Chapter 1
Understanding
the U.S. Business
System
PowerPoint Presentation by Charlie Cook
Copyright © 2005 Prentice Hall, Inc.
All rights reserved.
“In business you get what
you want by giving other
people what they want.”
— Alice Foote MacDougall
Copyright © 2005 Prentice Hall, Inc. All rights reserved.
1–2
LEARNING OUTCOMES
After reading this chapter, you should be able to:
1.
Define the nature of U.S. business and identify its main
goals and functions.
2.
Describe the different types of global economic systems
according to the means by which they control the factors
of production through input and output markets.
3.
Show how markets, demand, and supply affect resource
distribution in the United States.
4.
Identify the elements of private enterprise and explain
the various degrees of competition in the U.S. economic
system.
5.
Explain the importance of the economic environment to
business and identify the factors used to evaluate the
performance of an economic system.
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1–3
Key Topics
• Nature and goals of US business
• Global economic systems
• Supply and demand
• Private enterprise and competition
• Evaluating economic performance
• Status and outlook for the US economy
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1–4
What Is Business?
• An organization that
provides goods and
services to earn profits
Profits:
The positive difference
between revenues and
expenses
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1–5
Factors of Production
Labor
Capital
Information
Resources
Entrepreneurs
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Physical
Resources
1–6
How Are Factors of Production
Allocated?
• Planned Economy:
 An economic system in which the government owns
and operates all sources of production
• Market Economy:
 An economic system in which buyers and sellers
interact based on freedom of choice
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1–7
Capitalism:
A Fundamentally Market-Based Economy
Individuals Choose:
• Where to work
• What to buy
• How much to pay
Producers Choose:
• Who to hire
• What to produce
• How much to charge
Government supports private ownership
and encourages entrepreneurship
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1–8
Mixed Economies: Planned and Market
• The economies of most countries include both
planned and market elements.
• Worldwide trend is toward more market
elements.
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1–9
Socialism: Mixed Economy
• Socialism
 A planned economic system in which the government
owns and operates selected sources of production
• Privatization:
 The process of converting government enterprises
into privately owned companies
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1–10
Supply and Demand Drive the U.S.
Economic System
• Supply:
 The willingness and ability
of producers to offer a good
or service for sale
• Law of Supply:
 Producers will supply (offer)
more of a product for sale
as its price rises and less as
its price drops.
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1–11
Supply and Demand Drive the U.S.
Economic System (cont’d)
• Demand:
 The willingness and ability
of buyers to purchase a
good or service
• Law of Demand:
 Buyers will demand
(purchase) more of a
product as its price drops
and less as its price
increases.
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1–12
Demand and Supply Schedules
Price
$2
$4
$6
$8
$10
$12
$14
$16
$18
$20
Quantity of
Pizzas Demanded
2000
1900
1600
1200
1000
800
600
400
200
100
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Quantity of
Pizzas Supplied
100
400
600
800
1000
1200
1300
1600
1800
2000
1–13
$20 18 -

16 -
14 12 10 864-
1600 -
1400 -
1200 -
1000 -
800 -
600 -
400 -
200 -
2000 -

2-
1800 -
Price of Pizzas
Demand
and
Supply
Quantity of Pizzas Demanded
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1–14

$20 18 16 14 12 -
Supply Curve
10 8-
2000 -
1800 -
1600 -
1400 -
1200 -
1000 -
800 -
2-

600 -
4-
400 -
6-
200 -
Price of Pizzas
Demand
and
Supply
(cont’d)
Quantity of Pizzas Supplied
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1–15
$20 18 -
Price of Pizzas
Demand
and
Supply
16 14 12 -

10 -
Equilibrium Price
864-
2000 -
1800 -
1600 -
1400 -
1200 -
1000 -
800 -
600 -
400 -
200 -
2-
Quantity of Pizzas per Week
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1–16
The U.S. Economy is a Private
Enterprise System
Four Key Elements:
• Private Property
Rights
• Freedom of Choice
• Profits
• Competition
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• Individuals are free
to pursue their own
interests without
government
restriction.
1–17
Competition
• Competition motivates businesses to produce
their products better or cheaper
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1–18
Understanding Economic Performance
KEY CONCEPTS
• Business Cycle
• Aggregate Output
• Standard of Living
• Gross Domestic Product (GDP)
• Gross National Product (GNP)
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1–19
Understanding Economic Performance
• KEY CONCEPTS
 Productivity:
 The
amount a system produces compared to the
resources needed to produce it
Balance
of Trade
PRODUCTIVITY
is impacted by:
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National
Debt
1–20
Economic Stability:
Balanced Growth of Money and Goods
Two related factors threaten
stability:
INFLATION
UNEMPLOYMENT
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1–21
The CPI is a Tool to Measure Inflation
House
2000
1980
1930
$250,000
Car
Hamburger & Fries
$18,000
$5.00
$109,000
$7,871
$2.19
$25,696
$1,850
$.51
Source: Westegg.com/inflation/infl.cgi
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1–22
1 - 22
Recessions and Depressions
• Recession:
 Aggregate output
declines,
unemployment
increases
• Depression:
 Severe and longlasting recession
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1–23
Managing the US Economy
• Stabilization Policy:
 Government policy designed to smooth out
fluctuations in the economy
 Fiscal
Policies
 Monetary Policies
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1–24
Looking to the Future
Three Major Forces:
• The information revolution will
continue to boost productivity.
• Technological breakthroughs
will create new industries.
• Increasing globalization will
create larger markets and
tougher competition.
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1–25
Projections and Implications for
the U.S. Economy
Opportunities…
• Steady economic growth
• Fewer inflationary surges and lower budget
deficits
• Countries with free trade, innovation, and open
financial systems will thrive
• Successful businesses will be those that quickly
master new technology
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1–26
Projections and Implications for
the U.S. Economy
Challenges…
• Growing US trade deficit
• Disturbing income inequality
• Steadily increasing consumer debt
• Limited health insurance
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1–27
Chapter Review
• Describe the nature and goals of US business.
• Define the key global economic systems and
describe how they control the factors of production.
• Show how demand and supply affect the distribution
of resources in the US.
• Identify the elements of private enterprise and the
various degrees of competition.
• Explain how to evaluate an economic system.
• Describe the key projections for the US economy.
Copyright © 2005 Prentice Hall, Inc. All rights reserved.
1–28