Understanding the U.S. Business System Chapter 1 Understanding the U.S. Business System PowerPoint Presentation by Charlie Cook Copyright © 2005 Prentice Hall, Inc. All rights reserved.

L E A R N I N G O U T C O M E S After reading this chapter, you should be able to: Define the nature of U.S. business and identify its main goals and functions. Describe the different types of global economic systems according to the means by which they control the factors of production through input and output markets. Show how markets, demand, and supply affect resource distribution in the United States. Identify the elements of private enterprise and explain the various degrees of competition in the U.S. economic system. Explain the importance of the economic environment to business and identify the factors used to evaluate the performance of an economic system. Copyright © 2005 Prentice Hall, Inc. All rights reserved.

Key Topics Nature and goals of US business Global economic systems Supply and demand Private enterprise and competition Evaluating economic performance Status and outlook for the US economy Copyright © 2005 Prentice Hall, Inc. All rights reserved.

What Is “A Business”? An organization that provides goods and services to earn profits Profits: The positive difference between revenues and expenses Copyright © 2005 Prentice Hall, Inc. All rights reserved.

Functions of Business: From society’s perspective Choice Quality of Life Opportunity Enterprise Copyright © 2005 Prentice Hall, Inc. All rights reserved.

Goals of Business: From a business perspective Survival Social Responsibility Profit Growth Copyright © 2005 Prentice Hall, Inc. All rights reserved.

Factors of Production used by business Physical Resources Information Resources Entrepreneurs The factors formerly known as “Land” Herb Kelleher funded Southwest airlines at one point by taking his last dollars and betting them on the roulette wheel. Labor Capital Copyright © 2005 Prentice Hall, Inc. All rights reserved.

Homework: Question #1 What are the factors of production? Is one most important? Copyright © 2005 Prentice Hall, Inc. All rights reserved.

How Are Factors of Production Allocated? Planned Economy: An economic system in which the government owns and operates the sources of production Slicing the pie evenly Market Economy: An economic system in which buyers and sellers interact based on freedom of choice “The Invisible Hand” of self interest Growing the pie Karl Marx: Free market forces will collapse the economic system leading to centralized control of production and the end of conflicting market forces. Adam Smith: The Wealth of Nations: Why are some countries wealthier than other? Economic incentive leads to economic growth. Thomas Malthus: Economics is about the allocation of scarce resources: “the dismal science”. Copyright © 2005 Prentice Hall, Inc. All rights reserved.

Economic Systems control scale Capitalistic Socialistic (Planned Economy) (Market Economy) Pure Capitalism Communism Question: Where do the people enjoy the highest standard of living with the most equal distribution of wealth? Copyright © 2005 Prentice Hall, Inc. All rights reserved.

Socialism Toward Capitalism A planned economic system in which the government owns and operates selected sources of production Worldwide trend Worldwide trend is toward more market elements. Privatization: The process of converting government enterprises into privately owned companies Some notable exceptions are occurring: Venezuela’s President Hugo Chávez’s nationalization of Venezuela’s oil production is one notable example. Some notable exceptions are occuring: Nationalizing is the process of taking government control of privately held assets. Hugo Chávez of Venezuela is one recent notable example. Copyright © 2005 Prentice Hall, Inc. All rights reserved.

Capitalism: A Fundamentally Market-Based Economy Individuals Choose: Where to work What to buy How much to pay Producers Choose: Who to hire What to produce How much to charge Government freedoms AND controls support private ownership and encourage entrepreneurship and choice Copyright © 2005 Prentice Hall, Inc. All rights reserved.

Circular Flow in a Market Economy Copyright © 2005 Prentice Hall, Inc. All rights reserved. Figure 1–1

Key Topics Nature and goals of US business Global economic systems Supply and demand Private enterprise and competition Evaluating economic performance Status and outlook for the US economy Copyright © 2005 Prentice Hall, Inc. All rights reserved.

Supply and Demand Drive the Capitalistic U.S. Economic System The willingness and ability of producers to offer a good or service for sale Law of Supply: Producers will supply (offer) more of a product for sale as its price rises and less as its price drops. How much would it take to entice YOU to make cookies for the class? Copyright © 2005 Prentice Hall, Inc. All rights reserved.

Supply and Demand Drive the U.S. Economic System (cont’d) The willingness and ability of buyers to purchase a good or service Law of Demand: Buyers will demand (purchase) more of a product as its price drops and less as its price increases. How much would you PAY to buy cookies in class? Copyright © 2005 Prentice Hall, Inc. All rights reserved.

Demand and Supply Schedules Quantity of Quantity of Price Pizzas Demanded Pizzas Supplied $2 2000 100 $4 1900 400 $6 1600 600 $8 1200 800 $10 1000 1000 $12 800 1200 $14 600 1300 $16 400 1600 $18 200 1800 $20 100 2000 Copyright © 2005 Prentice Hall, Inc. All rights reserved.

  Demand and Supply Demand Curve Price of Pizzas 200 - 400 - 600 - 800 - 1000 - 1200 - 1400 - 1600 - 1800 - 2000 - $20 - 18 - 16 - 14 - 12 - 10 - 8 - 6 - 4 - 2 -  Demand Curve Price of Pizzas  Quantity of Pizzas Demanded Copyright © 2005 Prentice Hall, Inc. All rights reserved.

Demand and Supply (cont’d)  200 - 400 - 600 - 800 - 1000 - 1200 - 1400 - 1600 - 1800 - 2000 - $20 - 18 - 16 - 14 - 12 - 10 - 8 - 6 - 4 - 2 - Price of Pizzas Supply Curve  Quantity of Pizzas Supplied Copyright © 2005 Prentice Hall, Inc. All rights reserved.

 Demand and Supply Price of Pizzas Quantity of Pizzas per Week 200 - 400 - 600 - 800 - 1000 - 1200 - 1400 - 1600 - 1800 - 2000 - $20 - 18 - 16 - 14 - 12 - 10 - 8 - 6 - 4 - 2 - Price of Pizzas Demand Curve Supply Curve Equilibrium Price  Quantity of Pizzas per Week Copyright © 2005 Prentice Hall, Inc. All rights reserved.

Demand and Supply Figure 1–2a Copyright © 2005 Prentice Hall, Inc. All rights reserved. Figure 1–2a

Demand and Supply (cont’d) Copyright © 2005 Prentice Hall, Inc. All rights reserved. Figure 1–2b

Homework: Question #2 What is a demand curve? What is a supply curve? What is happening where they intersect? Copyright © 2005 Prentice Hall, Inc. All rights reserved.

Key Topics Nature and goals of US business Global economic systems Supply and demand Private enterprise and competition Evaluating economic performance Status and outlook for the US economy Copyright © 2005 Prentice Hall, Inc. All rights reserved.

The U.S. Economy is a Private Enterprise System Four Key Elements: Private Property Rights Freedom of Choice Profits Competition Individuals are free to pursue their own interests without government restriction. Enough government control is in place to ensure enforcement of individual and business rights Copyright © 2005 Prentice Hall, Inc. All rights reserved.

Competition Competition motivates businesses to produce their products better and/or cheaper Making our product better Making ours cheaper Why does competition do this? Bonus: Competitive Strategies Growing the market Bicycles Vs. Cannibalistic competition Politics Copyright © 2005 Prentice Hall, Inc. All rights reserved.

Degrees of Competition (p16) What kind of competitive landscape do I want if: My firm has been around a long time and I am tired of innovating? My firm exists in a sea of similar competitors? I am trying to start a brand new company? Copyright © 2005 Prentice Hall, Inc. All rights reserved. Table 1–1

Understanding Economic Performance Key Concept: The business Cycle KEY CONCEPTS Business Cycle Aggregate Output Standard of Living Gross Domestic Product (GDP) Gross National Product (GNP) Copyright © 2005 Prentice Hall, Inc. All rights reserved.

The balance of trade: Each month we import more than we export. That means we buy more than we sell. How do we pay the bills? Copyright © 2005 Prentice Hall, Inc. All rights reserved.

U.S. GDP and GDP per Capita Copyright © 2005 Prentice Hall, Inc. All rights reserved. Table 1–2

GDP and GDP per Capita (p 20) Copyright © 2005 Prentice Hall, Inc. All rights reserved. Figure 1–3

Understanding Economic Performance KEY CONCEPTS Productivity: The amount a system produces compared to the resources needed to produce it PRODUCTIVITY is impacted by: Balance of Trade National Debt Copyright © 2005 Prentice Hall, Inc. All rights reserved.

Economic Stability: Balancing Growth Two related factors threaten stability: INFLATION UNEMPLOYMENT Copyright © 2005 Prentice Hall, Inc. All rights reserved.

Hamburger Inflation Table 1–3 Copyright © 2005 Prentice Hall, Inc. All rights reserved. Table 1–3

Selected CPI Values Figure 1–4 Copyright © 2005 Prentice Hall, Inc. All rights reserved. Figure 1–4

The CPI is a Tool to Measure Inflation 2000 1980 1930 House $250,000 $109,000 $25,696 Car $18,000 $7,871 $1,850 Hamburger & Fries $5.00 $2.19 $.51 Source: Westegg.com/inflation/infl.cgi Copyright © 2005 Prentice Hall, Inc. All rights reserved. Copyright ©2003 Prentice Hall, Inc. 1 - 36

Recessions and Depressions Aggregate output declines, unemployment increases Depression: Severe and long-lasting recession Copyright © 2005 Prentice Hall, Inc. All rights reserved.

Managing the US Economy Stabilization Policy: Government policy designed to smooth out fluctuations in the economy Fiscal Policies Monetary Policies Copyright © 2005 Prentice Hall, Inc. All rights reserved.

Evolution of American Business Agricultural Manufacturing Service Industries Future??? Copyright © 2005 Prentice Hall, Inc. All rights reserved.

Looking to the Future Four Major Forces: The information revolution continues evolving. Technological breakthroughs will create new industries. Increasing globalization will create larger markets and tougher competition. Increasing instability in energy costs create danger and opportunity Copyright © 2005 Prentice Hall, Inc. All rights reserved.

Projections and Implications for the U.S. Economy Opportunities… Steady economic growth Fewer inflationary surges and lower budget deficits Countries with free trade, innovation, and open financial systems will thrive Successful businesses will be those that quickly master new technology Copyright © 2005 Prentice Hall, Inc. All rights reserved.

Projections and Implications for the U.S. Economy Challenges… Growing US trade deficit Disturbing income inequality Steadily increasing consumer debt Limited health insurance Increasing worldwide energy demand and energy costs Copyright © 2005 Prentice Hall, Inc. All rights reserved.

Group Discussions Review Evaluation Form Our first try! Copyright © 2005 Prentice Hall, Inc. All rights reserved.

What’s next? Chapter 1 overview lecture Chapter 1 teamwork to solve the assigned questions. Then we will complete a short case study involving supply and demand that will require some knowledge of chapter 1. Copyright © 2005 Prentice Hall, Inc. All rights reserved.

Chapter Review Describe the nature and goals of US business. Define the key global economic systems and describe how they control the factors of production. Show how demand and supply affect the distribution of resources in the US. Identify the elements of private enterprise and the various degrees of competition. Explain how to evaluate an economic system. Describe the key projections for the US economy. Copyright © 2005 Prentice Hall, Inc. All rights reserved.