Slide 1
The Fundamentals of Business
and Economics
Chapter 1
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©2007 Prentice Hall
Chapter 1: The Fundamentals of Business and Economics
Slide 2
Chapter 1 Objectives
After studying this chapter, you will be able to:
• Define what a business is and identify four vital
social and economic contributions that
businesses make.
• Differentiate between goods-producing and
service businesses, and list five factors
contributing to the increase in the number of
service businesses.
• Differentiate between a free-market system and
a planned system.
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©2007 Prentice Hall
Chapter 1 Objectives:
After studying this chapter, you will be able to:
1. Define what a business is and identify four vital social and economic
contributions that businesses make.
2. Differentiate between goods-producing and service businesses, and list five
factors contributing to the increase in the number of service businesses.
3. Differentiate between a free-market system and a planned system.
Slide 3
Chapter 1 Objectives, cont.
• Explain how supply and demand interact to
affect price.
• Discuss the four major economic roles of the
U.S. government.
• Explain how a free-market system monitors its
economic performance.
• Identify five challenges you will face as a
business professional in the coming years.
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©2007 Prentice Hall
Chapter 1 Objectives, cont.
4. Explain how supply and demand interact to affect price.
5. Discuss the four major economic roles of the U.S. government.
6. Explain how a free-market system monitors its economic performance.
7. Identify five challenges you will face as a business professional in the coming
years.
Slide 4
How this Course Will Help Your
Career
• Understand what it takes to be an
entrepreneur
• Learn the lingo
• Develop soft skills
• Learn about career opportunities
• Understand the role business plays in society
• See the business world through the eyes of a
business rather than a consumer
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©2007 Prentice Hall
In this course you’ll learn what it takes to run a business. As you progress though
this course, you’ll begin to look at things from the eyes of an employee or a
manager instead of a consumer. You’ll develop a fundamental business
vocabulary that will help you keep up with the latest news and make more
informed decisions. By participating in classroom discussions and completing the
chapter exercises, you’ll gain some valuable critical-thinking, problem-solving,
team-building, and communication skills that you can use on the job and
throughout your life.
Should you decide to pursue a career in business, this course will introduce you
to a variety of jobs in fields such as accounting, economics, human resources,
management, finance, marketing, and so on. You’ll see how people who work in
these business functions contribute to the success of a company as a whole.
You’ll gain insight into the types of skills and knowledge these jobs require. And
most important, you’ll discover that a career in business today is fascinating,
challenging, and often quite rewarding.
Slide 5
What is Business?
ForFor-Profit
NonNon-Profit
Money Motive
Social Service
Ethical Conduct
Efficiency
Effectiveness
Social Responsibility
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©2007 Prentice Hall
This slide includes an image that relates profit and non-profit institutions. It
includes the subcategories shared by both for Social Service and Money Motive.
It ultimately links to Ethical Conduct with leads to efficiency and effectiveness,
and finally to Social Responsibility.
A business is a profit-seeking activity that provides goods and services that
satisfy consumers’ needs. The driving force behind most businesses is the
prospect of earning a profit—what remains after all expenses have been
deducted from business revenue. Still, not every organization exists to earn a
profit. Nonprofit organizations exist to provide society with a social or
educational service.
Although nonprofit organizations do not have a profit motive, they must operate
efficiently and effectively to achieve their goals. Thus, the business opportunities,
challenges, and activities discussed throughout this textbook apply to both profitseeking and nonprofit organizations. Moreover, to be successful, both profitseeking and nonprofit organizations must be socially responsible and ethical
when dealing with investors, employees, customers, the community, and society.
Slide 6
Web 2.0
• Definition
• Activities:






Blogging
Podcasting
Wikis
Newsfeeds
Tagging
Virtual Worlds
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©2007 Prentice Hall
Although difficult to define, Web 2.0 can be described as a shift in the philosophy
and technology of the Word Wide Web, from static, isolated, and tightly
controlled websites to connected, interactive, user-driven services.
Technologies often included under the Web 2.0 umbrella include blogging,
podcasting, wikis, newsfeeds, tagging, and virtual worlds
Slide 7
Types of Business
Goods Producing
Business
Service Business
Capital Intensive
Labor Intensive
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©2007 Prentice Hall
This slide depicts a factory worker and describes the goods-producing business
as capital intensive. On the right, it includes a picture of a customer service
representative with a line of customers she is helping, with an explanation that
Service is Labor Intensive
Goods-producing businesses primarily produce tangible goods by engaging in
activities such as manufacturing, construction, mining, and agriculture. Because
they require large amounts of money, equipment, land, and other resources to
get started and to operate, goods-producing businesses are often capitalintensive businesses
Rather than creating tangible goods, service businesses perform activities for
customers. This category includes finance, insurance, transportation, utilities,
wholesale and retail trade, banking, entertainment, health care, repairs, and
information. Nordstrom, Jiffy Lube, and eBay are examples of service
businesses. Service businesses tend to be labor-intensive businesses, in that
they rely more on human resources than buildings, machinery, and equipment to
prosper
Slide 8
Why is the Service Sector
Growing?
• More disposable income.
• Changing demographic patterns and
lifestyle trends.
• Support complex goods and new
technology.
• Professional advice.
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©2007 Prentice Hall
This slide includes an image of a bank teller providing customer service to a
customer.
Over the past few decades, the U.S. economy has undergone a profound
transformation from being dominated by manufacturing to being dominated by
services. The service sector now accounts for 70 to 80 percent of the nation’s
economic output, and service business will continue to create the vast majority of
new jobs.
Many consumers have more disposable income. The 76 million baby boomers in
the United States (people born between 1946 and 1964) are in their peak earning
years and look for services to help them invest, travel, relax, and stay fit.
Services target changing demographic patterns and lifestyle trends. As the
population changes, businesses find opportunities in providing services that
people can’t or don’t do for themselves, from in-home care for an increasingly
aging population to self-storage units for people who’ve used their increasing
incomes to buy more stuff than they can fit in their homes.
Services are needed to support complex goods and new technology. From home
theaters to automated production systems, many goods now require specialized
installation, repair, user training, or extensive support services.
Companies are increasingly seeking professional advice. Many firms turn to
professional advisers for help as they seek ways to cut costs, refine processes,
expand internationally, and harness the power of the Internet and other
technologies.
Slide 9
Economics
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©2007 Prentice Hall
This slide includes a three-circle interconnecting graphic that depicts the
relationship between microeconomics and macroeconomics.
Economics is the study of how a society uses its scarce resources to produce
and distribute goods and services. The study of economic behavior among
consumers, businesses, and industries who collectively determine the quantity of
goods and services demanded and supplied at different prices is termed
microeconomics. The study of a country’s larger economic issues, such as how
firms compete, the effect of government policies, and how an economy maintains
and allocates its scarce resources, is termed macroeconomics.
Slide 10
Factors of Production
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©2007 Prentice Hall
This slide depicts an arrow facing right with text boxes visually explaining how
the fie factors of production are related.
Natural resources are things that are useful in their natural state, such as land,
forests, minerals, and water. Human resources are people—anyone from
company presidents to grocery clerks who work to produce goods and services.
Capital includes resources such as money, computers, machines, tools, and
buildings that a business needs in order to produce goods and services.
Entrepreneurship is the spirit of innovation, the initiative, and the willingness to
take the risks involved in creating and operating new businesses (see Exhibit
1.2). Knowledge is the collective intelligence of an organization. Knowledge
workers are employees whose primary contribution to their companies involves
the acquisition, analysis, and application of information.
Slide 11
Economic System
Scarce
Resources
Human
Resources
Capital
Entrepreneurs
Knowledge
Natural
Resources
Factors of Production
Goods
Services
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©2007 Prentice Hall
This slide shows how Scarce resources – human resources, capital,
entrepreneurs, knowledge and natural resources – are factors of production
which lead to goods or services being created. This is known as an Economic
System.
Slide 12
Types of Economic Systems
Free-Market
System
Capitalism
Planned
System
Mixed
Capitalism
Socialism
Communism
Privatization
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©2007 Prentice Hall
This slide includes a graphic that shows the Free-Market System on the left and a
Planned System on the right of a linear spectrum. Beneath this is the spectrum of
economic freedom from most free to least free: left to right is Capitalism, Mixed
Capitalism, Socialism and Communism. Beneath this being linked from the Planned
System is Privatization.
The role that individuals and government play in allocating a society’s resources depend
on the society’s economic system, the basic set of rules for allocating a society’s
resources to satisfy its citizens’ needs. Two main economic systems exist today: freemarket systems and planned systems.
In a free-market system, individuals are free to decide what products to produce, how to
produce them, whom to sell them to, and at what price to sell them. Capitalism is the
term used to describe the free-market system. In modern practice, however, the
government sometimes intervenes in free-market systems to influence prices and wages
or to change the way resources are allocated. This practice of limited intervention is
called mixed capitalism.
In a planned system, governments control all or part of the allocation of resources and
limit the freedom of choice. The planned system that allows individuals the least degree
of economic freedom is communism. Private ownership is restricted. Resource allocation
is handled through centralized planning by government officials. Socialism involves a
relatively high degree of government planning and some government ownership of land
and resources. However, government involvement is limited to industries considered
vital to the common welfare. Several socialist and communist economies are moving
toward free-market systems. They are privatizing some of their government-owned
enterprises by selling them to privately held firms.
Slide 13
Supply and Demand
$35
$30
D
Not enough
demand
Right price
makes supply &
demand equal
Price
E
$25
$20
S
Not enough
supply
$15
10
$10
15
20
25
30
Pairs of blue jeans (quantity)
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©2007 Prentice Hall
This slides shows a Supply and Demand curve in which the Supply line runs from lower left to upper right.
The supply line begins with a $20 value (on the Y axis) and angles up to end at a $35 value. The Quantity is
depicted on the X axis and runs horizontally from a quantity of 10 jeans to a quantity of 35 jeans. The
Demand curve runs from the lower right to the upper left beginning at a price of $20 and ending at a price of
$35. The Equilibrium price is noted at $25 at a quantity of 20 jeans.
The theory of supply and demand is the immediate driving force of the free-market system. Demand refers
to the amount of a good or service that consumers will buy at a given time at various prices. Supply refers to
the quantities of a good or service that producers will provide on a particular date at various prices. Simply
put, demand refers to the behavior of buyers, whereas supply refers to the behavior of sellers. Both work
together to impose a kind of order on the free-market system.
Consider the airline industry. Airline travel is a cyclical business; its revenues rise and fall with the economy.
When the economy is robust, consumers and businesses spend more on discretionary travel. When the
economy falters, they cut back on such discretionary spending.
Is there a price that will make both the supplier and the customer happy? The answer is yes--the price at
which the quantity of jeans demanded equals the quantity supplied.
This relationship is shown in the graph above. A range of possible prices is listed vertically at the left of the
graph, with the lowest at the bottom and the highest at the top. Quantity of blue jeans is represented along
the horizontal axis. The points plotted on the curve labeled D indicate that on a given day the store would
sell 10 pairs of jeans if they were priced at $35, 15 pairs if they were priced at $27, and so on. The curve
that describes this relationship between price and quantity demanded is a demand curve.
Now think about the situation from the seller’s point of view. This relationship can also be depicted
graphically. The line labeled S shows that the store would be willing to offer 30 pairs of jeans at $35, 25
pairs at $30, and so on.
The point marked E shows that when jeans are priced at $25, consumers are willing to buy 20 pairs of them
and the store is willing to sell 20 pairs. In other words, at the price of $25, the quantity supplied and the
quantity demanded are in balance. The price at this point is known as the equilibrium price.
Note that this intersection represents both a specific price ($25 in our example) and a specific quantity of
goods (20 pairs of jeans). It is also tied to a specific point in time. Note also that it is the mutual interaction
between quantity demanded and quantity supplied that determines the equilibrium price.
Slide 14
Free-Market Competition
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©2007 Prentice Hall
This slide shows a 2 by 2 matrix with Pure Competition in the upper left, Monopoly on
the upper right, Oligopoly in the lower left and Monopolistic Competition in the lower
right.
Competition is the situation in which two or more suppliers of a product are rivals in the
pursuit of the same customers.
The nature of competition varies widely by industry. In theory, the ideal type of
competition is pure competition, which is characterized by three conditions: a
marketplace of multiple buyers and sellers, a product or service with nearly identical
features such as wheat or cotton, and low barriers of entry.
At the other extreme, in a monopoly there is only one supplier of a product in a given
market, and that supplier thus is able to determine the price (within regulatory limits).
A market that is dominated by only a few suppliers (primarily Boeing and Airbus
Industries), cause a situation known as an oligopoly
Most of the competition in advanced free-market economies is monopolistic
competition, in which a large number of sellers (none of which dominates the market)
offer products that can be distinguished from competing products in at least some small
way. Toothpaste, cosmetics, soft drinks, Internet search engines, and restaurants are
examples of products that can vary in the features each offers.
Slide 15
Competitive Advantage
•
•
•
•
•
Price
Speed
Quality
Service
Innovation
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©2007 Prentice Hall
This slide shows an image of three businessmen in a first, second and third place
position on platforms of varying heights.
When markets become filled with competitors and products start to look alike,
companies use price, speed, quality, service, or innovation to gain a competitive
advantage—something that sets one company apart from its rivals and makes
its products more appealing to consumers.
Slide 16
Role of the Government
• Foster competition
• Regulate and Deregulate
industries
• Protect Stakeholder and
Stockholder’s rights
• Contribute to economic stability
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Although the free-market system generally works well, it’s far from perfect. If left
unchecked, the economic forces that make capitalism succeed may also create
severe problems for some groups or individuals. To correct these types of
problems, the government serves four major economic roles: it enacts laws and
creates regulations to foster competition; it regulates and deregulates certain
industries; it protects stakeholders’ rights; and it intervenes to contribute to
economic stability.
Because competition generally benefits the U.S. economy, the U.S. federal
government and state and local governments create thousands of new laws and
regulations every year to preserve competition and ensure that no single
enterprise becomes too powerful.
Antitrust laws limit what businesses can and cannot do to ensure that all
competitors have an equal chance of producing a product, reaching the market,
and making a profit. Some of the earliest government moves in this arena
produced such landmark pieces of legislation as the Sherman Antitrust Act, the
Clayton Antitrust Act, and the Federal Trade Commission Act.
To preserve competition, the government may also stipulate requirements
companies must meet to gain approval of a proposed merger or acquisition. If the
government thinks a proposed merger or acquisition might restrain competition, it
may deny approval altogether.
Sometimes the government imposes regulations on specific industries to ensure
fair competition, ethical business practices, safe working conditions, or general
public safety.
In a regulated industry, close government control is substituted for free
competition, and competition is either limited or eliminated. In extreme cases,
regulators may even decide who can enter an industry, what customers they
must serve, and how much they can charge. For years, the telecommunications,
airline, banking, and electric utility industries fell under strict government control.
However, the trend over the past few decades has been to open up competition
in regulated industries by removing or relaxing existing regulations. Hopes are
that such deregulation will allow new industry competitors to enter the market,
create more choices for consumers, and keep prices in check. But the debate is
ongoing about whether deregulation achieves these goals.
In addition to fostering competition, another important role the government plays
is to protect the stakeholders of a business. Businesses have many
stakeholders—groups that are affected by (or that affect) a business’s
operations, including colleagues, employees, supervisors, investors, customers,
suppliers, and society at large. In the course of serving one or more of these
stakeholders, a business may sometimes neglect the interests of other
stakeholders in the process. To protect consumers, employees, shareholders,
and the environment from the potentially harmful actions of business, the
government has established several regulatory agencies.
Consumer Product Safety Commission: Regulates and protects the public from
unreasonable risks of injury from consumer products.
Environmental Protection Agency: Develops and enforces standards to protect
the environment.
Equal Employment Opportunity Commission: Protects and resolves
discriminatory employment practices.
Federal Aviation Administration: Sets rules for the commercial airline industry.
Federal Communications Commission: Overseas communication by telephone,
telegraph, radio and television.
Federal Energy Regulatory Commission: Regulates rates and sales of electric
power and gas.
A nation’s economy never stays exactly the same size. Economic expansion
occurs when the economy is growing and people are spending more money.
Consumer purchases stimulate businesses to produce more goods and services,
which in turn stimulates employment. Economic contraction occurs when such
spending declines. Business cuts back on production, employees are laid off,
and the economy as a whole slows down.
If the period of downward swing is severe, the nation may enter into a recession,
traditionally defined as two consecutive quarters of decline in real gross domestic
product. When a downward swing or recession is over, the economy enters into
a period of recovery: Companies buy more, factories produce more, employment
is high, and workers spend their earnings.
These recurrent up-and-down swings are known as the business cycle. In an
attempt to avoid hardship and to foster economic stability, the government can
levy new taxes or adjust the current tax rates, raise or lower interest rates, and
regulate the total amount of money circulating in our economy. These
government actions have two facets: monetary policy and fiscal policy (see next
three slides).
Slide 17
Economic Indicators
•
•
•
•
Interest Rates
Unemployment Rates
Housing Data
Industrial Productivity
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©2007 Prentice Hall
Economic indicators are statistics such as interest rates, unemployment rates,
housing data, and industrial productivity that are used to monitor and measure
economic performance. Statistics that point to what may happen to the economy
in the future are called leading indicators; statistics that signal a swing in the
economy after the movement has begun are called lagging indicators.
Slide 18
Inflation vs. Deflation
Inflation
Purchasing Power
Deflation
Consumer Price
Index (CPI)
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©2007 Prentice Hall
This slide includes a picture with a spectrum on the top from left to right reading:
Inflation, Purchasing Power, Deflation. Under the Inflation is a picture of a man
in a suit carrying a large dollar sign. Under Purchasing Power is a person’s fist
wrapped around several dollar bills with the subtitle: Consumer Price Index (CPI).
Under deflation is a picture of a man in a suit on his knees throwing dollar bills in
the air.
Inflation is a steady rise in the prices of goods and services throughout the
economy. When the inflation rate begins to decline, economists use the term
disinflation. Deflation, on the other hand, is the sustained fall in the general price
level for goods and services. It is the opposite of inflation; that is, purchasing
power increases because a dollar held today will buy more tomorrow.
Slide 19
Producer Price Index (PPI)
• Gross Domestic Product
(GDP)
• Gross National Product (GNP)
• Globalization
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©2007 Prentice Hall
This slide includes a picture in the lower right hand corner of a computer server with a
small globe next to it.
In contrast to the CPI, the producer price index (PPI) measures price at the producer
or wholesaler level. (Although the PPI is usually referred to as a single index, it is
actually a family of more than 600 industry-specific indexes.) PPI calculations cover
virtually the entire goods-producing segment of the U.S. economy and many service
sectors as well.
The broadest measure of an economy’s health is the gross domestic product (GDP).
The GDP measures a country’s output—its production, distribution, and use of goods
and services—by computing the sum of all goods and services produced for final use in
a market during a specified period (usually a year).
GDP has largely replaced an earlier measure called the gross national product (GNP),
which excludes the value of production from foreign-owned businesses within a nation’s
boundaries and includes receipts from the overseas operations of domestic companies.
GNP considers who is responsible for the production; GDP considers where the
production occurs.
Globalization—the increasing tendency of the world to act as one market instead of a
series of national ones—opens new markets for a company’s goods and services and
new sources of natural resources, labor, and skills.
Slide 20
Challenges of Globalization
• Products and Services
• Managing Small Business
(Entrepreneurship)
• Globalization and Workforce Diversity
• Ethics and Social Responsibility
• Technology and Electronic Commerce
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©2007 Prentice Hall
Globalization—the increasing tendency of the world to act as one market
instead of a series of national ones—opens new markets for a company’s goods
and services. But at the same time it creates tougher competition and a raft of
new challenges for businesses:
Producing quality products and services that satisfy customer’s changing needs.
Today’s customer is well-informed and has many product choices.
Starting and managing a small business in today’s competitive environment.
Starting a new business or managing a small company in today’s global
economy requires creativity and a willingness to exploit new opportunities.
Thinking globally and committing to a culturally diverse workforce. Globalization
opens new markets for a company’s goods, increases competition, and changes
the composition of the workforce into one that is more diverse in race, gender,
age, physical and mental abilities, lifestyle, culture, education, ideas, and
background.
Behaving in an ethically and socially responsible manner. As businesses become
more complex through global expansion and technological change, they must
deal with an increasing number of ethical and social issues.
Keeping pace with technology and electronic commerce. Technology is
reshaping the world. The Internet and innovations in computerization and
telecommunication have made it possible for people anywhere in the world to
exchange information and goods.