The Dynamics of
Business and
Economics
Chapter 1
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Learning Objectives
1-1 Define basic concepts such as business, product, profit, and
economics.
1-2 Identify the main participants and activities of business.
1-3 Explain why studying business is important.
1-4 Compare the four types of economic systems.
1-5 Describe the role of supply, demand, and competition in a freeenterprise system.
1-6 Specify why and how the health of the economy is measured.
1-7 Outline the evolution of the American economy.
1-8 Explain the role of the entrepreneur in the economy.
1-9 Evaluate a small-business owner’s situation and propose a course
of action.
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The Nature of Business 1
Businesses try to earn profits by providing
products that satisfy people’s needs
Products include:
• Tangible goods
• Automobile, smartphone, pair of jeans
• Service
• Dry cleaning, doctor’s visit, movie
• Idea
• Accountants and attorneys provide ideas for solving problems
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The Nature of Business 2
The Goal of a Business: to earn a profit
Nonprofit organizations
• Do not share the purpose of earning profits
• May provide goods or services
• Engage in fund-raising
• Engage in management, marketing, and finance to
reach goals
Stakeholders
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The Nature of Business 3
The People and Activities of Business
• Management
• Involves the functions of planning, organizing, leading, and
controlling
• Marketing
• Focus of all marketing activities is satisfying customers
• Finance
• Refers to all activities concerned with obtaining money and
using it effectively
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Figure 1.1 Overview of the Business World
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The Nature of Business 4
Why Study Business?
• Help you develop skills and acquire knowledge to
prepare for your future career
• Help you understand activities needed to provide
goods and services
• Help you become a well-informed consumer and
member of society
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POLLING QUESTION
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What do you feel is the most significant macroenvironmental factor that impacts businesses?
A. Technology
B. Politics/Legal Issues
C. Sociocultural
D. Economic
The Economic Foundations of Business 1
What is economics?
Resources
• Natural resources
• Human resources (also called labor)
• Financial resources (also called capital)
• Intangible resources
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The Economic Foundations of Business 2
Economic Systems
• Communism
• Socialism
• Capitalism (or free enterprise)
• Pure capitalism
• Modified capitalism
• Mixed economies
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Table 1.1a Comparison of Communism,
Socialism, and Capitalism
Topic
Business
ownership
Communism
Most businesses
are owned and
operated by the
government.
Socialism
The government owns
and operates some
basic industries;
individuals own small
businesses.
Capitalism
Individuals own
and operate all
businesses.
Competition Government
Restricted in basic
controls competition industries; encouraged
and the economy.
in small business.
Encouraged by
market forces and
government
regulations.
Profits
Individuals and
businesses are
free to keep
profits after
paying taxes.
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Excess income
goes to the
government. The
government
supports social and
economic
institutions.
Profits earned by
small businesses may
be reinvested in the
business; profits from
government-owned
industries go to the
government.
Table 1.1b Comparison of Communism,
Socialism, and Capitalism
Topic
Product
availability
and price
Communism
Consumers have a
limited choice of
goods and services;
prices are usually
high.
Employment Little choice in
options
choosing a career;
most people work for
government-owned
industries or farms.
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Socialism
Capitalism
Consumers have
some choice of
goods and services;
prices are
determined by
supply and demand.
Consumers have a
wide choice of goods
and services; prices
are determined by
supply and demand.
More choice of
careers; many
people work in
government jobs.
Unlimited choice of
careers.
POLLING QUESTION
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Inman, the Prime Minister of Bowen, recognizes
the need for health care reform and sets about
passing regulations to see his goals achieved.
Which form of government does he represent?
A. Socialist
B. Capitalist
C. A hybrid
D. Communist
E. Mercantile
The Economic Foundations of Business 3
The Free-Enterprise System
• Many large economies are free-enterprise, such as
U.S., Canada, and Japan
• Many communist and socialist countries apply freeenterprise principles, such as China and Russia
• Allows a company to succeed or fail on the basis of
market demand
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The Economic Foundations of Business 4
The Free-Enterprise System continued
• Basic individual and business rights must exist in
order for free enterprise to work
• Right to own property
• Right to earn profits and use them as one wishes
• Right to determine business operations
• Right to choose a career, where to live or locate a business,
what goods/services to purchase, and more
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The Economic Foundations of Business 5
The Forces of Supply and Demand
• Demand
• Supply
• Equilibrium price
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Figure 1.2 Equilibrium Price of Handmade Rugs
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The Economic Foundations of Business 6
The Nature of Competition
• Competition
Four types of competitive environments:
• Pure competition
• Monopolistic competition
• Oligopoly
• Monopoly
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POLLING QUESTION
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The airline industry is part of what type of
competitive environment?
A. Pure competition
B. Monopolistic competition
C. Oligopoly
D. Monopoly
The Economic Foundations of Business 7
Economic Cycles and Productivity
• Economic expansion
• Inflation
• Economic contraction
• Recession
• Unemployment
• Depression
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Figure 1.3 Annual Average Unemployment
Rate, Civilian Labor Force, 16 Years and Over
Sources: Bureau of Labor Statistics, “Labor Force Statistics from the Current Population Survey,”
http://data.bls.gov/timeseries/LNS14000000 (accessed March 25, 2018).
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The Economic Foundations of Business 8
Economic Cycles and Productivity continued
• Measuring the economy
• Gross domestic product (GDP)
• Budget deficit
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Figure 1.4 Growth in U.S. Gross Domestic Product
Source: U.S. Department of Commerce Bureau of Economic Analysis, “National Economic Accounts,”
www.bea.gov/national/index.htm#gdp (accessed March 25, 2018).
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Table 1.3 How Do We Evaluate Our Nation’s
Economy?
Unit of Measure Description
Trade balance
The difference between our exports and our imports. If the balance is
negative, as it has been since the mid-1980s, it is called a trade
deficit and is generally viewed as unhealthy for our economy.
Consumer
Price Index
Measures changes in prices of goods and services purchased for
consumption by typical urban households.
Per capita
income
Indicates the income level of “average” Americans. Useful in
determining how much “average” consumers spend and how much
money Americans are earning.
Unemployment
rate
Indicates how many working-age Americans are not working who
otherwise want to work.
Inflation
Monitors price increases in consumer goods and services over
specified periods of time. Used to determine if costs of goods and
services are exceeding worker compensation over time.
Worker
productivity
The amount of goods and services produced for each hour worked.
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The American Economy 1
United States economy
• Mixed economy
• Foundation based on capitalism
• Standard of living is high
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The American Economy 2
The Importance of the American Economy
• Open economy
• Economy assessed on several factors
• Growth in GDP and jobs
• Government public policy
• Tax revenue from individuals and businesses
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Figure 1.5 Individual Income Tax Statistics
by Income Group
Source: Internal Revenue Service, Individual Income Tax Rates and Tax Shares, (accessed March 25, 2018).
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The American Economy 3
A Brief History of the American Economy
• The early economy
• The Industrial Revolution
• The manufacturing and marketing economies
• The service and new digital economy
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Figure 1.6 Online Retailing and E-Commerce
Source: Aaron Smith and Monica Anderson, “Online Shopping and E-Commerce,” Pew Research Center, December
19, 2016, http://www .pewinternet.org/2016/12/19/online-shopping-and-e-commerce/ (accessed March 25, 2018).
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The American Economy 4
The Role of the Entrepreneur
• Risk their wealth, time, and effort to develop for profit
an innovative product or way of doing something
• Let the free-enterprise system help them to succeed
• Change business practices through new technology
and innovative management techniques
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POLLING QUESTION
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Agree or Disagree: It’s important for the United
States to empower its entrepreneurs to be
successful through funding and tax credits.
A. I agree. Entrepreneurs bring new vision and
products to the U.S. market.
B. I disagree. This funding should be used to foster
growth in other countries.
C. I agree. Entrepreneurs encourage research and
development.
D. I disagree. Entrepreneurs take away from the
research and development conducted at large
businesses.
Mobile Payment Systems
Apple Pay is a mobile payment system that allows users to store their
credit card or debit card information. When checking out at stores,
users can bring up their credit card with two taps and use the
information to pay for their purchases.
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©How Hwee Young/Epa/REX/Shutterstock
The American Economy 5
The Role of Government in the American Economy
• Best described as modified capitalism
• Regulate business to preserve competition and
protect consumers through laws and regulations
• Intervene occasionally to regulate economy and spur
growth
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The American Economy 6
The Role of Ethics and Social Responsibility in
Business
• Promote public confidence in corporate America
• Foster business ethics
• Encourage socially responsible behavior
• Push for diversity in workforce
• Enhance reputation and drive profits
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Socially Responsible Behavior
Many companies engage in socially responsible behavior to give back to their
communities. Bank of America partners with Habitat for Humanity to build home
for disadvantaged families.
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©asiseeit/Getty Images
Can You Learn Business in a Classroom?
Absolutely!
To be successful in business you need:
• Knowledge
• Skills
• Experience
• Good judgment
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Solve the Dilemma
Mrs. Acres Homemade Pies 1
The company produces specialty pies and sells
them in local supermarkets and family restaurants
• In each of the first six months, 2,000 pies sold for
$4.50 each, netting $1.50 profit per pie
• Had problems keeping up with demand
• To meet demand: expanded operations, borrowed money, and
increased staff
• Production and sales increased to 8,000 pies per month and
profits to $12,000 per month
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Solve the Dilemma
Mrs. Acres Homemade Pies 2
Shelly has several options:
• Maintain current production levels and raise prices
• Expand facility and staff while maintaining the current
price
• Contract the production of pies to a national chain,
giving Shelly a percentage of profits with minimal
involvement
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Solve the Dilemma
Mrs. Acres Homemade Pies 3
Critical Thinking Questions
1. Explain and demonstrate the relationship between
supply and demand for Mrs. Acres Homemade Pies.
2. What challenges does Shelly face as she considers the
three options?
3. What would you do in Shelly’s position?
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