PRINCIPLES OF BUSINESS,
FINANCE AND MARKETING
Units 1 & 2
Economic
Decisions and
Systems
UNIT 1.01
Satisfying Wants & Needs
Economic Choices
Economic Systems
Supply and Demand
SATISFYING WANTS AND NEEDS
Wants
 Not necessary for survival, but add comfort and
pleasure to our lives
 i.e. video games, designer clothes,
Needs
 Things that are necessary for survival
 i.e. food, clothing, shelter
Question: Is a car a want or a need?
BASIC ECONOMIC PROBLEM
Unlimited wants and needs, limited economic
resources
Scarcity
 Not having enough resources to satisfy every need
 Limited supplies of goods and services
 Someone’s going to go without
ECONOMIC CHOICES
Opportunity Cost
 Value of the next best alternative that you were not
able to chose
 Trade Off – what you make when you give something
up to have something else
Job
College
 College vs. Work
Annual
Year
1
2
3
4
5
6
7
10
15
20
25
$
$
$
$
$
$
$
$
$
$
$
Income/
Expense
20,000
20,000
20,000
20,000
20,000
20,000
20,000
20,000
20,000
20,000
20,000
Cumulative
$
$
$
$
$
$
$
$
$
$
40,000
60,000
80,000
100,000
120,000
140,000
200,000
300,000
400,000
500,000
Annual Income/
Expense
$
(20,000)
$
(20,000)
$
(20,000)
$
(20,000)
$
(20,000)
$
50,000
$
50,000
$
50,000
$
50,000
$
50,000
$
50,000
Cumulative
$
$
$
$
$
$
$
$
$
$
(40,000)
(60,000)
(80,000)
(100,000)
(50,000)
150,000
400,000
650,000
900,000
DECISION MAKING PROCESS
6 Steps
 Define the problem
 Identify the
alternatives
 List all pros and cons
 Choose among
alternatives
 Act on your choice
 Evaluate your decision
Example
 Can’t get to work
 Walk, bike, car, mooch
ride
 Lazy, embarrassing, cool
 CAR!
 Spend $20K on used car
 Can’t afford gas 
FACTORS THAT AFFECT DECISION-MAKING
Values
 Things that are important to you in life
Goals
 Things a person wants to accomplish
 i.e. college degree, starting a business
Freedom of Choice
– the freedom to make decisions
independently while accepting the consequences of
those decisions
ECONOMIC RESOURCES
Factors of Production
 Natural Resources:
raw materials (water, oil, trees)
 Renewable resources can be replaced
 Non-renewable resources cannot be replaced
 Human Resources : people who contribute physical or mental
energy
 Capital Resources :
tools, equipment, buildings, money, etc.
used to produce goods and services
ENTREPRENEURIAL RESOURCES
Initiative to combine natural, human and capital
resources to produce goods or services
 The 3 economic questions
1. What to produce?
2. How to produce?
3. What needs and wants to satisfy?
Who decides this determines a countries economic
system
ECONOMIC SYSTEMS
Traditionalism or Traditional Economy
 Do things the way they’ve always been done
 Pros: everyone has a role in the economy; economic life is
stable
 Cons: discourages new ideas; growth is limited
 Examples: parts of Africa, Latin American rain forest
ECONOMIC SYSTEMS
Communism or Command Economy
 Government owns/controls all resources
 Pros: everyone has a job and benefits; can make a dramatic
change in a short time on production of goods
 Cons: consumer goods rank low on priority list, few
consumer wants are met; lack of incentive to work hard
 Examples: North Korea, China, Cuba
ECONOMIC SYSTEMS
Capitalism or Market Economy
 People owns/controls all resources
 Pros: produce goods & services people want and need;
freedom of choice; income: input ratio; competition keeps
prices lower
 Cons: wealth of economy not equally distributed
 Examples: US, Japan, Canada, Great Britian
ECONOMIC SYSTEMS
Socialism or Mixed Economy
 Government owns major industries; allows for private
ownership of other businesses
 Pros: gov’t and private business work together;
insurance/social security benefits provided
 Cons: high tax rates; smaller spendable income; discourages
private business
 Examples: Sweden, France
THE US ECONOMIC SYSTEM
 Private Property
 Business or individual owns their own property, not
the government
 Freedom of Choice
 Freedom to make decisions independently while
accepting the consequences of those decisions
 Profit
 Amount of money available to a business after all
costs and expenses have been paid
 Competition
 Rivalry among businesses to sell their goods and
services
ECONOMIC DECISION-MAKING
The process of choosing which needs and wants will be satisfied
 Consumer – person who buys and uses goods & services
 Producer – business that makes the goods & services
 Demand
– the quantity of a good or service that consumers
are willing to buy
 The cheaper an item is, the more people will want/be able to afford it
(and visa versa)
 Supply
– the quantity of a good or service that businesses are
willing and able to provide
 The more expensive it is to produce, fewer businesses are willing to
make it (and visa versa)
Consumers set demand, producers establish supply
SUPPLY AND DEMAND
ACL
1200
1000
Price of 3-day Pass
800
600
400
Demand
200
0
100000
150000
200000
250000
300000
350000
Number of Passes Sold
400000
450000
500000
550000
SUPPLY AND DEMAND
ACL
1200
1000
Price of 3-day Pass
Supply
800
600
400
200
0
100000
150000
200000
250000
300000
350000
Number of Passes Sold
400000
450000
500000
550000
SUPPLY AND DEMAND
ACL
1200
1000
Price of 3-day Pass
Supply
800
Market
Price
600
400
200
0
100000
Demand
150000
200000
250000
300000
350000
Number of Passes Sold
400000
450000
500000
550000
UNIT 1.02
KEY CHARACTERISTICS OF THE PRIVATE
ENTERPRISE SYSTEM
Private Enterprise System
Role of the Individual as a Producer
Role of the Individual as a Consumer
Role of the Individual as a Citizen
PRIVATE ENTERPRISE SYSTEM
An economic system that rewards firms for their ability to
perceive the needs and demands of consumers
Capitalism
20 million US businesses in operation
3 main types of business
1. Sole Proprietors
2. Partnerships
3. Corporations
 Fortune 500
HOW DO BUSINESSES AND CONSUMERS
INTERACT?
Role of the Individual as a Producer
Role of the Individual as a Consumer
Role of the Individual as a Citizen
INDIVIDUAL AS A PRODUCER
 Contribution to Economy
 Goals – Things a person wants to accomplish, such as
getting a college education, buying a car, or starting a
business
 Values – Things that are important to you in life
 Standard of Living
 Measure of how well people in a country live
 Quality and quantity of wants and needs that are satisfied
 Often determined by your choice of career
 Career Choices
 www.careercruising.com
ENTREPRENEUR
Someone who takes a risk in star ting a business to earn a profit
 The bad news:
 Over 1 million businesses start up in America each year
 Over 500,000 close each year
 Most start ups close within 16 months
 The good news:
 Average income for small business owner is $233,600
PROFIT
The amount of money available to the business af ter all costs
and expenses have been paid
How to increase profits?
 Increase sales
 Increase price
 Decrease costs
INDIVIDUAL AS A CONSUMER
 Consumes goods and services
 Vitale role in economic system
 Buy/Not-Buy decision effects what goods and services are
produced
 Heavily targeted by businesses
 Pay for Needs First
 Food
 Clothing
 Shelter
 Consumer Wants are a Huge Market!
GALLUP DAILY: U.S. CONSUMER
SPENDING
HOUSEHOLD SPENDING BY CATEGORY
STRENGTH OF THE CONSUMER
 Customer Service Key
 70% of Americans are willing to spend 13% more with
companies they believe provide excellent customer
service
 78% of consumers have bailed on a transaction because
of poor customer service
 Advocacy Groups
 Protect people from corporate abuse (unsafe products,
predatory lending, false advertising, etc.)
 Prevention & Awareness (anti-smoking groups,
parental advisory labels, etc.)
INDIVIDUAL AS A CITIZEN
 Bill of Rights
1. Freedom of religion, speech, press, assembly, and petition .
2. Right to keep and bear arms in order to maintain a well
regulated militia.
3. No quartering of soldiers.
4. Freedom from unreasonable searches and seizures.
5. Right to due process of law, freedom from self-incrimination,
double jeopardy.
6. Rights of accused persons, e.g., right to a speedy and public
trial.
7. Right of trial by jury in civil cases.
8. Freedom from excessive bail, cruel and unusual punishments .
9. Other rights of the people.
10.Powers reserved to the states.
CITIZEN’S ECONOMIC RESPONSIBILIT Y
Vote
Pay Taxes
Obey the Law
WHAT HAPPENS IF ECONOMIC
RESPONSIBILIT Y IGNORED?
UNIT 1.03
Different Types of Businesses
Forms of Business Ownership
Determining Type of Business Ownership
Other Considerations
T YPES OF BUSINESS
Sole Proprietor
Partnership
Corporation
SOLE PROPRIETOR
 A business owned by one person
 Most common legal form of ownership for new
businesses
 15-20 Million sole proprietors in United States
 Accounts for 75% of businesses in US
SOLE PROPRIETOR
Pros:
 Control the entire business
 Keep all of the profits
 Make decisions quickly
 Easy to establish
 Pay fewer taxes
Cons
 Unlimited liability
PARTNERSHIP
 A business owned by 2 or more persons who share
responsibilities and profits/losses
 Partnership Agreement (not filed with the government)
Name of the new business
Amount each person is to invest in the business
Amount each partner is to draw in salary/profit
How profits/losses after salaries are paid will be shared in proportion
to each partner’s investment
 Responsibilities of the partners in the entity
 What will happen in the event of death of a partner(s)




 3 Million business partnerships in United States
PARTNERSHIP
Pros:
 Combine talents and financial resources
 Share in responsibility of running the business and
making decisions
 Relatively easy to establish
 Pays less taxes than a corporation
Cons:
 Unlimited liability
 Potential for disagreements
 Loss of partner could mean end of business
CORPORATION
 A business organization that operates as a legal
entity separate from its owners
 Recognized as a person under the law
 Articles of Incorporation
 Sell Stock
 Most revenue generated from this type of business
CORPORATION
 Key Terms
 Stockholders/Shareholders: People who own stock in a
corporation
 Board of Directors: A group of people elected by shareholders
to guide a corporation
 Corporate Officers: are the directors and senior level
management of a corporation
 Charter: a license to operate from that state
 Proxy: ability of a shareholder to vote on the affairs of a
company
CORPORATION
Pros:
 Limited liability
 Share of the profits
 No management responsibility
 Can raise money by selling stock
 Easier to get credit
Cons:
 Legal red tape
 Increased tax burden
BUSINESS OWNERSHIP DISTRIBUTION
DETERMINING T YPE OF BUSINESS
OWNERSHIP
 the potential risks and liabilities of your business
 the formalities and expenses involved in establishing
and maintaining the various business structures
 your income tax situation
 your investment needs
OTHER T YPES OF BUSINESSES
 Franchise
 Extractor
 Producer
 Processor
 Manufacturer
 Distribution
 Service Firms
FRANCHISE
 A contractual agreement to sell a company’s
products or services in a designated geographic
area
FRANCHISE
 Franchisee: the person or group of people who have received
permission from a parent company to sell its products or
services
 Franchisor: the parent company that grants permission to a
person or group to sell its products or services
 McDonald’s
 75% of restaurants worldwide are owned by franchisees
 Minimum $500,000 non-borrowed funds (25% cash)
 Monthly Service Fee – 4% of sales
FRANCHISE
 Pros:
 Name brand recognition
 Established method of doing business
 Access to centralized advertising
 Professional help in startup/training
 Cons:
 High startup costs in purchasing rights to use the business
name
 Must follow corporate standards
OTHER T YPES OF BUSINESSES
 Extractors: A business that grows products or takes
raw materials from nature
 Producers: A business that gathers raw products in
their natural state
 Processors: Businesses that change natural
materials (raw goods) into a more finished form for
manufacturers to process further
 i.e. paper mills, oil refineries, steel mills, etc.
OTHER T YPES OF BUSINESSES
 Manufacturers: A business that takes an extractor’s
products or raw materials and changes them into a
form that consumers can use
 Industrial production
 i.e. General Motors, GE, Dell, Intel
 Service Firms: A business that does things for you
instead of making products
 Intangible goods
 i.e. hospitality, banking, legal
OTHER T YPES OF BUSINESSES
 Distribution:
 Wholesale: A middle firm that assists with distribution
activities between businesses
 i.e. Sams, CostCo
 Retail: A business that sells directly to the consumer
 i.e. Gap, Target,
UNIT 1.04
The Business Cycle
Measuring Economic Activity
THE BUSINESS CYCLE
Recurrent periods during which the nation’s economy
moves in and out of recession and recovery phases
 Major ups and downs of economy
 Short Term (2-3 years)
 Long Term (50-60 years)
BULL MARKET
 Peaks
 Growing economy
 Increasing investor confidence
 Anticipation of future price increases
BEAR MARKET
 Troughs
 General decline in the stock market over a period of time
 Transition from high investor optimism to widespread investor
fear and pessimism
 price decline of 20% or more over at least a two-month period
 sometimes referred to as "The Heifer Market"
PROSPERIT Y
A phase of the business cycle where most people who want to
work are working and businesses produce goods & ser vices in
record numbers.
 Economic Growth
 1945-1973




$200B in war bonds matured
GI Bill financed well-educated work force
Middle class swelled
Increase in GDP and Productivity
RECESSION
A period where demand begins to decline, businesses lower
production of goods & ser vices, unemployment begins to rise, and
GDP growth slows for several quar ters
 Reduced Economic Activity
 GDP negative for 2 or more quarters
 1.5% rise in Unemployment in 12 months
 Late 2000s







Collapse of the housing market
Bank failures
High Unemployment
Low Consumer Confidence
Escalating Debt
Inflation
Rising gas and food prices
DEPRESSION
A phase marked by high unemployment, weak sales of goods &
ser vices, and business failures






Sustained, long-term economic downturn
Large increases in Unemployment
Reduced credit availability
Large number of bankruptcies
Deflation
Bank failures
THE GREAT DEPRESSION
 1929 – late 1930s
 Stock Market Crash October 29 th
 “Black Tuesday”
 Massive Bank Failures
 Millions lost jobs
 Global in scale
Economic Indicators
United
States
Great
Britain
France
Germany
Industrial Production
-46%
-23%
-24%
-41%
Wholesale Prices
-32%
-33%
-34%
-29%
Foreign Trade
-70%
-60%
-54%
-61%
Unemployment
+607%
+129%
+214%
+232%
DEPRESSION OR RECESSION?
1930s
1. Overproduction in
agriculture
2. US banks recalling
international loans
3. Large stockpiles of
agricultural commodities
released in to market
4. Gold standard
5. Deflationary policies
reduced government
spending
2008
1. 8 th year in a row world’s 6B
people consumed more
food than produced
2. US owes world between $4 $5T
3. World’s stockpiles at
lowest in 37 years
4. No currency is redeemable
in gold
5. Increased government
spending
RECOVERY
A phase of the business cycle in which unemployment begins to
decrease, demand for goods & ser vices increases, and GDP
begins to rise again
 High levels of growth following a Recession
 Government stimulus packages
 Are we in a Recovery now?
 Timeline of late 2000 global recession
ECONOMIC INDICATORS
 Gross Domestic Product (GDP)
 Inflation
 Consumer Price Index (CPI)
 Productivity
 Unemployment
 Debt
 Consumer Confidence
GROSS DOMESTIC PRODUCT
The total value of all final goods & ser vices produced in a
countr y in one year
 GDP = private consumption + gross investment + government
spending +(expor ts – impor ts)
 Of ten reflects a countr y’s Standard of living
INFLATION
An increase in the general price level
 When prices increase, each unit of currency buys fewer goods
& services
 Caused by excessive growth of the money supply
CONSUMER PRICE INDEX
Shows change in the average prices of goods & ser vices bought
by consumers over a period of time
 Related to inflation
 Shows how much your money can buy
PRODUCTIVIT Y
The quantity of a good an average worker produces in an hour
 Measure of output from a production process
 GDP per hour worked
UNEMPLOYMENT
State of being without paid work, though willing and able to
work and actively seeking work
 Proportion of labor force that is without paid work
DEBT
money borrowed by the federal government of the US at any one
time through the issue of securities by the Treasur y and other
federal government agencies
 Deficit – the dif ference between the total amount spent by
Congress and the amount received by the IRS
 Was $14.7T last year, this year it’s $16.0 TRILLION
 US National Debt Clock
 Surplus – revenues exceed spending
 Balanced Budget – revenues = spending
 President Clinton, 1998-2001 ?
STRENGTH OF US ECONOMY TO OTHER
COUNTRIES
 Top 10 largest world economies
Gross domestic product in $ trillion
World Rank
Country
GDP
1
United States
14.7
2
China
5.75
3
Japan
5.4
4
Germany
3.31
5
France
2.56
6
United Kingdom
2.26
7
Italy
2.04
8
Brazil
2.02
9
Canada
1.56
10
Russia
1.47
 Trading Economics