Foundation of Business & Economics From Skinner & James What Is Business From Skinner Brown & James What Is Business Business is any activity that seeks profit by providing goods or services to others. _________ Brown Clow Business means the exchange of goods & services or money for mutual benefit. _______ Skinner A business is an organized effort of individuals to produce & sell goods & services for a profit. _______ H James William What does Business do? From Brown What does Business do Business provides necessitates such as food, cloths, housing, medical care, transportation as well as things that makes life easier. It also provides people with the opportunity to become wealthy. What to Study Business? From Brown & James What to Study Business? Increasing dependence on others: International Opportunities: Standard of living increases as business helps to take great pride & independence. Coping with Change: Exciting Opportunities exist around the world. The new era of business requires business leaders who know how to utilize those opportunities. Standard of Living: Barter System Coping with both predictable & unpredictable events can be easier, more efficient & less traumatic. Can take accurate strategies according to the changing demand. Preventing Misconceptions. Understanding business prevents accepting misconceptions, misinformation & inaccurate data as truth. What to Study Business? From Skinner Business Objectives Survival & Growth & Social Responsibility Survival is an obvious objective because other objectives can be pursued if survival is ensured. Growth Business can not run if it stands still & no growth. Market share increase, personal & individual development and increased productivity are important growth objectives. Social Responsibility In recent years it has been an important objective. Because business is considered as an important citizen in the societu like other people. So they must accept some responsibility for the society in areas like pollution, eliminating discriminatory practices and energy conservation. Business Objectives cont….. Profit It is the most important objective & plays an important role in business. Profit means different things to different people. Because of their values, attitudes & perceptions. There are perceptions regarding profit: Business Profit – the difference between business income (revenue) & business expense (cost.) Risk Taking – Business needs to take risk to earn profit. Evaluation of Demand – Org that evaluate consumer needs and demands and then move efficiently into a market can earn substantial profit. Efficient Management – a major cause of business failure is inadequate mgt of people, technology materials, & capital. Economic Profit – Economist’s along with expenses also considers the opportunity cost to get profit. - Opportunity costs is the costs of choosing to use resources for a purpose which results in sacrificing the next best alternatives for the use of those resources. Economic profit means what remains after both actual expense and opportunity costs are subtracted from revenue earned. Economics: The Foundation of Business From Skinner What is Economics Economics is the study of rationale human behavior in trying to meet basic wants & needs. ------------James Economics is the study of how a society (people) chooses to use scarce resources to produce goods & services and to distribute them to people for consumption. ----------Skinner This definition requires 3 concepts to understand clearly: Resources – A nation’s resources consist of 3 broad areas: natural, capital & labor Goods & Services – A nation’s resources are used to produce goods & services that will meet people needs & wants. Allocation of both resources & Products – allocation is the process of choosing how resources will be used to meet a society’s needs & wants; includes the distribution of products to consumers. What is Economics cont… Economics is the study of rationale human behavior in trying to meet basic wants & needs. ------------James Economics is the study of how a society (people) chooses to use scarce resources toNeeds: produce goods & services and to distribute are goods & services them to people forthat consumption. people must have simply to exist. ----------Skinner This definition requires 3 concepts to understand clearly: Wants: are things they would Resources – A nation’s resources consist of 3 broad areas: like to have but do not natural, capital &absolutely labor need for survival Goods & Services – A nation’s resources are used to produce goods & services that will meet people needs & wants. Allocation of both resources & Products – allocation is the process of choosing how resources will be used to meet a society’s needs & wants; includes the distribution of products to consumers. Economic System From Skinner, James & Brown What is Economic System? Economic System An economic System is the accepted process by which labor, capital & natural resources are organized to produce & distribute goods & services in a society _______ Skinner Every society must answer three questions: What will be produced; How will be produced; for whom will be produced. How a society answers these economic questions determines its economic system. _______ H James William Types of Economic System? Types of Economic System There are 3 basic types of economic systems. These are: The government can produce almost all the goods & services (A Planned Economy) Private enterprise can produce almost everything (Pure Capitalism; found only in text) There can be some government production & some private production (A Mixed Economy) Types of Economic System contd… Planned Economy: It means an economy in which the govt. owns the productive resources, financial enterprises, retail stores & banks. Here the govt. controls all or most of the factors of production & makes all or most production decisions. E.g. a communist system Consumers doesn’t have the freedom of choice. Market Economy (Pure Capitalism): Here individuals control al or most of the factors of production and make all or most of the production decisions. The market economy (capitalism) is also called the free-market or free enterprise system. Consumers have the freedom of choice. Types of Economic System contd… Mixed Economy: As its mane suggests the system shares some of the features of both the market & planned economics. That means in mixed economy both private & govt. production of good & services occurs. It also allows the freedom to start a new business (Freedom of Enterprise). Freedom of Enterprise means that business and individuals with the capital may enter in any legal business venture they wish. Profit is a reward to a business for using scarce resources efficiently. Competition is another important feature. Which Economic System is Best? Best Economic System ‘Best’ depends on several factors. Major factors are: Culture availability of resources educational level of people. For Example: Capitalism is not appropriate for a nation that does not encourage entrepreneurship. Capitalism encourages people to be better educated & to make their own business. Economic Goals & Performance From James Economic Goals & Performance Several performance indicators provide key methods of measuring how well an economy has achieved its goals & how much it has grown. Economic Growth – Nearly all economic system share the same goals: Stability, full employment & growth. Stability: Stability is a condition in which the relationship among money, goods & services, and labor remains relatively constant. A major threat to stability is inflation. Other threats are recession which decreases employment, income & production & depression. Economic Goals & Performance Full Employment: F/E means that everyone who wishes to work has a job. It is near to impossible in reality; even in the best time. Some worker will be unemployed for variety of reasons: Frictional Unemployment – y who have left job but have not found another one Seasonal unemployment – y who are unemployed due to seasonality of their work Structural Unemployment – unemployment predicted by the very makeup of the economy. Demand may be down across economy. Cyclical Unemployment – includes Y are temporarily unemployed due to downturn of business activity. Thus realistic goal is not full employment but minimal unemployment. So ‘full employment’ has been rephrased as ‘5% unemployment’ Economic Goals & Performance Measuring Growth: Growth is an increase in the amount of goods & services produces by the total economy in a given period in comparison with another period. Economic performance can be measured with specific measurement tool. But most useful tools are: GDP, Productivity rate, the balance of trade, economic growth, inflation & deflation & federal deficit. Gross Domestic Product (GDP): For more than 50 years GNP had been used as a measuring tool. But due to globalization GDP has now supplanted GNP as a measure of choice. The difference between these two is significant: GNP measures the total mkt value of all goods produces by US companies whether inside or outside the country but GDP measures the total mkt value of all goods produces in US. GDP includes profits earned by foreign co’s inside US. but exclude profits earned by US companied abroad. Economic Goals & Performance Productivity Rate P/r measures efficiency by comparing how much is produced with the resources consumed in the process Total Productivity = Specified Output/ Total Inputs Balance of Trade Each country exports goods for which it receives money & imports goods for which it pays money. Balance of trade refers to a country's total exports minus total imports. A positive BOT or trade surplus is favorable’ it indicates net inflow of money. Negative BOT or trade deficit is not favorable; it indicates a net outflow of money. Economic Goals & Performance Inflation Inflation is a rise in the general prices of goods 7 services. One cause of inflation is the relationship between productivity & wages. Productivity is the output per worker. When worker’s wage increases faster than productivity, consumers have more money on hand so the prices of goods inches up. The most commonly cited measurement of inflation is consumer price Index (CPI) Deflation It is general decline in the prices of goods & services. Economic Goals & Performance Federal Deficit It is the measure of the excess of money spent over money reiced by the federal govt. It affects interest rates The govt. finance is deficit by borrowing money. The more money the govt. borrows , the less money is available for business. To compete for these reduced funds, business must bid higher, raising the cost of credit & compounding effects of interest rates. Higher rates in turn make it more difficult & more expensive for business to borrow money for new factories. Thus federal deficits provide an important means of measuring the economy & can affect business activity & productivity.