Chapter 1
The U.S. Business Environment
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LEARNING OUTCOMES
After reading this chapter, you should be able to:
Define the nature of U.S. business and identify its main goals &
functions.
Describe the external environments of business and discuss how
these environments affect the success or failure of any
organization.
Describe the different types of global economic systems
according to the means by which they control the factors of
production.
Show how markets, demand, and supply affect resource
distribution in the United States.
Identify the elements of private enterprise and explain the various
degrees of competition in the U.S. economic system.
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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What in It for Me?
By understanding these economic forces and
how they interact, you’ll be better able to:
1. Appreciate how managers must contend with the
challenges and opportunities resulting from
economic forces from the standpoint of an employee
and a manager or business owner
2. Understand why prices fluctuate from the
perspective of a consumer
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Basic Business Concepts
Business
 An organization that provides goods or services that are then sold to
earn profits.
Profits
 The difference between a business’s revenues and its expenses. The
rewards owners get for risking their money and time.
Consumer Choice and Demand
 The freedom of consumers to choose how to satisfy their wants and
needs.
 The freedom of business owners to decide how to meet those wants
and needs.
Opportunity and Enterprise
 Success in business requires spotting a promising opportunity and
then developing a good plan for capitalizing on it.
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Basic Business Concepts (cont’d)
The Benefits of Business
 Provision of goods and services
 Employment of workers
 Innovation and opportunities
 Increased quality of life and standard of living
 Enhance personal incomes of owners and
stockholders
 Tax payments support government
 Support for charities and community leadership
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The External Environments of Business
External Environment
 Everything outside an organization’s boundaries that
might affect it

the domestic business environment

the global business environment

the technological environment

the political-legal environment

the sociocultural environment

the economic environment
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The External Environment (cont’d)
Domestic Business Environment
 The environment in which a firm conducts its
operations and derives its revenues by:

Seeking to be close to its customers

Establishing strong relationships with its suppliers

Distinguishing itself from its competitors
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The External Environment (cont’d)
Global Business Environment
 The international forces that affect a business:

International trade agreements

International economic conditions

Political unrest

International market opportunities

Suppliers

Cultures

Competitors

Currency values
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The External Environment (cont’d)
Technological Environment
 All the ways by which firms create
value for their constituents:

Human knowledge

Work methods

Physical equipment

Electronics and telecommunications

Various business activity processing
systems
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The External Environment (cont’d)
Political-Legal Environment
 The regulatory relationship between business and
the government (legal system) and its agencies that
define what organizations can and can’t do:

Product identification laws

Local zoning requirements

Advertising practices

Safety and health considerations

Acceptable standards of business conduct
 Pro- or anti-business sentiment in government and
political stability are also important considerations,
especially for international firms.
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The External Environment (cont’d)
Sociocultural Environment
 The customs, mores, values, and demographic
characteristics of the society in which an
organization functions
 Sociocultural processes determine the goods and
services and standards of business conduct a
society is likely to accept
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The External Environment (cont’d)
Economic Environment
 The relevant conditions that exist in the economic
system in which a company operates
 Example:

If an economy is doing well enough that most people have
jobs, a growing company may find it necessary to pay higher
wages and offer more benefits in order to attract workers
from other companies.
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Economic Systems
Economic System
 A nation’s system for allocating its resources among
its citizens, both individuals and organizations
Factors of Production
 Labor
 Capital
 Entrepreneurs
 Physical resources
 Information resources
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Planned Economies
Communism
 A system Karl Marx envisioned in which individuals
would contribute according to their abilities and
receive benefits according to their needs.

The government owns and operates all factors of
production.

The government assigns people to jobs and owns all
businesses and controls business decisions.
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Market Economies
Capitalism
 The government supports private ownership and
encourages entrepreneurship.
 Individuals choose where to work, what to buy, and
how much to pay.
 Producers choose who to hire, what to produce, and
how much to charge.
Mixed Market Economy
 Features characteristics of both planned and market
economies
 Privatization
 Socialism
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The Economics of Market Systems
Demand
 The willingness and ability of buyers to purchase a product (a
good or a service).
Supply
 The willingness and ability of producers to offer a good or
service for sale.
The Laws of Demand and Supply
 Demand: Buyers will purchase (demand) more of a product as
its price drops and less of a product as its price increases.
 Supply: Producers will offer (supply) more of a product for sale
as its price rises and less of a product as its price drops.
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Demand and Supply
Demand and Supply Schedule
 The relationships among different levels of demand
and supply at different price levels as obtained from
marketing research, historical data, and other
studies of the market.

Demand curve: How much product will be demanded
(bought) at different prices.

Supply curve: How much product will be supplied (offered
for sale) at different prices.

Market price (equilibrium price): The price at which the
quantity of goods demanded and the quantity of goods
supplied are equal.
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Surpluses and Shortages
Surplus
 A situation in which the quantity supplied exceeds
the quantity demanded

Causes losses
Shortage
 A situation in which the quantity demanded will be
greater than the quantity supplied

Causes lost profits

Invites increased competition
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Private Enterprise in a Market Economy
Private Enterprise System
 Allows individuals to pursue their own interests with
minimal government restriction.
Elements of a Private Enterprise System
 Private property rights
 Freedom of choice
 Profits
 Competition
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Degrees of Competition
Perfect Competition
 Prices are determined by supply and demand
because no single firm is powerful enough to
influence the price of its product.
All firms in an industry are small.
 The number of firms in the industry is large.

 Principles of perfect competition:
Buyers view all products as identical.
 Buyers and sellers know the prices that others are paying
and receiving in the marketplace.
 It is easy for firms to enter or leave the market.
 Prices are set exclusively by supply and demand and
accepted by both sellers and buyers.

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Degrees of Competition (cont’d)
Monopolistic Competition
 There are numerous sellers trying to differentiate
their products from those of competitors so as to
have some control over price.
 There are many sellers though fewer than in pure
competition.
 Sellers can enter or leave the market easily.
 The large number of buyers relative to sellers applies
potential limits to prices.
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Degrees of Competition (cont’d)
Oligopoly
 An industry with only a few large sellers
 Entry by new competitors is hard because large
capital investment is needed.
 The actions of one firm can significantly affect the
sales of every other firm in the industry.
 The prices of comparable products are usually
similar.
 As the trend toward globalization continues, most
experts believe that oligopolies will become
increasingly prevalent.
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Degrees of Competition (cont’d)
Monopoly
 An industry or market that has only one producer (or
else is so dominated by one producer that other
firms cannot compete with it).

The sole supplier enjoys complete control over the prices of
its products; its only constraint is a decrease in consumer
demand due to increased prices.
 Natural monopolies: Industries in which one firm
can most efficiently supply all needed goods or
services; typically allowed and regulated by
legislated acts and governmental agencies.

Example: Electric company
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Economic Indicators
Economic Indicators
 Statistics that show whether an economic system is
strengthening, weakening, or remaining stable
 Measure key goals of the U.S. economic system:
economic growth and economic stability
 Economic growth indicators

Aggregate output, standard of living, gross domestic
product, and productivity
 Economic stability indicators

Inflation and unemployment
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Economic Growth, Aggregate Output,
and Standard of Living
Business Cycle
 The pattern of short-term ups and downs (or, better,
expansions and contractions) in an economy.
Aggregate Output
 Growth during the business cycle is measured by the
total quantity of goods and services produced by an
economic system during a given period.
Standard of Living
 The total quantity and quality of goods and services
that consumers can purchase with the currency used
in their economic system.
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Economic Indicators
Gross Domestic Product (GDP)
 An aggregate output measure of the total value of all
goods and services produced within a given period
by a national economy through domestic factors of
production.
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.
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Economic Indicators (cont’d)
Real Growth Rate
 The growth rate of GDP adjusted for inflation and
changes in the value of the country’s currency
Real GDP
 GDP that has been adjusted to account for changes
in currency values and price changes.
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Economic Indicators (cont’d)
Nominal GDP
 GDP measured in current dollars or with all
components valued at current prices.
GDP per Capita
 A reflection of the standard of living: GDP per capita
means GDP per person.
 It is a better measure than GDP itself of the
economic well-being of the average person.
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Growth in the Economic System (cont’d)
Purchasing Power Parity
 The principle that exchange rates are set so that the
prices of similar products in different countries are
about the same.
 Indicates what people can buy with the financial
resources allocated to them by their respective
economic systems.
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Growth in the Economic System (cont’d)
Productivity
 A measure of economic growth that compares how
much a system produces with the resources needed
to produce it.

If more product is produced with fewer factors of production,
the price of the product decreases.

Standard of living improves through increases in productivity.
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Growth in the Economic System (cont’d)
Balance of Trade
 The economic value of all the products a country
exports minus the economic value of its imported
products.
 Positive
balance of trade: When a country
exports more than it imports.
 Negative
balance of trade: When a country
imports more than it exports.
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Growth in the Economic System (cont’d)
National Debt
 The amount of money that the government owes its
creditors.

Financed by borrowing in the form of bonds.

Government competition with potential borrowers for
available loan money reduces private borrowing for
investment that would increase productivity.
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Growth in the Economic System (cont’d)
Stability
 A 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
 Inflation occurs when the amount of money injected
into an economy exceeds the increase in actual
output, resulting in price increases exceeding
purchasing power increases.
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Growth in the Economic System (cont’d)
Consumer Price Index (CPI)
 A measure of the prices of typical products
purchased by consumers living in urban areas

Compared against base period—an arbitrarily selected time
period against which other time periods are compared.
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Growth in the Economic System (cont’d)
Unemployment
 The level of joblessness among people actively
seeking work in an economic system
Cyclical Unemployment
 Businesses continuing to eliminate jobs during a
business cycle downturn cause more reduced
revenues and further job losses.
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Growth in the Economic System (cont’d)
Recession
 A period during which aggregate output, as
measured by real GDP, declines
Depression
 A prolonged and deep recession
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Managing the U.S. Economy
Fiscal Policy
 The ways in which a government collects and
spends revenues
Monetary Policy
 The manner in which a government controls its
money supply
 Working mainly through the Fed, the government
can influence banks’ willingness to lend money and
prompt interest rates to go up or down.
Stabilization Policy
 Coordinating fiscal and monetary policies to smooth
fluctuations in output and unemployment and to
stabilize prices.
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