Understanding Economic Systems and Business

Understanding Economic Systems and Business
Chapter 1 Understanding Economic Systems and Business Understanding Economic Systems and Business CHAPTER 1 © Yashuhide Fumoto/Getty Images The Future of Business The Essentials 4th Edition Gitman & McDaniel Prepared by Deborah Baker Chapter 1 Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved

Learning Goals CHAPTER 1
Understanding Economic Systems and Business 1 How do businesses and not-for-profit organizations help create our standard of living? 2 What are the sectors of the business environment, and how do changes in them influence business decisions? 3 What are the primary features of the world’s economic systems, and how are the three sectors of the U.S. economy linked? 4 How do economic growth, full employment, price stability, and inflation indicate a nation’s economic health? CHAPTER 1

Learning Goals (continued)
Chapter 1 Understanding Economic Systems and Business 5 How does the government use monetary policy and fiscal policy to achieve its macroeconomic goals? 6 What are the basic microeconomic concepts of demand and supply, and how do they establish prices? 7 What are the four types of market structure? 8 Which trends are reshaping the business, micro-, and macroeconomic environments and competitive arena? CHAPTER 1

The Nature of Business 1 A business is an organization
Chapter 1 Understanding Economic Systems and Business A business is an organization that strives for a profit by providing goods and services desired by its customers. Goods and services that are the basis of our standard of living Jobs, goods and services that help determine our quality of life Businesses provide… © AP Images / Paul Sakuma Businesses meet the needs of consumers by providing countless goods and services that are desired by customers. Goods are tangible items manufactured by businesses. Businesses also serve other organizations by providing machinery, goods, computers, and thousands of other items. Services are intangible offerings that can’t be held, touched, or stored. Thus, businesses create the goods and services and services that are the basis of our standard of living. The standard of living is measured by the output of goods and services people can buy with the money they have. Please note that cities in the United States are not top-ranked for quality of life. Of the top 25 cities, 68 percent are in Europe, with Zurich and Geneva ranked highest. Baghdad scored the lowest. 1

The Nature of Business 1 standard of living
Chapter 1 Understanding Economic Systems and Business standard of living A country’s output of goods and services that people can buy with the money they have. The United States has one of the highest standards of living in the world. 1

The Nature of Business 1 quality of life
Chapter 1 Understanding Economic Systems and Business quality of life The general level of human happiness based on such things as life expectancy, educational standards, health, sanitation, and leisure time. 1

The Nature of Business 1 Revenue Costs Profit The money a company
Chapter 1 Understanding Economic Systems and Business Revenue less Costs Profit equals The money a company earns from providing services or selling goods to customers. Expenses that a company incurs from creating and selling goods and services. The money left over after all expenses are paid. When a company uses its resources intelligently, it can often increase sales, hold costs down, and earn a profit. There is generally a direct relationship between risks and profit. The greater the risks, the greater the potential for profit or loss. A company with a conservative approach may lose out to more aggressive competitors who react more quickly to changes in the business environment. 1

Not-for-Profit Organizations
Chapter 1 Understanding Economic Systems and Business Not-for-Profit Organizations Government is the largest not-for-profit group. Not-for-profit organizations account for more than 28% of economic activity In the U.S. A not-for-profit organization is an organization that exists to achieve some other goal than the usual business goal of profit. Not all organizations strive to make a profit. A not-for-profit organization exists to achieve some goal other than the usual business goal of profit. Examples are The United Way, the American Cancer Society, and the Sierra Club. Most hospitals, zoos, museums, and charities are also not-for-profit organizations. The government is the largest not-for-profit group. 1

Not-for-Profit Organizations
Chapter 1 Understanding Economic Systems and Business Develop strategy Measure performance Improve productivity Create budgets Encourage innovation Demonstrate accountability Not-for-profit managers are concerned with the same concepts as their colleagues in for-profit companies. 1

Factors of Production 1 Natural resources Labor Capital
Chapter 1 Understanding Economic Systems and Business Factors of Production Natural resources Labor Capital Entrepreneurship Knowledge Factors of production are the resources used to create goods and services. Four traditional factors of production are common to all productive activity: natural resources, labor, capital, and entrepreneurship. A fifth factor, knowledge, is gaining in importance. Knowledge is the combined talents and skills of the workforce. 1

CONCEPT check 1 Explain the concepts of revenue, costs, and profit.
Chapter 1 Understanding Economic Systems and Business Explain the concepts of revenue, costs, and profit. What are the five factors of production? What is the role of the entrepreneur in society? 1

Understanding the Business Environment
Chapter 1 Understanding Economic Systems and Business 2 What are the sectors of the business environment, and how do changes in them influence business decisions? 2

External Environment 2 Economic Political and legal Demographic Social
Chapter 1 Understanding Economic Systems and Business Economic Political and legal Demographic Social Competitive Global Technological Owners and managers have a great level of control over the internal environment. However, the external environmental conditions are generally beyond the control of management and change constantly. The external environment must continuously be monitored. 2

Economic Influences Chapter 1 Understanding Economic Systems and Business Fluctuations in economic activity create business cycles. Government can impact the level of economic activity through taxes and interest rate levels. Forces of supply and demand determine how prices and quantities of goods and services behave in a free market. Economic influence is one of the most important environmental factors. 2

Political and Legal Influences
Chapter 1 Understanding Economic Systems and Business Amount of government activity Types of laws passed General political stability of government Three components of the political and legal climate are shown on this slide. Federal, state, and local governments and agencies exert control over businesses. 2

Demographic Factors 2 demography
Chapter 1 Understanding Economic Systems and Business demography The study of people’s vital statistics, such as their age, race and ethnicity, and location. Demographic factors are an uncontrollable factor in the business environment and extremely important to managers. These factors are at the core of many business decisions. 2

Demographic Factors 2 Age Gender Race Ethnicity Location Chapter 1
Understanding Economic Systems and Business Demographic Factors Gender Race Ethnicity Location Age Demography is the study of people’s vital statistics, such as their age, race and ethnicity, and location. Decisions, such as market definition for products and the size and composition of the workforce, utilize demographic information. 2

Demographic Factors 2 Generation Y Generation X Baby Boomers
Chapter 1 Understanding Economic Systems and Business Demographic Factors Generation Y Generation X Baby Boomers Born between Born between Born between Those individuals in Generation Y were born between about 1979 and They are 72 million strong with an immense marketing impact. Generation Y is computer literate and prosperous. By 2010, minorities will represent 35 percent of the U.S. population. Businesses tailor their products to appeal to specific age groups, as well as minorities. 2

Social Factors 2 Attitudes Values Lifestyles Chapter 1
Understanding Economic Systems and Business Attitudes Values Lifestyles Social change is the most difficult environmental factor to forecast, influence or integrate into business plans. Social factors include our attitudes, values, and lifestyles. A lifestyle is the way people decide to live their lives. People are choosing products and services that meet diverse needs and interests rather than conforming to traditional stereotypes. Saving time also influences business decisions. As women have increased in the workforce, this development has increased family incomes, the demand for timesaving goods, and changing family shopping patterns. 2

Technology 2 technology
Chapter 1 Understanding Economic Systems and Business technology The application of science and engineering skills and knowledge to solve production and organizational problems. The application of technology can stimulate growth under capitalism or any other economic system. 2

CONCEPT check Chapter 1 Understanding Economic Systems and Business Define the components of the internal and external business environments. What factors within the economic environment affect businesses? Why do demographic shifts and technological developments create both challenges and new opportunities for business? 2

How Business and Economics Work
Chapter 1 Understanding Economic Systems and Business 3 What are the primary features of the world’s economic system, and how are the three sectors of the economy linked? 3

How Business and Economics Work
Chapter 1 Understanding Economic Systems and Business How Business and Economics Work economics Economics is the study of how a society uses scarce resources to produce and distribute goods and services. Economics is the study of how a society uses scarce resources to product and distribute goods and services. The resources of a person, a firm, or a nation are limited. Hence, economics is the study of choices—what people, firms, or nations choose from among the valuable resources. 3

Economic Concerns 3 What is produced? How much is produced?
Chapter 1 Understanding Economic Systems and Business What is produced? How much is produced? How is it produced? For whom is it produced? Every business operates within the economy. Economics is the study of choices: based on economic expectations, businesses decide what product is produced and at what price. In the U.S., the government and the free-market system guide the economy. 3

Global Economic Systems
Chapter 1 Understanding Economic Systems and Business Free Market / Capitalism Mixed Economies Planned Economies Communism Socialism The world’s major economic systems fall into two broad categories: free market ,or capitalism Planned economics, which include communism and socialism. In reality, many countries use a mixed market system incorporating elements from more than one economic system. 3

Chapter 1 Understanding Economic Systems and Business Differentiation among Economic Systems Allocating limited resources Choosing goods and services to produce Determining how and by whom to produce goods Distributing goods and services The major differentiator among economic systems is whether the government or individuals decides how to make the decisions, as listed on this slide. 3

Chapter 1 Understanding Economic Systems and Business Global Economic Systems capitalism An economic system based on competition in the marketplace and private ownership of the factors of production; also known as the private enterprise system. In recent years, more countries have shifted toward free-market economic systems and away from planned economies. 3

Chapter 1 Understanding Economic Systems and Business Global Economic Systems communism An economic system characterized by government ownership of virtually all resources, government control of all markets, and economic decision-making by central-government planning. The opposite of capitalism is communism. North Korea and Cuba are the best remaining examples of communist economic systems. 3

Chapter 1 Understanding Economic Systems and Business Global Economic Systems socialism An economic system in which the basic industries are owned either by the government itself or by the private sector under strong government control. Many countries, including Great Britain, Denmark, Israel, and Sweden, have socialist systems, but the systems vary from country to country. 3

Chapter 1 Understanding Economic Systems and Business Global Economic Systems mixed economies Economies that combine several systems; for example, an economy where the government owns certain industries but others are owned by the private sector. 3

Macroeconomics and Microeconomics
Chapter 1 Understanding Economic Systems and Business Macroeconomics and Microeconomics macroeconomics The subarea of economics that focuses on the economy as a whole by looking at aggregate data for large groups of people, companies or products. microeconomics The subarea of economics that focuses on individual parts of the economy, such as households or firms. Economics has two main subareas, microeconomics and macroeconomics, which offer a valuable outlook on the economy. Macroeconomics looks at the economy as a whole, through aggregate data—data considered as a whole. In contrast, microeconomics focuses on individual parts of the economy, such as households or firms. For example, a company such as Ford would consider such macroeconomic factors as unemployment rate, and interest rates. From a microeconomic viewpoint, Ford would judge consumer demand for new cars versus the existing supply, current prices and sales incentives. 3

CONCEPT check 3 What is economics, and how can you benefit from
Chapter 1 Understanding Economic Systems and Business What is economics, and how can you benefit from Understanding basic economic concepts? Compare and contrast the world’s major economic systems. Why is capitalism growing, communism declining, and socialism still popular? What is the difference between macroeconomics and microeconomics? 3

Understanding the Business Environment
Chapter 1 Understanding Economic Systems and Business 4 How do economic growth, full employment, and price stability indicate a nation’s economic health? Understanding the national economy and how changes in government policies affect households and businesses is a good place to begin an overview of economics. 4

Economic Growth 4 economic growth
Chapter 1 Understanding Economic Systems and Business Economic Growth economic growth An increase in a nation’s output of goods and services. The more a nation produces, the higher its standard of living. The most important way to judge a nation’s economic health is to look at its production of goods and services. An increase in a nation’s output of goods and services is economic growth. Economic growth is usually a good thing, but it also has a bad side. Increased production yields more pollution. Growth may strain public facilities, such as roads, schools, and hospitals. The government tries to apply economic policies that will help keep growth to a level that does not reduce the quality of life. 4

Economic Growth 4 gross domestic product
Chapter 1 Understanding Economic Systems and Business Economic Growth gross domestic product The total market value of final goods and services produced within a nation’s borders each year. The gross domestic product (GDP) is the total market of all final goods and services produced within a nation’s borders each year. GDP is the most basic measure of economic growth. It is reported quarterly and used to compare trends in national output. The rate of growth in real GDP (adjusted for inflation) is also important. The U.S. economy has been growing between 3 percent and 5 percent annually. A decline in GDP for two consecutive quarters is called a recession. China’s GDP has been growing at 8 to 9 percent per year. The primary contributor has been technology, and there are very few things in the global marketplace that are not or cannot be made in China. 4

Business Cycles 4 recession
Chapter 1 Understanding Economic Systems and Business Business Cycles recession A decline in GDP that lasts for at least two consecutive quarters. 4

Keeping People on the Job
Chapter 1 Understanding Economic Systems and Business Keeping People on the Job full employment The condition when all people who want to work and can work have jobs. Another macroeconomic goal is full employment, or having jobs for all who want to and can work. Keep in mind that full employment does not actually mean 100 percent employment. Some people choose not to work for personal reasons, or are temporarily unemployed while they wait to start a new job. Full employment is when 94 to 96 percent of those available to work actually have jobs. 4

Measuring Unemployment
Chapter 1 Understanding Economic Systems and Business Measuring Unemployment unemployment rate The percentage of the total labor force that is not working but is actively looking for work. 4

Types of Unemployment Chapter 1 Understanding Economic Systems and Business Frictional Structural Cyclical Seasonal Short-term unemployment that is not related to the business cycle Unemployment that is caused by a mismatch between jobs and workers skills Unemployment that occurs when a downturn in the business cycle reduces demand for labor Unemployment that occurs during specific seasons in certain industries Economist classify unemployment into four types: Frictional unemployment is short-term unemployment not related to the business cycle Structural unemployment is involuntary cyclical unemployment occurs when a downturn in the business cycle reduces the demand for labor Seasonal unemployment occurs during specific seasons in certain industries The unemployment indicates the percentage of the total labor force not working but is actively looking for work. In early 2008 the unemployment rate was 5 percent. 4

Keeping Prices Steady 4 inflation
Chapter 1 Understanding Economic Systems and Business Keeping Prices Steady inflation The situation in which the average of all prices of goods and services is rising. The third macroeconomic goal is to keep overall prices for goods and services fairly steady. The situation in which the average of all prices of goods and services is rising is called inflation. Inflation’s higher prices reduces purchasing power, the value of what money can buy. Purchasing power is a function of two things: inflation and income. In the 1980s inflation in the U.S. was in the 12 to 13 percent range. From the late 1990s to 2004, inflation ranged from 1.5 to 4 percent. Because of a spike in energy costs, the inflation rate for 2007 was 4.1 percent. 4

Demand-Pull Inflation
Types of Inflation Chapter 1 Understanding Economic Systems and Business Demand-Pull Inflation Demand for goods and services is greater than the supply Cost-Push Inflation Increases in production costs push up prices There are two types of inflation: demand-pull inflation and cost-push inflation. Demand-pull inflation is described as “too much money chasing too few goods.” The higher prices lead to greater supply, eventually creating a balance between supply and demand. Cost-push inflation is triggered by increases in production costs, causing an increase in the prices of final goods/services. Wage increases are also a major cause of “cost-push inflation, creating a “wage-price spiral.” 4

CONCEPT check Chapter 1 Understanding Economic Systems and Business What is a business cycle? How do businesses adapt to periods of contraction and expansion? Why is full employment usually defined as a target percentage below 100 percent? What is the difference between demand-pull and cost-push inflation? 4

Achieving Macroeconomic Goals
Chapter 1 Understanding Economic Systems and Business 5 How does the government use monetary policy and fiscal policy to achieve its macroeconomic goals? 5

Monetary Policy 5 Federal Reserve System (the Fed)
Chapter 1 Understanding Economic Systems and Business Monetary Policy Federal Reserve System (the Fed) The central banking system of the United States. 5

Fiscal Policy 5 crowding out
Chapter 1 Understanding Economic Systems and Business Fiscal Policy crowding out The situation that occurs when government spending replaces spending by the private sector. When government takes more money from businesses and consumers and uses these funds for increased government spending, a phenomenon known as crowding out occurs. For example, when the government spends more on public transportation, individuals spend less on private transportation. 5

Federal Budget Deficit
Fiscal Policy Chapter 1 Understanding Economic Systems and Business Federal Budget Deficit National Debt The condition that occurs when the federal government spends more for programs than it collects in taxes. The accumulated total of all of the federal government’s annual budget deficits. The U.S. government has run budget deficits for many years—the accumulated total is the national debt. It now amounts to $9.2 trillion or about $30,220 per every person in the U.S. 5

A High National Debt 5 Pros: Cons: Contributes to:
Chapter 1 Understanding Economic Systems and Business A High National Debt Pros: Contributes to: Economic growth High employment Price stability Cons: Not everyone holds the debt Crowding out private investment The national debt is a subject of debate in Congress and with the public. Pros and cons of a high national debt are summarized on this slide. 5

CONCEPT check 5 What are the two kinds of monetary policy?
Chapter 1 Understanding Economic Systems and Business What are the two kinds of monetary policy? What fiscal policy tools can the government use to achieve its macroeconomic goals? What problems can a large national debt present? 5

Microeconomics Chapter 1 Understanding Economic Systems and Business 6 What are the basic microeconomic concepts of demand and supply, and how do they establish prices? 6

The Nature of Demand 6 demand
Chapter 1 Understanding Economic Systems and Business The Nature of Demand demand The quantity of a good or service that people are willing to buy at various prices. Demand is the quantity of a good or service that people are willing to buy at various prices. The higher the price, the lower the quantity demanded, and vice versa. 6

The Nature of Supply 6 supply
Chapter 1 Understanding Economic Systems and Business The Nature of Supply supply The quantity of a good or service that businesses will make available at various prices. Supply is the quantity of a good or service that businesses will make available at various prices. The higher the price, the greater the amount the manufacturer is willing to supply, and vice versa. 6

Factors Causing Demand and Supply Curve Shifts
Chapter 1 Understanding Economic Systems and Business Shift Demand Shift Supply Buyers’ incomes Buyers’ preferences/tastes Prices of substitute products Expectations about future prices Number of buyers Technology Resource prices Changes in prices of other products that can be produced with the same resources Number of suppliers Taxes A number of things can increase or decrease demand. Exhibit 1.9 summarizes the factors that can shift demand and supply curves. Refer to this exhibit in the text to see how increases or decreases in these factors affect curve shifts. 6 Exhibit 1.9

CONCEPT check Chapter 1 Understanding Economic Systems and Business What is the relationship between prices and demand for a product? How is market equilibrium achieved? Describe the circumstances under which the price for gasoline would have returned to equilibrium in the U.S. after Hurricane Katrina. Draw a graph that shows an equilibrium point for supply and demand. 6

Competing in a Free Market
Chapter 1 Understanding Economic Systems and Business 7 What are the four types of market structure? 7

Four Types of Market Structures
Chapter 1 Understanding Economic Systems and Business Four Types of Market Structures Monopolistic Competition Perfect Competition Pure Monopoly Oligopoly One of the characteristics of a free-market system is that suppliers have the right to compete with one another. The number of suppliers in a market defines the market structure. There are four types of market structures: perfect competition, pure monopoly, monopolistic competition, and oligopoly. Exhibit 1.10 summarizes these primary types of market structures. 7

Perfect Competition 7 A large number of small firms are in the market
Chapter 1 Understanding Economic Systems and Business Perfect Competition A large number of small firms are in the market The firms sell similar products Buyers and sellers have good information about prices, sources of supply, etc. It is easy to open a new business or close an existing one Characteristics of perfect (pure) competition are shown on this slide. Perfect competition is an ideal. No industry shows all its characteristics, but the stock market and some agricultural markets come closest. 7

Pure Monopoly 7 A single firm accounts for all industry sales
Chapter 1 Understanding Economic Systems and Business Pure Monopoly A single firm accounts for all industry sales The firm is the industry Barriers to entry prevent new firms from competing with the existing firm At the other end of the spectrum is pure monopoly. Public utilities, such as gas and water companies, are pure monopolies. The U.S. Postal Service also fits this category. 7

Monopolistic Competition
Chapter 1 Understanding Economic Systems and Business Monopolistic Competition Many firms are in the market The firms offer products that are close substitutes but still differ It is relatively easy to enter the market Firms demonstrate product differences, in the form of advertising, to justify their prices to customers and distinguish their products from competitors. 7

Oligopoly 7 A few firms produce most or all of the output
Chapter 1 Understanding Economic Systems and Business Oligopoly A few firms produce most or all of the output Large capital requirements or other factors limit the number of firms Aircraft manufacturers, Boeing and Airbus Industries, are major firms in an oligopolistic industry. Many antitrust cases—legal challenges arising out of laws designed to control anticompetitive behavior—occur in oligopolies. 7

CONCEPT check 7 What is meant by market structure?
Chapter 1 Understanding Economic Systems and Business What is meant by market structure? Compare and contrast perfect competition and pure monopoly. Why is it rare to find perfect competition? How does an oligopoly differ from monopolistic competition? 7

Trends in the Business Environment and Competition
Chapter 1 Understanding Economic Systems and Business 8 Which trends are reshaping the micro- and macroeconomic environments and the competitive arena? 8

Chapter 1 Understanding Economic Systems and Business Not Over the Hill Yet Baby boomers make up 42 percent of the workforce. By 2010, 25 percent of all employments will be of retirement age. Many will work beyond the traditional retirement age of 65. Today’s workforce spans four generations. The workforce is aging and becoming more diverse. 8

Not Over the Hill Yet 8 Challenges from the aging population include:
Chapter 1 Understanding Economic Systems and Business Not Over the Hill Yet Challenges from the aging population include: Health care Financial services Government Society Although many older workers are reaching the typical retirement age of 65, many plan to keep working. Financial pressures of longer life expectancies and the satisfaction of working are driving these decisions. 8

Meeting Competitive Challenges
Chapter 1 Understanding Economic Systems and Business relationship management The practice of building, maintaining, and enhancing interactions with customers to develop long-term satisfaction through mutually beneficial partnerships. Includes: Supply Chain Management Relationship Marketing Companies are using different strategies to remain competitive in the global marketplace. One of the most important is relationship management. 8

CONCEPT check Chapter 1 Understanding Economic Systems and Business What steps can companies take to benefit from the aging of its workers and to effectively manage a multigenerational workforce? Why is the increasing demand for energy worldwide a cause for concern? Describe several strategies that companies use to remain competitive in the global economy. 8

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