Chapter 1 Exploring the World of Business and Economics Learning Objectives 1. Discuss your future in the world of business. 2. Define business and identify potential risks and rewards. 3. Define economics and describe the two types of economic systems: capitalism and command economy. 4. Identify the ways to measure economic performance. 5. Examine the four different phases in the typical business cycle. 6. Outline the four types of competition. 7. Summarize the factors that affect the business environment and the challenges American businesses will encounter in the future. Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 2 Free Enterprise “ …the system of business in which individuals are free to decide what to produce, how to produce it, and at what price to sell it. “ Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 3 Your Future in the Changing World of Business • What do you want? • Why do you want it? • Write it down! “Success is a journey, not just a destination.” Joe Dudley Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 4 Why Study Business? • To choose a career • To be a successful employee • To start your own business • To become a better-informed consumer and investor Here are some interesting sites: Copyright © Cengage Learning. All rights reserved. www.careerbuilder.com www.careeronestop.org www.monster.com www.hotjobs.yahoo.com Chapter 1 | Slide 5 Median Yearly Income Who Makes the Most Money? Source: 2009 Statistical Abstract of the United States, p. 443 Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 6 Cultural (Workplace) Diversity “ “ …differences among people in a workforce owing to race, ethnicity, and gender. Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 7 Text Features Learning Objectives Inside Business Margin Notes Boxed Features Spotlight End-of-Chapter Materials Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 8 Pathway to Success in This Course 1. 2. 3. 4. 5. 6. 7. Prepare before you go to class. Read the chapter. Underline or highlight important concepts. Take notes. Apply the concepts. Practice critical thinking. Prepare for exams. Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 9 Business “ …the organized effort of individuals to produce and sell, for a profit, the goods and services that satisfy society’s needs. “ Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 10 Figure 1.1: Combining Resources A business must combine all four resources effectively to be successful. Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 11 Ultimate Objective of Every Firm “ “ …to satisfy the needs of its customers. Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 12 Business Profit Sales Revenue - Business Expenses Profit (Loss)* *Profit becomes property of its owners Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 13 Stakeholders “ …all the different people or groups of people who are affected by the policies, decisions, and activities made by an organization. Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 14 Business Ownership Risks Not being paid Loss of whatever is invested in the business Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 15 Paths to E-Profits $ Amazon Free shipping Outside merchants = commission $ eBay Online auction Commission Online telephone communications $ Google Search engine Paid advertising links Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 16 Economics “ “ …the study of how wealth* is created and distributed.** * wealth is “anything of value, including products produced and sold by business” **distribution is “who gets what” Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 17 Economy “ …the way in which people deal with the creation and distribution of wealth. Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 18 Economic Perspectives Microeconomics The study of decisions made by Individuals Businesses Macroeconomics The study of National economy Global economy Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 19 Factors of Production “ “ …resources used to produce goods and services. Land/natural resources Labor Capital Entrepreneurship Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 20 Types of Economic Systems Capitalism Free Enterprise Adam Smith (Wealth of Nations) The Invisible Hand Laissez-Faire Capitalism Command Socialism Communism (Karl Marx) Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 21 Economic Systems Differ • Economic systems differ depending on the answers to four basic economic questions about nation’s economic activity 1. 2. 3. 4. What and how much will be produced? How will it be produced? For whom will it be produced? Who owns/controls factors of production? Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 22 Capitalism “ …individuals own and operate the majority of businesses that provide goods and services. Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 23 Adam Smith Wealth of Nations (1776) Society pursues self-interest People work hard if • Earn more pay • Earn more profit Capitalism promotes good of community Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 24 Invisible Hand “ ...describes how an individual’s own personal gain benefits others and a nation’s economy. Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 25 Figure 1.3: Assumptions for Laissez-Faire Capitalism Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 26 U.S. = Mixed Economy “ …an economy that exhibits elements of both capitalism and socialism. Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 27 Figure 1.4: Circular Flow in Mixed Economy Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 28 Command Economy “ …government decides what goods and services will be produced, how they will be produced, for whom available goods and services will be produced, and who owns and controls the major factors of production. Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 29 Command Economies Socialism Communism Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 30 Socialism Key industries owned/controlled by government Land, buildings, and raw materials may be property of state Private ownership permitted to varying degrees People choose own occupations National goals determine what/how produced Uses taxes, rents, and wages to control distribution Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 31 Communism Karl Marx ─ Father Advocated classless society Citizens own all economic resources Workers contribute based on ability and receive benefits based on need Examples ─ North Korea, China Centralized planning ─ sets prices and wages Emphasis on government needs ─ not consumers No job choice ─ professionals better off than factory workers Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 32 Measuring Economic Performance Economic Indicators Balance of Trade Corporate Profits Inflation Rate National Income New Housing Starts Prime Interest Rate Productivity Rate Unemployment Rate Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 33 Consumer Price Index for All Urban Consumers (CPI-U) 250 (1982–84=100, unless otherwise noted) 200 150 100 50 0 U.S. Department of Labor, Bureau of Labor Statistics, Inflation & Prices, All Urban Consumers, http://www.bls.gov/data , Table 24. Historical Consumer Price Index for All Urban Consumers (CPI-U): U. S. city average, accessed July 2009. Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 34 Productivity …the average level of “ output per worker per hour. “ Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 35 Results of Increased Productivity 1. Owners make more profit and/or sell products for less 2. Can lead to higher unemployment Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 36 Figure 1.5: GDP in Current Dollars and in Inflation-Adjusted Dollars Source: U.S. Bureau of Economic Analysis website at www.bea.gov, accessed September 14, 2008 Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 37 Table 1.2: Common Measures Used to Evaluate a Nation’s Economic Health Balance of trade The total value of a nation’s exports minus the total value of its imports over a specific period of time Corporate profits The total amount of profits made by corporations over selected time periods Inflation rate An economic statistic that tracks the increase in prices of goods and services over a period of time; usually calculated on a monthly or annual basis (cont.) Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 38 Table 1.2: Common Measures Used to Evaluate a Nation’s Economic Health (cont.) National income The total income earned by various segments of the population, including employees, self-employed individuals, corporations, and other types of income New housing starts The total number of new homes started during a specific time period Prime interest rate The lowest interest rate that banks charge their most credit-worthy customers (cont.) Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 39 Table 1.2: Common Measures Used to Evaluate a Nation’s Economic Health (cont.) Productivity rate An economic measure that tracks the increase and decrease in the average level of output per worker Unemployment rate The percentage of a nation’s labor force unemployed at any time Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 40 Business Cycle “ …the recurrence of periods of growth and recession in a nation’s economic activity. “ Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 41 States of Business Cycle Dow Jones Peak Peak Recovery Recession Recession Depression Depression 1 2 3 Trough 4 5 6 7 8 9 10 11 Quarters Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 42 Government Actions in Recession/Depression Monetary Policy Determines size of money supply and interest rates Fiscal Policy Influences amount of savings and expenditures by altering tax structure and government spending Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 43 Federal Deficit “ …a shortfall created when the federal government spends more in a fiscal year than it receives. Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 44 Figure 1.6: Supply Curve and Demand Curve Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 45 Table 1.3: Four Different Types of Competition The number of firms determines the degree of competition within an industry. Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 46 Product Differentiation “ …the process of developing and promoting differences between one’s products and all similar products. Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 47 Standard of Living “ …a loose subjective measure of how well off an individual or a society is mainly in terms of want satisfaction through goods and services. Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 48 Figure 1.7: Time Line of American Business Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 49 Environments of Business Competitive Technological Business Global Copyright © Cengage Learning. All rights reserved. Economic Chapter 1 | Slide 50 The Challenges Ahead 1. How can we create a more stable economy and create new jobs? 2. How can we restore the public’s confidence in the banking and financial industries? 3. How can we regulate banks, savings and loan associations, credit unions, and other financial institutions to prevent the type of abuses that led to an economic crisis? 4. How can we encourage Iraq and Afghanistan to establish a democratic and free society and resolve possible conflict with North Korea and other countries throughout the world? (cont.) Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 51 The Challenges Ahead (cont.) 5. How can we meet the challenges of managing culturally diverse workforces to address the needs of a culturally diverse marketplace? 6. How can we make American firms more productive and more competitive with foreign firms that have lower labor costs? 7. How can we preserve the benefits of competition and small businesses in our American economic system? 8. How can we encourage economic growth and at the same time continue to conserve natural resources and sustain our environment? (cont.) Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 52 The Challenges Ahead (cont.) 9. How can we meet the needs of two-income families, single parents, older Americans, and the less fortunate who need health care and social programs to exist? Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 53 Chapter Quiz 1. General Motors and Toyota are both examples of a) b) c) d) e) marketing intermediaries. manufacturers. wholesalers. international agents. service businesses. Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 54 Chapter Quiz (cont.) 2. What remains after all business expenses have been deducted from sales revenues is referred to as a) b) c) d) e) cash. excess return. profit. gross return. operating revenue. Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 55 Chapter Quiz (cont.) 3. The total dollar value of all goods and services produced by all people within the boundaries of a country during a one-year period is called a) b) c) d) e) gross manufacturing output. gross domestic product. real gross national product. economic product. national production report. Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 56 Chapter Quiz (cont.) 4. __________ is an economic system in which individuals own and operate the majority of businesses that provide goods and services. a) b) c) d) e) Bureaucratic economy Command economy Communism Capitalism Socialism Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 57 Chapter Quiz (cont.) 5. __________ is a loose subjective measure of how well off an individual or society is. a) b) c) d) e) Standard of living Consumer price index Personal economic index Individual consumption standard Employee producer index Copyright © Cengage Learning. All rights reserved. Chapter 1 | Slide 58