Foundations of Business Chapter 1 PDF

Chapter 1 Exploring the World of Business and...

Chapter 1 Exploring the World of Business and Economics © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  LEARNING OBJECTIVES 1-1 Discuss what you must do to be successful in today’s business world. 1-2 Define business and identify potential risks and rewards. 1-3 Define economics and describe two types of economic systems: capitalism and command economy. 1-4 Identify the ways to measure economic performance. 1-5 Examine the different phases in the typical business cycle. 1-6 Outline the four types of competition. 1-7 Summarize the factors that affect the business environment and the challenges that American businesses will encounter in the future. © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Introduction  Free enterprise – the system of business in which individuals are free to decide what to produce, how to produce it, and at what price to sell it Example: Our free enterprise system ensures that Amazon.com can sell everything from televisions, toys, and tools to computers, cameras, and clothing. © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Why Study Business?  For help in choosing a career  To be a successful employee Cultural (or workplace) diversity – differences among people in a workforce owing to race, ethnicity, and gender  To improve your management skills  To start your own business  To become a better informed consumer and investor © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. FIGURE 1-1 Who Makes the Most Money? © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Business: A Definition  Business – the organized effort of individuals to produce and sell, for a profit, the goods and services that satisfy society’s needs © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  The Organized Effort of Individuals (slide 1 of 3)  Material resources – the raw materials used in manufacturing resources as well as buildings and machinery  Human resources – the people who furnish their labor to the business in return for wages  Financial resources – the money required to pay employees, purchase materials, and generally keep the business operating  Informational resources – information that tells the managers of the business how effectively the other three resources are being combined and used © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. FIGURE 1-2 Combining Resources © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  The Organized Effort of Individuals (slide 2 of 3)  Today, businesses are usually organized as one of three specific types. 1. Service businesses – produce services, such as haircuts, legal advice, or tax preparation  Example: H&R Block 2. Manufacturing businesses – process various materials into tangible goods  Example: Intel 3. Marketing intermediaries – buy products from manufacturers and then resell them  Example: Sony Corporation © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  The Organized Effort of Individuals (slide 3 of 3)  e-business – 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 © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Business Profit (slide 1 of 2)  Profit – 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.  Stakeholders – all the different people or groups of people who are affected by an organization’s policies, decisions, and activities © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. FIGURE 1-3 The Relationship Between Sales Revenue and Profit © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Business Profit (slide 2 of 2)  Profit is the reward business owners receive for producing goods and services that customers want.  Profit is also the payment that business owners receive for assuming the considerable risks of ownership. The risk of not being paid The risk of losing whatever they have invested into the business © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Types of Economic Systems (slide 1 of 3)  Economics – the study of how wealth is created and distributed  Today, experts often study economic problems from two different perspectives: 1. Microeconomics – the study of the decisions made by individuals and businesses 2. Macroeconomics – the study of the national economy and the global economy  Economy – the way in which people deal with creation and distribution of wealth © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Types of Economic Systems (slide 2 of 3)  Factors of production – resources used to produce goods and services Land and natural resources – elements used in the production process to make appliances, automobiles, and other products  Examples: crude oil, forest, minerals, land, and water Labor – the time and effort used to produce goods and services  Examples: managers and employees Capital – the money, facilities, equipment, and machines used in the operation of organizations  Example: manufacturing equipment at a production facility Entrepreneurship – the activity that organizes land and natural resources, labor, and capital  Entrepreneur – a person who risks time, effort, and money to start and operate a business © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Types of Economic Systems (slide 3 of 3)  Today, two different economic systems exist: capitalism and command economies. The way each system answers the following four basic economic questions determines a nation’s economy: 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? © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Capitalism (slide 1 of 2)  Capitalism – 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.  Invisible hand – a term created by Adam Smith to describe how an individual’s personal gain benefits others and a nation’s economy © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. FIGURE 1-4 Basic Assumptions of Adam Smith’s Laissez-Faire Capitalism © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Capitalism (slide 2 of 2)  The term “laissez-faire” describes Smith’s capitalistic system and implies that there should be no government interference in the economy.  Adam Smith’s laissez-faire capitalism is also based on the concept of a market economy. Market economy – an economic system in which businesses and individuals decide what to produce and buy, and the market determines quantities sold and prices  Example: 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, as the consumer, must decide if you will buy a Ford product or an automobile manufactured by another company. © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Capitalism in the United States  Mixed economy – an economy that exhibits elements of both capitalism and socialism The U.S. economy is a mixed economy. In a mixed economy, the four basic economic questions (what, how, for whom, and who) are answered through the interaction of:  Households - Consumer products – goods and services purchased by individuals for personal consumption  Businesses  Governments © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. FIGURE 1-5 The Circular Flow in Our Mixed Economy © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Command Economies  Command economy – 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  Examples of command economies: Socialism Communism © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Measuring Economic Performance The Importance of Productivity in the Global Marketplace  Productivity – the average level of output per worker per hour The Nation’s Gross Domestic Product  Gross domestic product (GDP) – the total dollar value of all goods and services produced by all people within the boundaries of a country during a specified time period—usually a one-year period  To make accurate comparisons of the GDP for different years, dollar amounts must be adjusted for inflation and deflation. Inflation – a general rise in the level of prices Deflation – a general decrease in the level of prices © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. FIGURE 1-6 GDP in Current Dollars and in Inflation-Adjusted Dollars © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Other Important Economic Indicators That Measure a Nation’s Economy  Unemployment rate – the percentage of a nation’s labor force unemployed at any time  Consumer price index (CPI) – a monthly index that measures the changes in prices of a fixed basket of goods purchased by a typical consumer in an urban area  Producer price index (PPI) – an index that measures prices that producers receive for their finished goods © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  TABLE 1-1 Common Measures Used to Evaluate a Nation’s Economic Health (slide 1 of 2) Economic Measure Description The total value of a nation’s exports minus the total 1. Balance of trade value of its imports over a specific period of time. A measure of how optimistic or pessimistic 2. Consumer consumers are about the nation’s economy. This confidence index measure is usually reported on a monthly basis. The total amount of profits made by corporations 3. Corporate profits over selected time periods. An economic statistic that tracks the increase in prices of goods and services over a period of time. 4. Inflation rate This measure is usually reported monthly and calculated on an annual basis. © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  TABLE 1-1 Common Measures Used to Evaluate a Nation’s Economic Health (slide 2 of 2) Economic Measure Description The total income earned by various segments of the 5. National income population, including employees, self-employed individuals, corporations, and other types of income. The total number of new homes started during a 6. New housing starts specific time period. The lowest interest rate that banks charge their most 7. Prime interest rate credit-worthy customers. © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  The Business Cycle (slide 1 of 2)  Business cycle – the recurrence of periods of growth and recession in a nation’s economic activity  Generally, the business cycle consists of four phases: 1. The peak (prosperity) 2. Recession – two or more consecutive three-month periods of decline in a country’s GDP  Depression – a severe recession that lasts longer than a typical recession and has a larger decline in business activity when compared to a recession © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  The Business Cycle (slide 2 of 2)  Generally, the business cycle consists of four phases (continued): 3. The trough  To offset the effects of recession and depression, the federal government uses both monetary and fiscal policies. - Monetary policies – Federal Reserve’s decisions that determine the size of the supply of money in the nation and the level of interest rates - Fiscal policy – government influence on the amount of savings and expenditures; accomplished by altering the tax structure and by changing the levels of government spending  Federal deficit – a shortfall created when the federal government spends more in a fiscal year than it receives  National debt – the total of all federal deficits 4. Recovery (expansion) © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Types of Competition  Competition – rivalry among businesses for sales to potential customers  Economists recognize four different degrees of competition: 1. Perfect 2. Monopolistic 3. Oligopoly 4. Monopoly © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. TABLE 1-2 Four Different Types of Competition Number of Type of Business Firms Competition or Suppliers Real-World Examples 1. Perfect Many Corn, wheat, peanuts, many agricultural products 2. Monopolistic Many Clothing, shoes 3. Oligopoly Few Automobiles, cereals 4. Monopoly One Software protected by copyright, many local public utilities © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Perfect Competition (slide 1 of 2)  Perfect (or pure) competition – the market situation in which there are many buyers and sellers of a product, and no single buyer or seller is powerful enough to affect the price of that product  Conditions for a perfect competition: The market is for a single product. There are no restrictions on firms entering the industry. All sellers offer essentially the same product for sale. All buyers and sellers know everything there is to know about the market. The overall market is not affected by the actions of any one buyer or seller.  Perfect competition is quite rare in today’s world. © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Perfect Competition (slide 2 of 2) The Basics of Supply and Demand  Supply – the quantity of a product that producers are willing to sell at each of various prices  Demand – the quantity of a product that buyers are willing to purchase at each of various prices The Equilibrium, or Market, Price  Market price – the price at which the quantity demanded is exactly equal to the quantity supplied © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. FIGURE 1-7 Supply Curve and Demand Curve © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Monopolistic Competition  Monopolistic competition – a market situation in which there are many buyers along with a relatively large number of sellers who differentiate their products from the products of competitors Product differentiation – the process of developing and promoting differences between one’s products and all competitive products  Examples: clothing, shoes, soaps, furniture © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Oligopoly  Oligopoly – a market (or industry) in which there are few sellers  Examples: the automobile, airline, and car rental industries © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Monopoly  Monopoly – a market (or industry) with only one seller, and there are barriers to keep other firms from entering the industry  Example: public utilities Each utility firm operates in a natural monopoly, an industry that requires a huge investment in capital and within which any duplication of facilities would be wasteful. A limited (or legal) monopoly is created when a government entity issues a franchise, license, copyright, patent, or trademark.  Except for natural monopolies and legal monopolies, federal antitrust laws discourage or prohibit both monopolies and attempts to form monopolies in order to ensure that competitive markets exist and customers have a choice for products they need or want to purchase. © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  American Business Today  Our economic system provides Americans with a high standard of living compared with people in other countries throughout the world. Standard of living – a loose, subjective measure of how well off an individual or a society is, mainly in terms of want satisfaction through goods and services  Our economic system offers solutions to many of the problems that plague society and provides opportunities for people who are willing to work and to continue learning.  To understand the current business environment and the challenges ahead, it helps to understand how business developed. © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Early Business Development  Domestic system – a method of manufacturing in which an entrepreneur distributes raw materials to various homes, where families process them into finished goods to be offered for sale by the entrepreneur  Factory system – a system of manufacturing in which all the materials, machinery, and workers required to manufacture a product are assembled in one place  Specialization – the separation of a manufacturing process into distinct tasks and the assignment of different tasks to different individuals © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Business Development in the 1900s  Major events that shaped the nation’s economy during the 20th century: The stock market crash and the Great Depression Federal government involvement in business in order to stimulate the economy, reduce unemployment, and ease the problems during the Great Depression World War II, the Korean War, and the Vietnam War Rapid economic growth and higher standard of living during the 1950s and 1960s The social responsibility movement during the 1960s A shortage of crude oil and higher prices for most goods in the mid- 1970s High inflation, high interest rates, and reduced business profits during the last part of the 1970s and early 1980s Sustained economic growth in the 1990s © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  A New Century: 2000 and Beyond  Positives: Technology became available at an affordable price. The growth of the service economy—an economy in which more effort is devoted to the production of services than to the production of goods—changed the way American firms do business.  Negatives: Many economic indicators still indicate troubling economic problems and pessimism. Social unrest Political uncertainty on the national, state, and local levels © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  The Current Business Environment  In today’s competitive business world, all of the following environments affect business: The competitive environment The global environment The technological environment  Social media – the online interaction that allows people and businesses to communicate and share ideas, personal information, and information about products or services The economic environment  Sustainability – the ability to maintain or improve standards of living without damaging or depleting natural resources for present and future generations © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  The Challenges Ahead (slide 1 of 2)  Several key issues will challenge our economic system (and our nation) over the next decade.  Questions to be resolved: How can we create a more stable economy and create new, quality jobs for the unemployed? How can we reduce the number of low-income workers and increase the number of middle- and higher-income workers? How do we reduce the national debt and still stimulate business growth? How do we restore confidence in the financial and banking industries and our political systems? How can we use research and technology to make American workers more productive and American firms more competitive in the global marketplace? © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  The Challenges Ahead (slide 2 of 2)  Questions to be resolved (continued): How can we preserve the benefits of competition and small business in our American economic system? How can we conserve natural resources and sustain our environment? How can we resolve social unrest, discrimination, and inequality in society? How can we meet the needs of low-income families, single parents, older Americans, and the less fortunate who need health care and social programs to exist? How can we combat terrorism and restore peace throughout the world? © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.