Fourth Edition Copyright ©2003 Prentice Hall, Inc. PART Understanding the Contemporary Business Environment
Copyright ©2003 Prentice Hall, Inc Chapter 1 Understanding the Business System
Copyright ©2003 Prentice Hall, Inc “ In business you get what you want by giving other people what they want. ” ~ Alice Foote MacDougall
Copyright ©2003 Prentice Hall, Inc Key Topics Nature and goals of business Global economic systems Private enterprise and competition Evaluating economic performance
Copyright ©2003 Prentice Hall, Inc Exercise Write four things do you know about business. Write 4 things you would like to know?
Copyright ©2003 Prentice Hall, Inc What Is Business? An organization that provides goods and services to earn profits Profits: The positive difference between revenues and expenses
Copyright ©2003 Prentice Hall, Inc Difference between business and non- profit organizations? goals are quite different, the same skills (management, marketing, finance, etc.) are needed to be successful in both arenas. Discussion: What benefits do businesses offer society? (goods, services, employment, tax revenue, technological advances, etc.)
Copyright ©2003 Prentice Hall, Inc Physical Resources LaborCapital Entrepreneurs Factors of Production Information Resources
Copyright ©2003 Prentice Hall, Inc Factors of production Labor: The people who work for businesses. Labor includes both physical and mental contributions. A country with a highly educated workforce is considered rich in this resource. Capital: The funds needed to create and operate a business. Sources include personal investment by owners, loans, sale of stock and bonds, and revenue from the sale of product. Entrepreneurs: People who are willing to accept the risks that are part of creating and operating businesses, in return for the potential profits. Physical resources: Tangible things organizations use in the conduct of their business. Possibilities include natural resources, raw materials, office equipment and facilities, computers, transportation and communication infrastructure, etc. Information resources: Data and other information used by business. This factor has become increasingly important in the last decade.
Copyright ©2003 Prentice Hall, Inc Exercise: group Discusion Higher Education service. list the factors of production that were used to produce it.
Copyright ©2003 Prentice Hall, Inc Two Types of Economic Systems Planned Economy – A centralized government controls all or most factors of production and makes all or most production and allocation decisions for the economy. Market Economy – Individual producers and consumers control production and allocation by creating combinations of supply and demand Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
Copyright ©2003 Prentice Hall, Inc How Are Factors of Production Allocated? Planned Economy: An economic system in which the government owns and operates all sources of production Market Economy: An economic system in which buyers and sellers interact based on freedom of choice
“Circular Flow in Market Economy” OUTPUT MARKETS Goods Services INPUT MARKETS Labor Capital Entrepreneurs Physical Resources Information Resources HOUSEHOLDS Demand products in output markets Supply resources in input markets FIRMS Supply products in output markets Demand resources in input markets DEMAND DEMANDSUPPLY SUPPLY Copyright ©2003 Prentice Hall, Inc
Copyright ©2003 Prentice Hall, Inc Types of Economic Systems Planned Economy - Communism – individuals contribute according to their abilities and receive benefits according to their needs. The government owns and operates all factors of production. The government assigns people to jobs and owns all businesses and controls business decisions Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
Copyright ©2003 Prentice Hall, Inc Types of Economic Systems (cont.) Market Economics Capitalism – The government supports private ownership and encourages entrepreneurship. – Individuals choose where to work, what to buy, and how much to pay. – Producers choose who to hire, what to produce, and how much to charge. Market – A mechanism of exchange between buyers and sellers of a good or service Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
Copyright ©2003 Prentice Hall, Inc Types of Economic Systems (cont.) Market Economics Mixed Market Economy – Features characteristics of both planned and market economies. – Privatization: The process of converting government enterprises into privately owned companies. – Socialism: The government owns and operates select major industries such as banking and transportation. Smaller businesses are privately owned Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
Copyright ©2003 Prentice Hall, Inc The Economics of Market Systems Demand – The willingness and ability of buyers to purchase a product (a good or a service). Supply – The willingness and ability of producers to offer a good or service for sale. The Laws of Demand and Supply in a Market Economy – 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 Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
Copyright ©2003 Prentice Hall, Inc Demand and Supply in a Market Economy Demand and Supply Schedule – The relationships among different levels of demand and supply at different price levels Demand curve: How much product will be demanded (bought) at different prices. Supply curve: How much product will be supplied (offered for sale) at different prices. Market price (equilibrium price): The price at which the quantity of goods demanded and the quantity of goods supplied are equal Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
Copyright ©2003 Prentice Hall, Inc exercise Guess the 4 key elements of free enterprise?
Copyright ©2003 Prentice Hall, Inc The Palestinian Economy is a Private Enterprise System 1.Private Property Rights 2.Freedom of Choice 3.Profits 4.Competition Individuals are free to pursue their own interests without government restriction Four Key Elements:
Copyright ©2003 Prentice Hall, Inc Competition Competition motivates businesses to produce their products better or cheaper. Companies that don’t compete effectively will be forced out of business.
Copyright ©2003 Prentice Hall, Inc Exercise What is the relationship between standard of living and quality of life? How is quality of life evaluated in different countries?
Copyright ©2003 Prentice Hall, Inc Measuring growth It requires a clear understanding of basic economic indicators and terms: Business Cycle: Pattern of short-term expansions and contractions in an economy. When the economy is expanding, we experience growth, and when the economy is contracting, we experience recession. Aggregate output: Total quantity of goods and services produced by an economic system during a given period. Standard of living: Total quantity and quality of goods and services that people can purchase within their economic system. When output increases faster than the population, we experience growth in our standard of living.
Copyright ©2003 Prentice Hall, Inc So how do we measure the performance of an economic system? Gross Domestic Product (GDP): Value of all goods and services produced by an economic system in a year through domestic factors of production. Gross National Product (GNP): Value of all goods and services produced by an economic system in a year regardless of where factors of production are located. In other words, when a Japanese automobile produces cars at its factory in Tennessee, the profits from that factory are included in the American GDP, and in the Japanese GNP. Productivity is the amount a system produces compared to the resources needed to produce it.
Copyright ©2003 Prentice Hall, Inc Recessions & Depressions Recession: Aggregate output declines, unemployment increases. A recession is usually measured by two consecutive quarters of decline in real GDP. Depression: Severe and long-lasting recession
Copyright ©2003 Prentice Hall, Inc Managing the Economy Stabilization Policy: Government policy designed to smooth out fluctuations in the economy Fiscal Policies Monetary Policies
Copyright ©2003 Prentice Hall, Inc Types of Policies Monetary Policy: Designed to control the amount of money flowing around the economy (the money supply). This policy is used to tackle inflation and balance of payments. Methods under this policy: 1. Interest rates: 2. The government may impose restrictions on financial institutions to affect borrowing. 3. The central bank can control bank assets and the amount of lending. Fiscal policy: Aims to control the total spending in the economy. 1. Government spending. 2. Change in direct taxation. 3. Change in indirect taxation.
Copyright ©2003 Prentice Hall, Inc Looking to the Future Three Major Forces will drive the global economy for the next decade what are they? 1.The information revolution will continue to boost productivity: especially in information- dependent industries such as finance, media, and trade. 2.Technological breakthroughs will create new industries: Increasing globalization will create larger markets, while fostering tougher competition. As a result, companies will need to focus more than ever on innovation and efficiency.
Copyright ©2003 Prentice Hall, Inc Review What are the five factors of production? Is one factor more important than the others? If so, which one? Why? The five factors of production are labor, capital, entrepreneurs, physical resources, and information resources. All five factors are crucial. However, their relative importance depends on the product and the industry. In the software development business, for example, skilled labor and information resources are especially important, but the business couldn’t survive without capital and physical resources (computers), and it wouldn’t have been launched without an entrepreneur.
Copyright ©2003 Prentice Hall, Inc Review In recent years, many countries have moved from planned economies to market economies. Why do you think this has occurred? Can you imagine a situation that would cause a revival of planned economies? The failure of communism—both politically and economically—has led to an increase in the number of mixed and market economies. Answers will vary as to what would cause a resurgence of planned economies, but the factors might include a failure of capitalism to effectively distribute society’s resources, or an unbearable level of crime and corruption.
Copyright ©2003 Prentice Hall, Inc Review Explain how current economic indicators such as inflation and unemployment affect you personally. Explain how they will affect you as a manager. Answers will vary, but all students should obviously include prices paid for consumer goods and the availability of desirable jobs. Managers are affected by inflation because it tends to drive up the wages they must pay, and by unemployment because it affects their ability to find workers. Also, both inflation and unemployment affect consumer and industrial demand, which play a key role in management.