Business Fundamentals - Midterm Review PDF

CHAPTER 1: The U.S. Business Environment Business: organization that provides goods or services that are then sold to earn profits ★ profits = a business’s revenues - its expenses Business opportunity involves goods or services that consumers need or want – especially if no one...

CHAPTER 1: The U.S. Business Environment Business: organization that provides goods or services that are then sold to earn profits ★ profits = a business’s revenues - its expenses Business opportunity involves goods or services that consumers need or want – especially if no one else is supplying them or if existing businesses are doing so inefficiently or incompletely. ★ biggest difference between goods and services: tangibility ★ External Environments [in the Business Organization]: everything outside an organization’s boundaries that might affect it, including: 1. Economic Environment Definition: relevant conditions that exist in the economic system in which a company operates Example: In an economy where wages are high and people mostly have jobs, a growing company may need to pay higher wages and offer more benefits to attract workers from other companies, but where many people are looking for jobs, the company may be able to pay less and offer fewer benefits. 2. Technological Environment Definition: All the ways by which firms create value for their constituents and includes human knowledge, work methods, physical equipment, electronics, and telecommunications Example: using technology for school (e.g. Zoom) during COVID-19 3. Sociocultural Environment Definition: the customs, mores, values, and demographic characteristics of the society in which an organization functions and determines the goods and services, as well as the standards of business conduct, that a society is likely to value and accept Example: Urban Outfitters released a Monopoly-like game called Ghettopoly that later received bad publicity so they removed it. 4. Domestic Business Environment Definition: the environment in which a firm conducts its operations and derives its revenues Example: Urban Outfitters initially located in a college town 5. Global Business Environment Definition: the international forces that affect a business and includes international trade agreements, international economic conditions, and political unrest Example: the negative effects of COVID-19 6. Political-Legal Environment Definition: the relationship between business and government Reasons for importance: - The legal system defines in part what an organization can and cannot do. - Various government agencies regulate important activities (e.g advertising practices, safety and health considerations, and acceptable standards of business conduct) Economic Systems: a nation’s system for allocating its resources among its citizens, both individuals and organizations, including: 1. Planned economy  Definition: economy that relies on a centralized government to control all or most factors of production and to make all or most production and allocation decisions Planned economies take two basic forms: 1. Communism a. Definition: a political system in which the government owns and operates all factors of production b. Example: North Korea 2. Socialism: the government owns and operates selected major industries 2. Market economy Definition: individual producers and consumers control production and allocation decisions through supply and demand Market: mechanism for exchange between buyers and sellers of a particular good or service Market economies rely on a private enterprise system: 1. Capitalism: a system that sanctions the private ownership of the factors of production and encourages entrepreneurship by offering profits as an incentive (e.g. U.S.) 2. ★ Free/Private enterprise requires the presence of four elements: a. Private enterprise system: ownership of the resources used to create wealth is in the hands of individuals 1. Private property rights: one that allows individuals to pursue their own interests with minimal government restriction 2. Freedom of choice: you can sell your labor to any employer you choose 3. Profits: the lure of profits leads some people to abandon the security of working for someone else and assume the risks of entrepreneurship 4. Competition: occurs when two or more businesses vie for the same resources or customers ★ Degrees of Competition: 1. Perfect competition: a. Characteristics: local farmer (as an example); many competitors; relatively easy in terms of ease of entry into industry; identical in terms of similarity of goods or services offered by competing firms; no level of control over price by individual firms b. For perfect competition to exist, two conditions must be met: 1. All firms in an industry must be small 2. The number of firms in the industry must be large → Under these conditions, no single firm is powerful enough to influence the price of its product. Prices are, therefore, determined by such market forces as supply and demand. → ★ These two conditions also reflect four principles: 1. The products of each firm are so similar that buyers view them as identical to those of other firms. 2. Both buyers and sellers know the prices that others are paying and receiving in the marketplace. 3. Because each firm is small, it is easy for firms to enter or leave the market. 4. Going prices are set exclusively by supply and demand and accepted by both sellers and buyers. 2. Monopolistic competition: a. Characteristics: stationery store; many, but fewer than in perfect competition, competitors; fairly easy in terms of ease of entry into industry; similar in terms of  similarity of goods or services offered by competing firms; some level of control over price by individual firms b. There are numerous sellers trying to make their products at least seem to be different from those of competitors. 3. ★ Oligopoly: a. Characteristics: steel industry/airplane airlines; few competitors; difficult in terms of ease of entry into industry; can be similar or different in terms of similarity of goods or services offered by competing firms; some level of control over price by individual firms b. A handful of (generally large) sellers with the power to influence the prices of their products. 4. ★ Monopoly: a. Characteristics: public utility; no competitors; regulated by government in terms of ease of entry into industry; no directly competing goods or services in terms of similarity of goods or services offered by competing firms; considerable level of control over price by individual firms b. There’s only one producer (or is so dominated by one producer that other firms cannot compete with it). c. In the U.S., laws (e.g. Sherman Antitrust Act (1890) and the Clayton Act (1914)) forbid many monopolies and regulate prices charged by natural monopolies. i. Natural monopoly: one company can most efficiently supply all needed goods or services (example: the electric company in NYC ‘Con Edison Solutions’) Demand and Supply in a market economy: Demand: the willingness and ability of buyers to purchase a product (a good or a service) Law of demand: buyers will purchase (demand) more of a product as its price drops and less of a product as its price increases. Supply: the willingness and ability of producers to offer a good or service for sale Law of supply: producers will offer (supply) more of a product for sale as its price rises and less of a product as its price drops. Demand and supply schedule: an assessment of the relationships among different levels of demand and supply at different price levels 2. Mixed market economy Definition: features characteristics of both planned and market economies Example: China When a government is making a change from a planned economy to a market economy, it usually begins to adopt market mechanisms through privatization. ★ Privatization: the process of converting government enterprises into privately-owned companies. WHY? 1. When they need money, they sell industries. 2. Efficiency ★ Factors of Production: resources used in the production of goods and services, including: 1. Labor (or Human Resources or Human Capital) Definition: Physical and mental capabilities of people as they contribute to economic production Example: Starbucks baristas 2. Capital  Definition: Funds needed to create and operate a business enterprise 3. Entrepreneurs Definition: Businessperson or individual who accepts the risks and opportunities involved in creating and operating a new business venture Example: former CEO Howard Schultz 4. Physical resources Definition: tangible items that organizations use in the conduct of their businesses and include natural resources and raw materials, offices, storage and production facilities, parts and supplies, computers, and peripherals Example: coffee beans 5. Information resources Definition: data and other information used by businesses and include market forecasts, the specialized knowledge of people, and economic data Example: economic forecasts; coffee bean pricing data Surplus: a situation in which quantity supplied exceeds quantity demanded Shortage: a situation in which quantity demanded exceeds quantity supplied Economic indicators: statistics that show whether an economic system is strengthening, weakening, or remaining stable; help assess the performance of an economy Business cycle: the pattern of short-term ups and downs (or expansions and contractions) in an economy ★ Aggregate output: the total quantity of goods and services produced by an economic system during a given period; primary measure of growth in the business cycle ○ An increase in aggregate output = economic growth ○ When output grows more quickly than the population, two things usually follow: 1. Output per capita—the quantity of goods and services per person—goes up. 2. The system provides more of the goods and services that people want. → With these two, it results in a higher standard of living. Standard of living: the total quantity and quality of goods and services that they can purchase with the currency used in their economic system ★ Kuwaiti Dinar (KWD) is the best currency right now because of oil. ★ Which of the following is the biggest difference of prices of the Big Mac: Factors of Production Gross Domestic Product (GDP): refers to the total value of all goods and services produced within a given period by a national economy through domestic factors of production; a measure of the aggregate output. → If the GDP is going up, the aggregate output is going up meaning that the nation is experiencing economic growth. Gross National Product (GNP): the total value of all goods and services produced by a national economy within a given period regardless of where the factors of production are located (example: General Motors automobile plant in Brazil, which means that the profits earned by the factory are included in U.S. GNP and also included in Brazil’s GDP) Nominal GDP: gross domestic product (GDP) measured in current dollars or with all components valued at current prices Purchasing Power Parity: the principle that exchange rates are set so that the prices of similar products in different countries are about the same. Productivity: measure of economic growth that compares how much a system produces with the resources needed to produce it  ★ Balance of Trade = the economic value of all the products that a country exports - the economic value of its imported products ○ Positive balance of trade: when a country exports (sells to other countries) more than it imports (buys from other countries) ○ Negative balance of trade: when a country imports more than it exports National Debt: the amount of money the government owes its creditors Stability: condition in which the amount of money available in an economic system and the quantity of goods and services produced in it are growing at about the same rate ★ Inflation: occurs when widespread price increases occur throughout an economic system → People have more money to spend but the same quantity of products available to buy means people are competing with one another to buy available products resulting in prices going up. ★ When does inflation happen? When the government injects money with no production (e.g. COVID-19); inflation in the U.S. is 2.5% Consumer Price Index (CPI): a measure of the prices of typical products purchased by consumers living in urban areas ★ CPI ↓ = inflation ↓ & CPI ↑ = inflation ↑ ★ Unemployment: the level of joblessness among people actively seeking work in an economic system ○ At least two problems are related to unemployment: 1. If wage rates get too high, businesses will respond by hiring fewer workers and unemployment will go up. 2. Businesses could raise prices to counter increased labor costs, but they won’t be able to sell as many of their products at higher prices. Because of reduced sales, they’ll cut back on hiring and, once again, unemployment will go up. ★ U.S. unemployment rate: 4.3% ★ highest unemployment rate: 37% in Eswatini Recession: a period during which aggregate output, as measured by GDP, declines ○ During this time, producers need fewer employees–less labor–to produce products. Depression: a prolonged and deep recession ○ The last major depression in the U.S. started in 1929 and lasted more than 10 years. ○ Venezuela is currently in a depression. ★ Fiscal policies: policies used by a government regarding how it collects and spends revenue (example: Tax rates) ★ Monetary policies: policies used by a government to control the size of its money supply; works primarily through the Federal Reserve System/the Fed (the nation’s central bank), the government can influence the ability and willingness of banks throughout the country to lend money Stabilization policy: government economic policy intended to smooth out fluctuations in output and unemployment and to stabilize prices CHAPTER 2: Understanding Business Ethics and Social Responsibility Ethics: beliefs about what’s right and wrong or good and bad in actions that affect others Business ethics: refers to ethical or unethical behaviors by employees in the context of their jobs ★ the biggest difference between Law and Ethics? Laws are written/codified. Ethical behavior: behavior that conforms to individuals beliefs and social norms about what’s right and good Unethical behavior: behavior that conforms to individual beliefs and social norms about what is defined as wrong and bad Managerial behavior: standards of behavior that guide individual managers in their wok ○ Behavior toward Employees ○ Behavior toward the Organization ○ Behavior toward Other Economic Agents Assessing Ethical Behavior, including: 1. Gather the relevant factual information 2. Analyze the facts to determine the most appropriate moral values 3. Make an ethical judgment based on how right or wrong the proposed activity or policy is ★ (IMPORTANT) Ethical norms, including: 1. Utility: Does a particular act optimize the benefits to those who are affected by it? (That is, do all relevant parties receive “fair” benefits?) 2. Rights: Does it respect the rights of all individuals involved? 3. Justice: Is it consistent with what’s fair? 4. Caring: Is it consistent with people’s responsibilities to each other? Two of the most common approaches to formalizing top management commitment to ethical business practices, including: 1. Adopting written codes 2. Instituting ethics programs Social responsibility: the overall way in which a business attempts to balance its commitments to relevant groups and individuals in its social environment ★ (IMPORTANT) Organizational stakeholders: those groups, individuals, and organizations that are directly affected by the practices of an organization and who therefore have a stake in its performance ○ ★ (IMPORTANT) Major corporate stakeholders in the business organizations are: 1. Employees  a. Treat employees fairly and respect their dignity and basic human needs and make them a part of the team b. Responsibility toward employees: 1. Provide opportunities to balance work and life pressures and preferences 2. Help employees maintain job skills 3. Treat terminated or laid-off employees with respect and compassion 4. A company that provides its employees with equal opportunities without regard to race, sex, or other irrelevant factors is meeting both its legal and social responsibilities 2. Investors a. Follow proper accounting procedures; provide information to shareholders about financial performance; manage the organization to protect shareholder rights and investments b. Responsibility toward investors: ★ 1. Insider trading: using confidential information to gain from the purchase or sale of stocks 2. Misrepresentation of finances: in 2002, the U.S. Congress passed the Sarbanes-Oxley Act, which requires an organization’s chief financial offer to personally guarantee the accuracy of all financial reporting 3. Suppliers a. Recognize the importance of mutually beneficial partnership arrangements with suppliers by keeping them informed about future plans, negotiating delivery schedules and prices that are acceptable to both firms 4. Customers a. Treat customers fairly and honestly by charging fair prices, honor warranties, meet delivery commitments, and stand behind the quality of the products they sell b. Responsibility toward customers: 1. Consumer rights: - ★ (IMPORTANT CONCEPTS) Consumerism: a form of social activism dedicated to protecting the rights of consumers in their dealing with businesses 2. Unfair pricing: - ★ Collusion: two or more companies collaborate/make an illegal agreement to commit a wrongful act (e.g. price fixing) - ★ Price gouging: increasing price due to the high demand (e.g. mask prices went up due to the high demand for them during COVID-19)  - 5. Local & international communities where they do business a. To be socially responsible to their local communities; recognize that there are multiple sets of stakeholders in each country where it does business b. International businesses must also address their responsibilities in areas such as wages, working conditions, and environmental protection across different countries that have varying laws and norms regulating such responsibilities ○ ★ Obstructionist stance: involves doing as little as possible and may involve attempts to deny or cover up violations ○ ★ Defensive stance: company meets only minimum legal requirements in its commitments to groups and individuals in its social environment (e.g. they will do everything that’s legally required, including admitting to mistake and taking corrective actions, but nothing more) ○ ★ Accommodative stance: a company, if specifically asked to do so, exceeds legal minimums in its commitment to groups ○ ★ Proactive stance: a company actively seeks opportunities to contribute to the well-being of groups and individuals in its social environment (e.g. Patagonia has the most proactive stance when it comes to corporate responsibility) The government directly influences organizations through regulation. ○ Regulation: the establishment of laws and rules that dictate what organizations can and cannot do Direct Indirect  Companies themselves cannot legally make direct donations to political campaigns, so they influence the government through: - Congress creates the laws in the U.S. - Politicians want to be re-elected, in order for this they need money which comes from Political Action Committees (PACs) and lobbying. 1. Political Action Committees (PACs): special organizations created to solicit money and then distribute it to political candidates 2. Lobbying: the use of persons or groups to formally represent an organization or groups of organizations before political bodies Formal Organizational Dimensions, including: 1. Legal compliance: the extent to which the organization conforms to local, state, federal, and international laws 2. Ethical compliance: the extent to which the members of the organization follow basic ethical (and legal) standards of behavior 3. Philanthropic giving: the awarding of funds or gifts to charities or other worthy causes Evaluating social responsibility: ○ Corporate Social Audit: systematic analysis of a firm’s success in using funds earmarked for meeting its social responsibility goals A task force of high-level managers from within the firm usually conducts the audit, which requires that the organization clearly: 1. Define all of its social goals 2. Analyze the resources it devotes to each goal 3. Determine how well it’s achieving the various goals 4. Make recommendations about which areas need additional attention The Concept of Accountability: the expectation of an expanded role for business in protecting and enhancing the general welfare of society Responsibility toward the Environment: 1. Air pollution 2. Water pollution 3. Land pollution a. Toxic waste disposal b. Recycling CHAPTER 3: Entrepreneurship, New Ventures, and Business Ownership Small business: one that’s independent (not part of a larger business) and that has relatively little influence in its market ○ The U.S. Department of Commerce considers a business “small” if it has