1. Fourth Edition Copyright ©2003 Prentice Hall, Inc. PART 1........................ Understanding the Contemporary Business Environment

2. Copyright ©2003 Prentice Hall, Inc. 1 - 2 Chapter 1 Understanding the Business System

3. Copyright ©2003 Prentice Hall, Inc. 1 - 3 “ In business you get what you want by giving other people what they want. ” ~ Alice Foote MacDougall

4. Copyright ©2003 Prentice Hall, Inc. 1 - 4 Key Topics Nature and goals of business Global economic systems Private enterprise and competition Evaluating economic performance

5. Copyright ©2003 Prentice Hall, Inc. 1 - 5 Exercise Write four things do you know about business. Write 4 things you would like to know?

6. Copyright ©2003 Prentice Hall, Inc. 1 - 6 What Is Business? An organization that provides goods and services to earn profits Profits: The positive difference between revenues and expenses

7. Copyright ©2003 Prentice Hall, Inc. 1 - 7 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.)

8. Copyright ©2003 Prentice Hall, Inc. 1 - 8 Physical Resources LaborCapital Entrepreneurs Factors of Production Information Resources

9. Copyright ©2003 Prentice Hall, Inc. 1 - 9 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.

10. Copyright ©2003 Prentice Hall, Inc. 1 - 10 Exercise: group Discusion Higher Education service. list the factors of production that were used to produce it.

11. Copyright ©2003 Prentice Hall, Inc. 1 - 11 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

12. “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. 1 - 12

13. Copyright ©2003 Prentice Hall, Inc. 1 - 13 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 supports private ownership and encourages entrepreneurship

14. Copyright ©2003 Prentice Hall, Inc. 1 - 14 Mixed Economies Planned and Market The economies of most countries include both planned and market elements Worldwide trend toward more market elements

15. Copyright ©2003 Prentice Hall, Inc. 1 - 15 Socialism A Mixed Economy Socialism is a planned economic system in which the government owns and operates selected sources of production Privatization: Process of converting government enterprises into privately owned companies

16. Copyright ©2003 Prentice Hall, Inc. 1 - 16 exercise Guess the 4 key elements of free enterprise?

17. Copyright ©2003 Prentice Hall, Inc. 1 - 17 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:

18. Copyright ©2003 Prentice Hall, Inc. 1 - 18 Competition Competition motivates businesses to produce their products better or cheaper. Companies that don’t compete effectively will be forced out of business.

19. Copyright ©2003 Prentice Hall, Inc. 1 - 19 Exercise What is the relationship between standard of living and quality of life? How is quality of life evaluated in different countries?

20. Copyright ©2003 Prentice Hall, Inc. 1 - 20 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.

21. Copyright ©2003 Prentice Hall, Inc. 1 - 21 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.

22. Copyright ©2003 Prentice Hall, Inc. 1 - 22 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

23. Copyright ©2003 Prentice Hall, Inc. 1 - 23 Managing the Economy Stabilization Policy: Government policy designed to smooth out fluctuations in the economy Fiscal Policies Monetary Policies

24. Copyright ©2003 Prentice Hall, Inc. 1 - 24 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.

25. Copyright ©2003 Prentice Hall, Inc. 1 - 25 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 2.Technological breakthroughs will create new industries 3.Increasing globalization will create larger markets and tougher competition

26. Copyright ©2003 Prentice Hall, Inc. 1 - 26 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.

27. Copyright ©2003 Prentice Hall, Inc. 1 - 27 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.