoting an existing employee: Honesty and integrity Willingness to work hard Dependability Time management skills Self-confidence cultural (or workplace) diversity a system that recognizes Motivation and respects the differences Willingness to learn among people because of their age, race, ethnicity, gender, sexual Communication skills orientation, and ability Professionalism 6 Part 1 The Environment of Business 17943_ch01_ptg01.indd 6 09/12/21 11:14 AM  The road to success can take many different paths! While many people want immediate success, it’s important to chart a path that leads to life-long success. It helps to remember what Joe Dudley, the founder of Dudley Beauty Products said: JOSEFSDAVE/SHUTTERSTOCK.COM “Success is a journey, not just a destination.” Employers will also be interested in any work experience you may have had in cooperative work/school programs, during summer vacations, or in part-time jobs during the school year. Experience—even part-time work experience—can make a difference when it is time to apply for the job you really want. Many employees want to become managers because managers often receive higher salaries and can earn promotions within an organization. To be effective, managers must be able to perform four basic management functions: planning, organizing, leading and motivating, and controlling. All four topics are discussed in Chapter 6, Understanding the Management Process. To successfully perform these management functions, managers must also be able to work effectively with individual employees, other managers within the firm, and people outside the firm. In addition to the four management functions just mentioned, a successful manager will need many of the same characteristics that an employee needs to be successful. To Start Your Own Business Some people prefer to work for themselves, and they open their own businesses. To be successful, business owners must possess many of the same characteristics that successful employees and managers have, and they must be willing to work hard and put in long hours. It also helps if a small-business owner has an idea that will provide a product or service that customers want. At the age of 16, Palmer Luckey began building virtual reality headsets in his garage after school and work. While the first prototypes based on his ideas were crude by today’s standards, the product showed a great deal of promise. After further development, refinements, and more ideas, the product— now called Oculus—was a success in the marketplace. How successful? Answer: so successful that Facebook paid $2 billion to acquire the company.4 Unfortunately, many business firms fail. In fact, only about 50 percent survive the first five years. Typical reasons for business failures include undercapitalization (not enough money), poor business location, poor customer service, unqualified or untrained employees, fraud, lack of a proper business plan, and failure to seek outside professional help. The material in this course will help you to overcome many of these problems. The material in Chapter 5, Small Business, Entrepreneurship, and Franchises, and selected topics and examples throughout this text will also help you to decide whether you want to open your own business. To Become a Better Informed Consumer and Investor The world of business surrounds us. You cannot buy a home, a new Ford Escape Hybrid from the local Ford dealer, a pair of jeans at Gap Inc., or a hot dog from a street vendor without entering into a business transaction. Because you no doubt will engage Chapter 1 Exploring the World of Business and Economics 7 17943_ch01_ptg01.indd 7 09/12/21 11:14 AM  in business transactions almost every day of your life, one very good reason for studying business is to become a more fully informed consumer. Many people also rely on a basic understanding of business to help them invest for the future. According to Julie Stav, Hispanic stockbroker turned radio and YouTube personality and the author of Get Your Share: A Guide to Striking It Rich in the Stock Market and other personal finance help books, it is important to learn the basics about the economy and business, stocks, mutual funds, and other alternatives before investing your money. She also believes that it is never too early to start investing.5 Although this is an obvious conclusion, just dreaming of being rich does not make it happen. In fact, like many facets of life, it takes planning and determination to establish the type of investment program that will help you accomplish your financial goals. 1-1b Special Note to Business Students It is important to begin reading this text with one thing in mind: This business course does not have to be difficult. We have done everything possible to eliminate the problems that you encounter in a typical class. All of the features in each chapter have been evaluated and recommended by instructors with years of teaching experience. In addition, business students—just like you—were asked to critique each chapter component. Based on this feedback, the text includes the following features: Learning objectives appear at the beginning of each chapter. Inside Business is a chapter-opening case that highlights how successful, real- world companies do business on a day-to-day basis. Margin notes are used throughout a chapter to reinforce both learning objectives and key terms. Boxed features in each chapter highlight how managers, employees, and entrepreneurs can be both ethical and successful. Topics discussed in the boxed features include ethics and social responsibility, suggestions for entrepreneurs, technology and innovation, environmental issues, and exploring different career options. Concept Checks at the end of each major section within a chapter help you test your understanding of the main issues just discussed. End-of-chapter materials provide a chapter summary, a list of key terms, discussion questions, and a case about a successful, real-world company. The last section of every chapter is entitled Building Skills for Career Success and includes exercises devoted to enhancing your social media skills, building team skills, and researching different careers. End-of-part materials provide a continuing case about Graeter’s Ice Cream, a company that operates a chain of retail outlets in the Cincinnati, Ohio, area and sells to Kroger Stores and other retailers and consumers throughout the country. Also, at the end of each major part is an exercise designed to help you develop the components included in a typical business plan. We’ve worked hard to make sure this edition reflects what is happening in the world and our nation. We wanted you ZERBOR/SHUTTERSTOCK.COM to know how changes in the economy and world events, and yes, even a pandemic can impact not only business, but also you as a student and a consumer. Just as important, we wanted to create a text and student learning materials that help you be successful. 8 Part 1 The Environment of Business 17943_ch01_ptg01.indd 8 09/12/21 11:14 AM  Because a text should always be evaluated by the students and professors who use it, we would welcome and sincerely appreciate your comments and suggestions. ✓ Concept Check Please feel free to contact us by using one of the following e-mail addresses: ▸ What reasons would you give if you were advising someone to Bill Pride: [email protected] study business? Bob Hughes: [email protected] ▸ What factors affect a person’s Jack Kapoor: [email protected] choice of careers? ▸ Once you have a job, what steps 1-2 Business: A Definition can you take to be successful? Business is the organized effort of individuals to produce and sell, for a profit, the Learning Objective goods and services that satisfy society’s needs. The general term business refers to 1-2 Identify the potential risks all such efforts within a society (as in “American business”). However, a business is and rewards of business. a particular organization, such as a Kroger grocery store or a Cracker Barrel Old Country Store. To be successful, a business must perform three activities. It must be organized, it must satisfy needs, and it must earn a profit. 1-2a The Organized Effort of Individuals For a business to be organized, it must combine four kinds of resources: material, human, financial, and informational. Material resources include the raw materials used in manufacturing processes. For example, Mrs. Fields Cookies needs flour, sugar, butter, eggs, and other raw materials to produce the food products it sells worldwide. Material resources can also include buildings and machinery—sometimes referred to as the capital resources needed to produce goods and services. In addition, a company needs human, financial, and informational resources. Human resources are the people who furnish their labor to the business in return for wages. The financial resource is the money required to pay employees, purchase materials, and generally keep the business operating. Information is the resource that tells the managers of the business how effectively the other three resources are being combined and used (refer to Figure 1-2). Today, businesses are usually organized as one of three specific types. Service businesses produce services, such as haircuts, legal advice, or tax preparation. H&R Block provides tax preparation and software and digital products to both businesses and consumers in the United States and around the world. Manufacturing businesses process various material resources into tangible goods, such as automobiles and trucks, clothing, or computers. Intel, for example, produces computer chips and other technology components that, in turn, are sold to companies that manufacture computers. Finally, some firms called marketing intermediaries buy products from manufacturers and then resell them. Sony Corporation is a manufacturer that produces stereo equipment, televisions, cameras, and other electronic products. These products may be sold to a marketing intermediary—often referred to as a retailer—such as Best Buy or Walmart, which then resells the manufactured goods to consumers in their retail stores. Figure 1-2 Combining Resources A business must combine all four resources effectively to be successful. Human Informational resources resources BUSINESS business the organized effort of Material Financial individuals to produce and sell, for resources resources a profit, the goods and services that satisfy society’s needs Chapter 1 Exploring the World of Business and Economics 9 17943_ch01_ptg01.indd 9 09/12/21 11:14 AM  While most people think of retailers as the “store around the corner,” today many consumers prefer to shop online. For example, there was a dramatic increase in the number of customers shopping online during the COVID-19 pandemic. While people still needed food, cleaning supplies, toilet paper, and other essential items, they were afraid to venture out to shop at local retailers because of the fear of contracting the virus. As an alternative, they used the internet to order merchandise online and then had their purchases delivered to their home or used “curbside” delivery. As a result, major retailers including Walmart, Amazon, Target, Home Depot, Lowe’s, and smaller retailers saw increases in the number of online sales. To take advantage of the opportunities to sell goods and services online, there are retailers that exist only on the internet and more traditional business firms that sell goods and services in both their brick-and-mortar stores and online. For example, Etsy is a highly successful internet retailer. The secret of Etsy’s success is that the company provides an online site for buyers looking for unique or custom- made items not found in typical retail stores. Macy’s, on the other hand, sells merchandise in both its stores and online. For our purposes, e-business can be defined as the organized effort of individuals to produce and sell for a profit, the goods and services that satisfy society’s needs through the facilities available on the internet. While very similar to the definition of business, an e-business is different because of the last seven words—through the facilities available on the internet. e-Business—a topic we will continue to explore throughout this text—has become an accepted method of conducting business and a way for businesses to increase sales and profits and reduce expenses. 1-2b Satisfying Needs The ultimate objective of every firm must be to satisfy the needs of its customers. People generally do not buy goods and services simply to own them; they buy goods and services to use them in order to satisfy their particular needs. In fact, a large number of start-up businesses fail because customers don’t need or want what the e-business the organized effort of business is selling. Many experts suggest that talking to customers to determine individuals to produce and sell for a profit, the goods and services that what needs they have is an essential step that many would-be business owners satisfy society’s needs through the ignore. In other situations, would-be business owners don’t consider if competitors facilities available on the internet are already meeting the needs of customers in a specific geographic area. Even an Oh, thank heaven for 7-Eleven!® This 7-Eleven store in Osaka, Japan, is just one convenience store, but it is part of a company that has over 70,000 stores in 17 different countries. Started in 1927, today 7-Eleven is the largest chain of convenience stores in the world and is built on a basic principle: “Give the customers what they want, when and where they want it.” NP27/SHUTTERSTOCK.COM 10 Part 1 The Environment of Business 17943_ch01_ptg01.indd 10 09/12/21 11:14 AM  existing business can fail if it doesn’t adapt to changing customer needs and its products or services no longer meet customer needs. Different people have different needs. Some of us may feel the need for transportation is best satisfied by an air-conditioned BMW with navigation system, turbo V8 engine, stereo system, heated and cooled seats, automatic transmission, power windows, and remote-control side mirrors. Others may believe that a Chevrolet Spark with a four-cylinder engine and manual transmission will do just fine. Both products are available to those who want them, along with a wide variety of other products that satisfy the need for transportation. When businesses understand their customers’ needs and work to satisfy those needs, they are usually successful. Back in 1962, Sam Walton opened his first discount store in Rogers, Arkansas. Although the original store was quite different from the Walmart superstores you see today, the basic ideas of providing customer service and offering goods that satisfied needs at low prices are part of the reason why this firm has grown to become the largest retailer in the world. 1-2c Business Profit A business receives money (sales revenue) from its customers in exchange for goods or services. It must also pay out money to cover the expenses involved in doing business. If the firm’s sales revenues are greater than its expenses, it has earned a profit. More specifically, as shown in Figure 1-3, profit is what remains after all business expenses have been deducted from sales revenue. A negative profit, which results when a firm’s expenses are greater than its sales revenue, is called a loss. A business cannot continue to operate at a loss for an indefinite period of time. Management and employees must find some way to increase sales revenues and reduce expenses to return to profitability. If some specific actions are not taken to eliminate losses, a firm may be forced to close its doors or file for bankruptcy protection. For example, many businesses including JCPenney, Neiman Marcus, J. Crew, and Hertz were forced to file bankruptcy in 2020 because each firm had lower sales revenues and experienced a loss caused by the COVID-19 pandemic. Fortunately, many of the firms that filed for bankruptcy protection were able to reorganize and continue to operate. Although many people—especially stockholders and business owners—believe that profit is literally the bottom line or most important goal for a business, many stakeholders may be just as concerned about a firm’s social responsibility and environmental record. The term stakeholders is used to describe all the different people or groups of people who are affected by an organization’s policies, decisions, and activities. Many corporations, for example, are careful to point out their efforts to sustain the planet, participate in the green ecological movement, and help people to live better lives in an annual social responsibility report. In its latest report, General Mills describes how it contributed over $93 million in 2019 (the last year that complete statistics are available) to a wide variety of charitable causes, including support for programs that feed the hungry and for nonprofit organizations, schools, and communities in the United States and around the globe.6 Figure 1-3 The Relationship Between Sales Revenue and Profit Profit is what remains after all business expenses have been deducted from sales revenue. profit what remains after all business expenses have been deducted from sales revenue Sales revenue stakeholders all the different people or groups of people who Expenses Profit are affected by an organization’s policies, decisions, and activities Chapter 1 Exploring the World of Business and Economics 11 17943_ch01_ptg01.indd 11 09/12/21 11:14 AM  The profit earned by a business becomes the property of its owners. Thus, in one ✓ Concept Check sense, profit is the reward business owners receive for producing goods and services ▸ Describe the four resources that customers need and want. Profit is also the payment that business owners that must be combined receive for assuming the considerable risks of business ownership. One of these is to organize and operate a the risk of not being paid. Everyone else—employees, suppliers, and lenders—must business. be paid before the owners. ▸ What is the difference between A second risk that owners must consider is the risk of losing whatever they have a manufacturing business, invested into the business. A business that cannot earn a profit is very likely to fail, a service business, and a in which case the owners lose whatever money, effort, and time they have invested. marketing intermediary? To satisfy society’s needs and make a profit, a business must operate within the ▸ Explain the relationship among parameters of a nation’s economic system. In the next section, we define economics profit, business risk, and the and describe two different types of economic systems. satisfaction of customers’ needs. 1-3 Types of Economic Systems Learning Objective Economics is the study of how wealth is created and distributed. By wealth, we 1-3 Describe the two types of mean “anything of value,” including the goods and services produced and sold by economic systems: capitalism business. How wealth is distributed simply means “who gets what.” Experts often and command economy. use economics to explain the choices we make and how these choices change as we cope with the demands of everyday life. In simple terms, individuals, businesses, governments, and society must make decisions that reflect what is important to each group at a particular time. For example, suppose you want to take a weekend trip to some exotic vacation spot, and you also want to begin an investment program. Because of your financial resources, though, you cannot do both, so you must decide what is most important. Business firms, governments, and to some extent society face the same types of decisions. Each group must deal with scarcity when making important decisions. In this case, scarcity means “lack of resources”—money, time, natural resources, and so on—that are needed to satisfy a want or need. economics the study of how wealth is created and distributed Today, experts often study economic problems from two different perspectives: microeconomics the study of the microeconomics and macroeconomics. Microeconomics is the study of the decisions decisions made by individuals and made by individuals and businesses. Microeconomics, for example, examines how the businesses prices of homes affect the number of homes individuals will buy. On the other hand, Who owns Dairy Queen? There’s a chance you’ve purchased shakes or burgers at DQ, but do you know who owns the restaurant chain? The restaurant chain is part of a multinational corporation—Berkshire Hathaway—a company that owns dozens and dozens of successful companies and was started by Warren Buffett. Today Berkshire JONATHAN WEISS/SHUTTERSTOCK.COM Hathaway and Dairy Queen meet customer needs, earn profits, and employ thousands of employees because they thrive in a nation with a capitalistic economy. 12 Part 1 The Environment of Business 17943_ch01_ptg01.indd 12 09/12/21 11:14 AM  macroeconomics is the study of the national economy and the global economy. Macroeconomics examines the economic effect of national income, unemployment, inflation, taxes, government spending, interest rates, and similar factors on a nation and society. The decisions that individuals, business firms, government, and society make, and the way in which people deal with the creation and distribution of wealth determine the kind of economic system, or economy, that a nation has. Over the years, the economic systems of the world have differed in essentially two ways: (1) the ownership of the factors of production and (2) how they answer four basic economic questions that direct a nation’s economic activity. Factors of production are the inputs and resources used to produce goods and services. There are four such factors: Land and natural resources—elements that can be used in the production process to make appliances, automobiles, and other products. Typical examples include crude oil, forests, minerals, land, water, and even air. Labor—the time and effort that we use to produce goods and services. It includes human resources—people with skills, knowledge, training, and experiences. Examples include managers and employees. Capital—facilities, equipment, machines, tools, and man-made items used in the production of goods and services and the operation of businesses. For example, the manufacturing equipment in a Pepperidge Farm production facility or a computer used in the corporate offices of McDonald’s are both types of capital. Although most people think of money as capital, it is not one of the basic four macroeconomics the study of the national economy and the factors of production because it is a financial resource used to obtain the factors global economy of production necessary to conceptualize, create, and produce goods and services. economy the way in which Entrepreneurship—the activity that conceptualizes, creates, and organizes land people deal with the creation and and natural resources, labor, and capital. It is the willingness to take risks and distribution of wealth the knowledge and ability to use the other factors of production efficiently. An factors of production inputs and entrepreneur is a person who risks time, effort, and money to start and operate resources used to produce goods a business. and services entrepreneur a person who risks A nation’s economic system determines how the factors of production are used time, effort, and money to start and to meet the needs of society. Today, two different economic systems exist: capitalism operate a business Is this so-much hot air? No, not really. Fueled by environmental concerns, more and more businesses in industrialized nations are using wind and solar power for their energy needs. Today both wind and solar power are sources of clean and cost-effective energy leading some experts to suggest there’s a new natural resource in town. ZHENGZAISHURU/SHUTTERSTOCK.COM Chapter 1 Exploring the World of Business and Economics 13 17943_ch01_ptg01.indd 13 09/12/21 11:14 AM  Entrepreneurial Success The Next Wave of Entrepreneurs Is Here During the COVID-19 pandemic, the United States experi- freelance jobs for alternative ways to make money. Apps enced the highest unemployment rate since 1929, and that like Airbnb and Uber became immensely popular. Now, indirectly led to a boom in entrepreneurship. Based on data consumer demand suggests several products and services from the U.S. Census Bureau, new business formations such as home improvement, pet products, home beauty during the pandemic jumped dramatically, reaching a products, gaming, and fitness and health that may offer new record high. business opportunities to meet the needs of customers. Since business creation has historically declined The COVID-19 pandemic disrupted business operations, during periods of recession, professionals are opti- shifted consumer behavior, and created new opportunities. mistic about this new wave of entrepreneurship. The As a result, entrepreneurs will have to look outside the box sharp increase in applications to form businesses to match customer needs with their internal core strengths. also suggests that the labor market will recover As new start-ups emerge, only time will tell which ones will more quickly from the COVID-19 recession than the enjoy long-term success. Great Recession of 2008. After all, new, successful Sources: Based on information in Michael Sasso and Alexandre Tanzi, “Covid Recession businesses will need to hire employees. Spawning Entrepreneurs in U.S. Amid Joblessness,” Bloomberg, October 14, 2020, Recessions often give rise to new types of busi- www.bloomberg.com/news/articles/2020-10-14/covid-recession-spawning -entrepreneurs-in-u-s-amid-joblessness; Adam Singolda, “Op-Ed: Analysis of 8 Billion nesses as innovative entrepreneurs capitalize on Page Views Shows Where the Next Hot Start-up Can Thrive,” CNBC, May 12, 2020, new opportunities. The Great Recession of 2008, for www.cnbc.com/2020/05/12/here-are-the-new-businesses-to-start-during-the -coronavirus-recession.html; Dr. Anthony M. Criniti, IV, “How to Become a Successful example, gave birth to the gig economy as unem- Entrepreneur During the Pandemic,” The Entrepreneur, July 28, 2020, https://www ployed individuals looked for temporary, flexible, or.entrepreneur.com/article/353674. and command economies. The way each system answers the four basic economic questions listed below determines which type of economy a nation has. 1. What goods and services—and how much of each—will be produced? 2. How will these goods and services be produced? 3. For whom will these goods and services be produced? 4. Who owns and who controls the major factors of production? 1-3a Capitalism Capitalism is an economic system in which individuals own and operate the majority of businesses that provide goods and services. Capitalism stems from the theories of the Scottish economist Adam Smith. In his book Wealth of Nations, published in 1776, Smith argued that a society’s interests are best served when the individuals within that society are allowed to pursue their own self-interest. According to Smith, when individuals act to improve their own fortunes, they indirectly promote the good of their community and the people in that community. Smith went on to call this concept the “invisible hand.” The invisible hand is a term created by Adam Smith to describe how an individual’s own personal gain benefits others and a nation’s economy. For example, the only way a small-business owner capitalism an economic system in who produces shoes can increase personal wealth is to sell shoes to customers. which individuals own and operate To become even more prosperous, the small-business owner must hire workers the majority of businesses that to produce even more shoes. According to the invisible hand, people in the small- provide goods and services business owner’s community not only would have shoes but also would have jobs invisible hand a term created by Adam Smith to describe how an working for the shoemaker. Thus, the success of people in the community and, to individual’s personal gain benefits some extent, the nation’s economy are tied indirectly to the success of the small- others and a nation’s economy business owner. 14 Part 1 The Environment of Business 17943_ch01_ptg01.indd 14 09/12/21 11:14 AM  Adam Smith’s capitalism is based on the following fundamental issues—also refer to Figure 1-4. 1. The creation of wealth is the concern of private individuals, not the government. 2. Individuals must own private property and the resources used to create wealth. 3. Economic freedom ensures the existence of competitive markets that allow both sellers and buyers to enter and leave the market as they choose. 4. The role of government should be limited to providing defense against foreign enemies, ensuring internal order, and furnishing public works and education. One factor that Smith felt was extremely important was the role of government. He believed that government should act only as rule maker and umpire. The French term laissez-faire describes Smith’s capitalistic system and implies that there should be no government interference in the economy. Loosely translated, this term means “let them do” (as they choose). Adam Smith’s laissez-faire capitalism is also based on the concept of a market economy. A market economy (sometimes referred to as a free-market economy) is an economic system in which businesses and individuals decide what to produce and buy, and the market determines prices and quantities sold. In today’s competitive world, a business like Ford Motor Company must decide what type of automobiles it will sell, how the automobiles will be produced, and for whom the automobiles will be produced. You, the consumer, must decide if you will buy a Ford product or an automobile manufactured by another company. Prices are determined by the interaction of consumers and businesses in the marketplace. 1-3b Capitalism in the United States Our economic system is rooted in the laissez-faire capitalism of Adam Smith. However, our real-world economy is not as laissez-faire as Smith would have liked because government participates as more than umpire and rule maker. Our economy is, in fact, a mixed economy, one that exhibits elements of both capitalism and socialism. In a mixed economy, the four basic economic questions discussed at the beginning of this section (what, how, for whom, and who) are answered through the interaction of households, businesses, and governments. The interactions among these three groups are shown in Figure 1-5. Households Households, made up of individuals, are the consumers of goods and services as well as owners of some of the factors of production. As resource owners, people should be free to determine how their resources are used and also to enjoy the income and wages, rents, interest, and other benefits derived from ownership of their resources. For example, members of households provide businesses with labor. In return, businesses pay wages, which households receive as income. As consumers, household members spend their income to purchase the goods and services produced by business. Today, almost 70 percent of our nation’s total production consists of consumer products—goods and services purchased by market economy an economic Figure 1-4 Basic Assumptions of Adam Smith’s Laissez-Faire Capitalism system in which businesses and individuals decide what to produce and buy, and the market determines Right to create wealth prices and quantities sold. mixed economy an economy that Right to own private property and resources exhibits elements of both capitalism and socialism Right to economic freedom and freedom to compete consumer products goods and Right to limited government intervention services purchased by individuals for personal consumption Chapter 1 Exploring the World of Business and Economics 15 17943_ch01_ptg01.indd 15 09/12/21 11:14 AM  Figure 1-5 The Circular Flow in Our Mixed Economy Our economic system is guided by the interaction of buyers and sellers, with the role of government being taken into account. Resource Natu l ral pi ta markets res Ca ou r bo Wa La ge rc es es me s Resources La Govt. spending Re co rc bo ou nt r In res Int Cap ere r al i tal Natu st Taxes Taxes Households Governments Businesses Service Service Govt. spending Con Products e su u Go ces m en ev er od vi sr sp er s di l e S en ng Sa Se ds o rv es Go ic Product markets individuals for personal consumption.7 This means that consumers, as a group, are the biggest customers of American business. Consumer spending is a very important component for the financial health of any nation. Consider what happened in the first six months of 2020 in the United States. When the nation experienced the first cases of the COVID-19 virus, consumer spending began to slow down. Then the situation got even worse when non-essential businesses including restaurants, theaters, and some retailers closed down in March and April in many states. When this happened, many consumers were advised (or told) to stay home, and they began to save money and buy only essential items. The combination of fear of losing their job or reduced hours on the job and not knowing how long the pandemic would last caused a huge drop in consumer spending and an economic downturn. Fortunately, consumer spending and the economy began to turn around in the summer of 2020 as businesses began to reopen, and early research indicated that a vaccine that could protect people from the virus and decrease the number of deaths would be available by the end of the year. Businesses Like households, businesses are engaged in two different exchanges. They exchange money for resources, labor, and capital and use these resources to produce goods and services. Then they exchange their goods and services for sales revenue. This sales revenue, in turn, is exchanged for additional resources, which are used to produce and sell more goods and services. When business profits are distributed to business owners, these profits become household income. (Business owners are, after all, members of households.) When the economy is running smoothly, households are willing to invest their money in businesses. They can do so directly by buying stocks issued by businesses, by purchasing shares in mutual funds that purchase stocks in businesses, or by lending money to businesses. They can also invest indirectly by placing their money in bank accounts. Banks and other financial institutions then invest money as part of their normal business operations. Thus, business profits, too, are retained in the business 16 Part 1 The Environment of Business 17943_ch01_ptg01.indd 16 09/12/21 11:14 AM  system, and the circular flow in Figure 1-5 is complete. How, then, does government fit in? Governments The numerous government services are important but they (1) would either not be produced by private business firms or (2) would be produced only for those who could afford them. Typical services include national defense, police, fire protection, education, and construction of roads and highways. To pay for all these M-SUR/SHUTTERSTOCK.COM services, governments collect a variety of taxes from households (such as personal income taxes and sales taxes) and from businesses (corporate income taxes). Figure 1-5 shows this exchange of taxes for government services. It also shows government spending of tax dollars for resources and products required to provide these services. Actually, with government included, our circular flow looks more like a combination of several flows. In reality, it is. The important point is that together the various flows make up a single unit—a complete economic system that provides answers to the basic economic questions. Simply put, the system works. 1-3c Command Economies A command economy is an economic system in which the government decides what goods and services will be produced, how they will be produced, for whom available goods and services will be produced, and who owns and controls the major factors of production. Today, two types of economic systems—socialism and communism—serve as examples of command economies. Socialism In a socialist economy, the key industries are owned and controlled by the government. Land, buildings, and raw materials may also be the property of the state in a socialist economy. Depending on the country, private ownership of smaller businesses is permitted to varying degrees. Usually, people may choose their own occupations, although many work in state-owned industries. Today, China, New Zealand, Canada, Sweden, and Norway are often referred to as socialist nations ✓ Concept Check because they have adopted some socialist policies and welfare programs.. ▸ What are the four basic What to produce and how to produce it often are determined in accordance with economic questions? How are national goals, which are based on projected needs and the availability of resources. they answered in a capitalist The distribution of goods and services—who gets what—is also controlled by the economy? state to the extent that it controls taxes, rents, and wages. Among the professed ▸ Describe the four basic aims of socialist countries are the equitable distribution of income, the elimination assumptions required for a of poverty, and the distribution of social services (such as medical care) to all who laissez-faire capitalist economy. need them. The disadvantages of socialism include increased taxation and loss of ▸ Why is the American economy incentive and motivation for both individuals and business owners. called a mixed economy? Communism If Adam Smith was the father of capitalism, Karl Marx was the ▸ How does capitalism differ from father of communism. In his writings during the mid-1800s, Marx advocated a socialism and communism? classless society whose citizens together owned all economic resources. All workers would then contribute to this communist society according to their ability and command economy an would receive benefits according to their need. economic system in which the Since the breakup of the Soviet Union and economic reforms in China and most government decides what goods of the Eastern European countries, the best remaining example of communism is and services will be produced, North Korea. Today, the basic four economic questions (what, how, for whom, and how they will be produced, for whom available goods and services who) are answered through centralized government plans. Emphasis is placed on the will be produced, and who owns production of goods and services the government needs rather than on the needs of and controls the major factors of consumers, so there are frequent shortages of consumer goods. production Chapter 1 Exploring the World of Business and Economics 17 17943_ch01_ptg01.indd 17 09/12/21 11:14 AM  1-4 Measuring Economic Performance Learning Objective Consider for just a moment the following questions: 1-4 Identify the ways to Are U.S. workers as productive as workers in other countries? measure economic performance. Is the gross domestic product for the United States increasing or decreasing? How does inflation affect the prices that consumers pay for products and services? Information needed to answer these questions is easily obtainable from many sources. More important, the answers to these and other questions can be used to gauge the economic health of the nation. 1-4a The Importance of Productivity in the Global Marketplace One way to measure a nation’s economic performance is to assess its productivity. While there are other definitions of productivity, for our purposes, productivity is the average level of output per worker per hour. An increase in productivity results in economic growth because a larger number of goods and services are produced by a given labor force. To see how productivity affects you and the economy, consider the following three questions: Question: How does an increase in productivity affect the economy? Answer: Because of increased productivity, it takes fewer workers to produce more goods and services. As a result, employers can reduce costs, earn more profits, and may sell their products or services for less. Finally, productivity growth helps American business to compete more effectively with other nations in a global, competitive world. Question: Is an increase in productivity always good? Answer: Fewer workers producing more goods and se