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Chapter 1 Understanding the U.S. Business System Chapter Overview Businesses are organizations that produce or sell goods or services to make a profit. Each business must operate in the context of its economic system. Economic systems differ in terms of who owns or controls the five basic factors of production: labor, capital, entrepreneurs, physical resources, and information resources. In planned economies, the government controls all or most factors. In market economies, individuals and businesses control the factors of production and engage in free exchange. The U.S. is a market economy, based on the principles of capitalism, and propelled by the forces of demand and supply. Demand is the willingness and ability of buyers to purchase a good or service. Supply is the willingness and ability of suppliers to offer goods and services for sale. Market equilibrium is the price at which the quantity demanded and the quantity supplied is equal. Fundamentally, the U.S. economy is a private enterprise system, incorporating four key elements: private property rights, freedom of choice, profits, and competition. Degrees of competition vary from perfect competition, to monopolistic competition, to oligopoly, to monopoly. The basic goals of the U.S. economic system are growth and stability. Performance indicators include aggregate output, standard of living, gross domestic product, and productivity. Growth and stability can be threatened by inflation and unemployment, which the government influences through fiscal and monetary policies. Chapter Objectives 1. Define the nature of U.S. business and identify its main goals. 2. Describe different types of global economic systems according to the means by which they control the factors of production through input and output markets. 3. Show how demand and supply affect resource distribution in the U.S. 4. Identify the elements of private enterprise and explain the various degrees of competition in the U.S. economic system. 5. Explain the importance of the economic environment to business and identify the factors used to evaluate the performance of an economic system. 1 REFERENCE OUTLINE Opening Case: Megawatt Laundering and Other Bright Ideas I. The Concept of Business and the Concept of Profit A. Consumer Choice and Demand B. Opportunity and Enterprise C. Quality of Life II. The U.S. Economic System A. Factors of Production 1. Labor 2. Capital 3. Entrepreneurs 4. Physical Resources 5. Information Resources B. Types of Economic Systems 1. Planned Economies 2. Market Economies a. Input and Output Markets b. Capitalism c. Mixed Market Economies d. Socialism III. The Economics of a Market System A. Demand and Supply in a Market Economy B. The Laws of Demand and Supply 1. The Demand and Supply Schedule 2. Demand and Supply Curves 3. Surpluses and Shortages C. Private Enterprise and Competition in a Market Economy D. Degrees of Competition 1. Perfect Competition 2. Monopolistic Competition 3. Oligopoly 4. Monopoly IV. Understanding Economic Performance A. Economic Growth 1. Aggregate Output and Standard of Living 2. Gross Domestic Product (GDP) 3. Productivity B. Economic Stability C. Managing the U.S. Economy 1. Fiscal Policies 2. Monetary Policies 2 LECTURE OUTLINE I. The Concept of Business and the Concept of Profit (Use PowerPoint 1.4.) A business is an organization that provides goods and services to earn profits. Profits are the difference between a business’ revenues and expenses. A. Consumer Choice and Demand In a capitalistic system like that of the United States, consumers have freedom of choice. In turn, businesses must take into account consumer demand in their pursuit of profits. B. Opportunity and Enterprise Unmet consumer demands provide promising opportunities for potential business success. C. Quality of Life New forms of technology, service businesses, and international opportunities keep production, consumption, and employment growing indefinitely, creating a healthy business climate that contributes directly to our quality of life. Notes: __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ II. The U.S. Economic System An economic system is a nation’s system for allocating its resources among its individual citizens and organizations. A. Factors of Production (Use PowerPoint 1.5.) A basic difference between economic systems is the way in which they manage their resources, known as factors of production. 1. Labor. The human resource element in businesses, labor includes the physical and intellectual contributions people make while engaged in economic production. 3 2. Capital. The financial resources needed to operate an enterprise are known as capital. 3. Entrepreneurs. An entrepreneur is an individual who accepts the risks and opportunities entailed by creating and operating a new business. 4. Physical Resources. The tangible things that organizations use to conduct their business are physical resources. 5. Information Resources. Businesses rely on information resources, such as market forecasts, the specialized knowledge of people, and economic data. B. Types of Economic Systems (Use PowerPoint 1.6, 1.7, 1.8, 1.9, 1.10.) Economic systems vary, depending on how the factors of production are managed. 1. Planned Economies. These systems rely on partial or total government control of the factors of production. With communism, as currently operating in Cuba, North Korea, and the People’s Republic of China – all sources of production are owned and operated by the government. 2. Market Economies. Producers and consumers control production and allocation decisions through supply and demand. a. Input and Output Markets. Firms buy resources from households in an input market; firms supply goods and services in response to household demand in an output market. b. Capitalism. The political basis of a market economy is capitalism, which sanctions the private ownership of the factors of production and encourages entrepreneurship by offering profits as incentives. c. Mixed Market Economies. This type of economy features characteristics of both planned and market economies; many countries are moving from planned systems to mixed market 4 systems through privatization, which involves the transformation of government-controlled businesses into privately owned enterprises. d. Socialism. In this partially planned system, the government owns and operates selected major industries. Notes: __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ III. The Economics of a Market System (Use PowerPoint 1.11.) Market systems allow businesses the flexibility to decide what to produce, how much to produce, and what price to charge; customers are a driving force in market systems since they decide what to buy and at what price. Demand and supply are the predominant forces that guide decisions about what to buy and what to sell. A. Demand and Supply in a Market Economy Billions of exchanges take place every day between businesses and individuals; between businesses; and among individuals, businesses, and governments. Exchanges conducted in one area often affect exchanges elsewhere. B. The Laws of Demand and Supply (Use PowerPoint 1.12 – 1.16.) Demand is the willingness and ability of buyers to purchase a product; supply is the willingness and ability of producers to offer a good or service for sale. The law of demand states that buyers will purchase more of a product as its price drops; the law of supply states that producers will offer more of a product for sale as its price increases. 1. The Demand and Supply Schedule. The demand and supply schedule indicates how much of a product will be sold at various prices. 2. Demand and Supply Curves. A demand curve shows how many products will be demanded at different prices; a supply curve shows how many products will be 5 supplied at various prices. The point at which the curves intersect is the equilibrium price. 3. Surpluses and Shortages. With a surplus, the quantity supplied exceeds the quantity demanded; quantity demanded exceeds quantity supplied with a shortage. C. Private Enterprise and Competition in a Market Economy (Use PowerPoint 1.17, 1.18.) Individuals pursue their own interests with minimal government restriction in a private enterprise system; such a system requires private property rights, freedom of choice, profits, and competition. Competition occurs when two or more businesses vie for the same resources or customers. D. Degrees of Competition (Use PowerPoint 1.19.) Economists have identified four degrees of competition in a private enterprise system. 1. Perfect Competition. Many small firms exist in an industry; no single firm is powerful enough to influence price. 2. Monopolistic Competition. Few sellers but many buyers exist, so buyers focus on numerous differentiation strategies, such as brand names, design, and advertising. 3. Oligopoly. An industry has only a handful of sellers; market entry is difficult because large capital investment is needed. 4. Monopoly. An industry or market has only one producer; that producer enjoys complete control over price. Notes: __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ IV. Understanding Economic Performance Two goals of the U.S. economic system are economic growth and economic stability. 6 A. Economic Growth (Use PowerPoint 1.20, 1.21.) Economic growth can be measured with the following tools: 1. Aggregate Output and Standard of Living. Aggregate output is the total quantity of goods and services produced by an economic system during a given period; an increase in the amount of goods and services that consumers can purchase with their currency represents an increase in the standard of living. 2. Gross Domestic Product (GDP). The GDP is the total value of all goods and services produced within a given period through domestic factors of production; GDP is a measurement of aggregate output. 3. Productivity. Productivity compares how much a system produces with the resources needed to produce it; increases in productivity yield increases in the standard of living. a. Balance of Trade. This represents the difference between a country’s imports and exports. A favorable balance results when the value of a country’s exports is greater than its imports; that is, more money is flowing into the country as a result of exporting. b. National Debt. A country’s national debt is the amount of money that is owed to creditors. The United States has been spending more money than what it has taken in, creating a budget deficit. B. Economic Stability (Use PowerPoint 1.22, 1.23, 1.24.) Stability results when the amount of money available in an economic system and the quantity of goods and services produced in it are growing at about the same rate. 1. Inflation. Inflation occurs when widespread price increases plague an economic system; the amount of money in the economic system exceeds the amount of actual output. Inflation can be measured by the consumer price index (CPI), which weighs prices of typical products purchased by consumers living in urban areas. 7 2. Unemployment. Unemployment is the level of joblessness among people actively seeking work in an economic system; when unemployment is high, a surplus of available workers exists. Unemployment is sometimes a symptom of a recession, when aggregate output declines, or of a depression, a prolonged and deep recession. C. Managing the U.S. Economy (Use PowerPoint 1.25.) 1. Fiscal Policies. Fiscal policies manage the collection and spending of revenues; tax increases can function as fiscal policies. 2. Monetary Policies. Monetary policies focus on controlling the size of the nation’s money supply. The government can influence banks to lend money; it can also influence the supply of money by manipulating interest rates. 8