Business Copyright 2005 Prentice- Hall, Inc. 2-1

1-2 Session #1 Understanding Business & Economic System Business Introduction - Teaching Team Business and Management Department Faculty of Economics UNPAD

WHAT IS BUSINESS ???

Business What Is Business? Activity seeking ProfitActivity seeking Profit Provides goods/servicesProvides goods/services

Business Profits: The difference between a business’s revenues and its expenses

Business 1–6 The Benefits of Business –Provision of goods and services –Employment of workers –Innovation and opportunities –Increased quality of life and standard of living –Enhance personal incomes of owners and stockholders –Tax payments support government –Support for charities and community leadership

Business Factors of Production  Labor  Capital  Entrepreneur  Physical Resources  Information Resources Copyright 2005 Prentice- Hall, Inc. 1-7 Resources used in the production of goods and services:

Business Factor of Production Physical resources: Tangible things organizations use in the conduct of their businessTangible things organizations use in the conduct of their business Information resources : Data and other information used by businessData and other information used by business

Business Economics: Use of scarce resources to produce goods/services, distribute them among competing groups/individuals

Business What is an Economic System?  A nation’s system for allocating resources among citizens.  Assumes resources are scarce thus requiring allocation.  Market is mechanism for exchange between Buyer/Seller 1-10

Business Three Economic Systems Communism Socialism Capitalism (Highly Controlled ) (Little Control ) Mixed

Business Capitalism Private Property Private Property Profit/Ownership Profit/Ownership Freedom of Competition Freedom of Competition Freedom of Choice Freedom of Choice

Business Communism Public Ownership Public Ownership –Productive Capacity –Capital Central Planning/Controlled Economy Central Planning/Controlled Economy Managers = Mandatory Party Membership Managers = Mandatory Party Membership

Business Socialism Private & Public Ownership Private & Public Ownership Some Choices are Limited Some Choices are Limited Creates Social Equality & Equality of Results Creates Social Equality & Equality of Results Reduces Individual Incentive Reduces Individual Incentive

Business Mixed Economies Free-Market Economy = Capitalism Free-Market Economy = Capitalism Command Economy Command Economy –Socialism –Communism Trend Results in Blend Trend Results in Blend –Capitalism > Socialism –Socialism > Capitalism

Business Circular Flow of Economics Output ( Goods & Services) Input (Factors of Production ) Supply Demand Supply Demand

Business 1–17 The Economics of Market Systems DemandDemand –The willingness and ability of buyers to purchase a product (a good or a service). SupplySupply –The willingness and ability of producers to offer a good or service for sale. The Laws of Demand and SupplyThe Laws of Demand and Supply –Demand: Buyers will purchase (demand) more of a product as its price drops and less of a product as its price increases. –Supply: Producers will offer (supply) more of a product for sale as its price rises and less of a product as its price drops.

Business Private Enterprise in a Market Economy Private Enterprise SystemPrivate Enterprise System –Allows individuals to pursue their own interests with minimal government restriction. Elements of a Private Enterprise SystemElements of a Private Enterprise System –Private property rights –Freedom of choice –Profits –Competition

Business Degrees of Competition Sellers OneMany Monopoly Oligopoly MonopolisticCompetition Perfect Competition Competition exists in different degrees, ranging from perfect to nonexistent

Business 1–20 Perfect Competition Prices are determined by supply and demand because no single firm is powerful enough to influence the price of its product. –All firms in an industry are small –The number of firms in the industry is large. Principles of perfect competition:Principles of perfect competition: –Buyers view all products as identical. –Buyers and sellers know the prices that others are paying and receiving in the marketplace. –It is easy for firms to enter or leave the market. –Prices are set exclusively by supply and demand and accepted by both sellers and buyers.

Business 1–21 Monopolistic Competition There are numerous sellers trying to differentiate their products from those of competitors so as to have some control over price.There are numerous sellers trying to differentiate their products from those of competitors so as to have some control over price. There are many sellers though fewer than in pure competition.There are many sellers though fewer than in pure competition. Sellers can enter or leave the market easily.Sellers can enter or leave the market easily. The large number of buyers relative to sellers applies potential limits to prices.The large number of buyers relative to sellers applies potential limits to prices.

Business 1–22 Oligopoly An industry with only a few large sellersAn industry with only a few large sellers Entry by new competitors is hard because large capital investment is needed.Entry by new competitors is hard because large capital investment is needed. The actions of one firm can significantly affect the sales of every other firm in the industry.The actions of one firm can significantly affect the sales of every other firm in the industry. The prices of comparable products are usually similar.The prices of comparable products are usually similar. As the trend toward globalization continues, most experts believe that oligopolies will become increasingly prevalent.As the trend toward globalization continues, most experts believe that oligopolies will become increasingly prevalent.

Business 1–23 Monopoly An industry or market that has only one producer (or else is so dominated by one producer that other firms cannot compete with it).An industry or market that has only one producer (or else is so dominated by one producer that other firms cannot compete with it). The sole supplier enjoys complete control over the prices of its products; its only constraint is a decrease in consumer demand due to increased prices.The sole supplier enjoys complete control over the prices of its products; its only constraint is a decrease in consumer demand due to increased prices. –Natural monopolies: Industries in which one firm can most efficiently supply all needed goods or services; typically allowed and regulated by legislated acts and governmental agencies.

Business 1–24 Economic Indicators Statistics that show whether an economic system is strengthening, weakening, or remaining stableStatistics that show whether an economic system is strengthening, weakening, or remaining stable –Gross Domestic Product (GDP) –Unemployment Rate –Price Indexes Consumer Price Index(CPI)Consumer Price Index(CPI) Producer Price Index(PPI)Producer Price Index(PPI)