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CHAPTER 1
INTRODUCTION TO BUSINESS
PRIVATE ENTERPRISE AND ITS CHALLENGES
WHAT IS BUSINESS
When we talk about business we think of companies like Koç, Arçelik, TOFAŞ founded by
Vehbi Koç or Bossa, Sasa, Teksa by Ömer Sabancı, Hilton Hotels established by Conrad Hilton.
A study of these firms shows that they are in operation to earn money, to make a profit, by providing a product to the market or a service to satisfy the needs of the public.
Business consists of all profit-seeking activities that are organised and directed to provide goods
and services to customers.
So what are goods and services:
Goods: Tangible
Services: Intangible
Manufactured
Performed
Made in premises not
open to customers
Performed at the premises
with customer participation
Delivered to customer
location
Customers move to place
where service is given
Purchase give right of
ownership
Purchase gives temporary
right to use at a fixed time
and/or place
Tangible form at point of
sale; can be inspected
Intangible; often cannot be
inspected
Can be physically stocked
Cannot be physically stocked
Mostly homogeneous
Heterogeneous-unique to each
customer and service producer
Business firms produce and market goods and services in the hope of making a profit.
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Business and Profit
Profit is very important to the businesses. That is almost the number one requirement for any activity to be a business.
PROFIT
the money that remains after a firm deducts its expenses of production and
marketing of goods and services, from its revenues.
REVENUES - EXPENSES = PROFIT
To earn a profit, the firm has to satisfy a need or a want.
Profit is the reward of the firm’s owners who have taken the necessary risk in
starting and running a business.
RISK
is the chance of loss. Firms reinvest some of their profit for growth and
growth creates jobs.
Profits also attract new investors, which stimulates investment, creates more jobs, and improves
the economic well being of the society.
Business and Its Environment
Business firms exist within a larger environment. The elements that make up this environment
include technology, the economy, competition, society, ethics, politics, and the law. This environment is the source of both opportunities and threats for the firm and businesses must adapt
to the changes in this environment if they are to continue and grow.
Business and Society
Firms provide goods or services to its customers and in exchange they earn a profit for its owners.
The firms also serve society by providing jobs and paying taxes. Is this all that the firm is
required to do? Do they not have other responsibilities apart from serving their customers, making a profit for their owners and paying taxes to the government?
SOCIAL RESPONSIBILITY is the concept that businesses are part of a larger society in which
it exists and, therefore, they have to pay care and attention to the needs of the people. They
serve the society by developing the society socially, as well as economically. The recent issues in
the world for protection of the environment and ecology and the efforts of the firms with their charitable contributions, like “Live Aid” to the people of Africa, are good examples.
Business firms must be responsible in their dealings with their various public, or stakeholders.
STAKEHOLDERS are owners, suppliers, customers, creditors, government, public, and all the various groups of people who are affected by the firm's actions.
Owners
Employees
Customers
Suppliers
STAKEHOLDERS
Creditors
Govern-
ment
General Public
Women
Minorities
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ECONOMICS and FACTORS OF PRODUCTION
In general, in societies people have unlimited wants whereas they have limited resources. To
achieve a compromise between a society’s unlimited wants and its limited, or scarce resources a
decision has to be reached decisions about how to use its available resource, or, its factors of
production.
The Factors of Production are the basic inputs of the productive system - land, labor,
capital, and entrepreneurship.
LAND
includes all natural resources. (air, water, forest, minerals, metal, petroleum, etc.)
LABOR
is the human resource - the mental and physical effort available to produce goods and services.
Unskilled, semiskilled, skilled are terms used to describe different types of
labor. Management skill is also a type of labor.
CAPITAL
is the funds provided by investors, lenders and retained earnings to finance a firm’s activities.
ENTREPRENEURSHIP
is the process of bringing land and capital together and taking
the risk involved in producing a good or service in the hope of profit.
An "entrepreneur” is a risk taker who starts and operates a business in
hope of making a profit. Ömer Sabancı was a risk taker when he went
from Kayseri to Adana and there he put everything he earned into a new
business not knowing the consequences but having a vision. An entrepreneur knows he is taking a risk when he goes into a business.
Risk is always present in any business activity.
ECONOMICS
To repeat once again, Economics is how people and society choose to use the scarce resources (factors of production) to satisfy people's unlimited wants. The two main branches of
economics are macroeconomics and microeconomics.
MACROECONOMICS is a study of the overall operation of an economic system. It focuses on the
total national economy. It deals with factors like;
- Government spending
- Inflation
- Unemployment
˜ The Business Cycle This is an important macroeconomics concept. It is the fluctuation, or the
up and down sequence of changes, that occur in an economy’s overall level of business and economic activity - prosperity (refah), recession (durgunluk), depression (buhran) and recovery
(iyileşme).
This is a normal economic activity but it creates hardship in the economy of a nation. The consumers reducing their purchases usually create it, which leads the factories to produce less. This
results in factories lying off workers. These workers with almost no money buy less, and it goes
on. This situation can be solved aided by the government by stabilizing the economy, adjusting
the tax system, regulating the interest rates and the total amount of money in circulation. This
intervention is governed under two policies of the government.
˜ Monetary Policy
The use of various tools and actions by the nation's monetary
authority to regulate the nation's money supply.
˜ Fiscal Policy
The government’s use of tax and spending program to cope with
macroeconomic problems.
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MICROECONOMICS is the study of economic activities of the decision-making unit within an economic system. It focuses on individual decision-making and deals with household and business
firms.
FORCES of SUPPLY and DEMAND
MARKET ECONOMY
Economic system in which prices determine how the factors of production will be used and how the resulting goods and services will be distributed. Here price is the
key concept.
FORCES OF SUPPLY AND DEMAND DETERMINE THE
PRICE ON BOTH MICRO AND MACRO LEVELS.
SUPPLY
The law of supply; as the price (P) goes up, the supply (S) goes up (suppliers will increase the production), In summer of 1999 hotels in southern
Turkey had to reduce their prices in order to attract customers. There
were too many beds (rooms) but very little demand. Instead of running
an empty establishment price cuts were applied.
DEMAND
The law of demand; as the price (P) goes up, the demand (D) goes down.
Early in 2000 banks reduced their interest rates for loans as drastic as
3.75% from the previous 8.50% with high interest rates people were hesitating to draw a loan to finance a car or, more important, a house. With
reduction in the interest rates not only did they benefit, but the automotive
industry started picking up business.
In a market economy, INTERACTION of SUPPLY and DEMAND forces determine the prices.
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ECONOMIC SYSTEMS
ECONOMIC SYSTEM
is the framework of arrangements, for carrying out specialisation, or division of labor, and exchange process.
We are all parts of a system. Every system must face the fact that human wants are unlimited,
while resources are limited. There are two key tools to deal with this dilemma.
SPECIALIZATION
EXCHANGE
Division of labor, work, task, job. Each individual concentrates on one
particular task instead of performing many tasks.
Trade, giving up one thing to get another.
Economic Systems Determine:
 What goods and services to produce,
 How much to produce, and,
 Who will get them.
TYPES of ECONOMIC SYSTEMS
CAPITALISM
Is an economic system in which the decisions of privately owned business
firms determine which goods and services will be produced and how they will
be distributed among the people.
Adam Smith, known as the father of capitalism, put forth the Laissez faire principle which means
"leave us alone": let business people compete without government regulations or control. According to Smith, the ideal capitalist economy (pure capitalism), the market serves as a selfcorrecting mechanism – an invisible hand to ensure the production of goods and services that the
society wants, in the quantity that the society wants, without anyone’s ever issuing an order of any
kind. Smith favoured FREE ENTERPRISE (or private enterprise) which is an economic philosophy that advocates letting privately owned business firms operate with minimal government
control. He believed that the market is its own regulator and opposed government intervention.
However, the government sometimes intervenes in the businesses to influence prices and wages,
control output of products and to change the way resources are allocated. This type of intervention is called mixed capitalism, and it is the economic system of the United States. Examples of
capitalistic states are United States, Canada, Japan and Switzerland.
As stated above, Smith believed in a free market that would be balanced and self-regulated by
the “invisible hand” of competition. So what is competition?
COMPETITION AND MARKET STRUCTURES
COMPETITION is rivalry among firms to attract customers in the hope of making a profit. To increase share in the market, a firm must take business away from someone else. To do this, the
firm has to provide superior customer satisfaction.
A) NON-PRICE COMPETITION
Same product/Same price
DIFFERENT
B) PRICE COMPETITION
Same product/Different price
(Competition based on price)
 Packaging
 Service
 Corporate Image
 Car rental companies
 Supermarkets
 Gas stations
PURE COMPETITION
A type of market structure in which there are:
¤ Many small sellers (No strong effect on total supply),
¤ Many small buyers (No strong effect on total demand),
¤ Homogeneous product,
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¤ Easy to enter and exit,
¤ Market conditions are the same for all buyers and sellers,
¤ There is perfect information in the hands of the buyers and sellers.
MONOPOLISTIC COMPETITION
A type of market structure in which there are many sellers and many buyers, but each seller's product is somewhat different from that of the others.
Each firm has some power over price because each sells a product that is
differentiated significantly from those of its competitors.
 Auto Service Shops
 Garment Manufacturers
 Food Service
 Soft Drinks
OLIGOPOLY
A type of market structure in which a few large firms account for most of an
industry's sale.
Large share in the market/Large number of customers
 Oil Companies
Shell, Mobil. BP. TP, Elf
 Home Appliance
Sony, Philips, Hitachi
 Auto Industry Opel, Ford, Renault, Tofaş,
They determine the price - dominant companies, leaders in the market
MONOPOLY
Completely opposite of pure competition; One firm – one product, no substitute.
Firm produces a product and there is no close substitute. Customer
must buy from one source only.
 Cigarettes
 Rakı, Vodka, Gin
 Electricity
 Natural Gas
COMMUNISM
An economic system in which the citizens collectively own all of the country's
productive capacity.
Communism is the system that allows the least degree of economic freedom to the individuals. It
can be characterised by 1) state ownership of the factors of production and 2) planned resource
allocation. Central Planning is the practice by which a government that drafts a master plan and
directly manages the economy to achieve the plan goals. This philosophy was put forth by the
nineteenth century German social Philosopher Karl Marx. Cuba, and North Korea are the only
two remaining communist countries.
SOCIALISM
An economic system in which the government practices economic planning
owns the whole nations major resources and many of its basic industries, and
imposes heavy taxes to finance a welfare state. Great Britain, France, Italy,
Sweden, Norway, Turkey, are known as socialist states.
Yeni uygulanan vergiler !!!!
Benzine bir ayda %26 zam
Sabah, 20 June 1999
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However, today no economic system in the world is purely capitalist, communist or socialist. Economic systems today are more correctly described as mixed economies. A mixed economy is a
blend of varying degrees of private enterprice, government ownership and government planning.
MEASURING ECONOMIC WELL-BEING
STANDARD OF LIVING is a measure of Society's economic well-being. It helps us to see the
change in a society's well being over time and to compare one society's well being with another.
There are several ways of measuring a society’s standard of living.
GROSS NATIONAL PRODUCT The sum of the market values of all the final (GNP) goods and
Services that are produced during a year, by a country’s firms,
anywhere in the world. (Gayri Safi Milli Hasıla)
GROSS DOMESTIC PRODUCT
is the sum of the market values of all final goods and services
that are produced during the year in a country by domestically
owned and foreign firms. (Gayri Safi Yurtiçi hasıla)
One problem with using the "GNP" as a measure of a nation's
economic output is inflation.
INCREASE IN THE GROSS NATIONAL PRODUCT
1995
GNP
1996
7,854,887
(Current billion TL)
15,125,091
Increase in GNP
8.0
7.9
US Dollar
46.183
82.391
(Average per year)
GNP
170.8
(Billion Dollars)
183.5
Population
61.4
(Yearly Aver/million
CAPITAL, April 1997
2,928
(Source: DIE)
GNP/C
2,759
(US Dollars)
GNP/C
127.4
(Current million TL)
INFLATION
62.6
241.2
Increase in the prices of goods and services over a period of time that
has the effect of reducing purchasing power of a nation's currency.
The rate of inflation is measured by conducting a comparison in the increase of prices of various
goods, such as food, clothing, housing, utilities (electric, water, natural gas) and services over a
set period of time. This is referred to as the consumer price index (CPI). It is obvious that, as is
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the case in most economic indicators, this does not always give a very correct indication. For one
thing the items may not represent those mostly used at that location or time and secondly it might
not have the new items that are in the market and sought by the public.
Over the long run, productivity is the only way to raise living standards in a country. Productivity is the relationship between the input of resources (factors of production) and the output of
goods and services. Improving this input/output ratio – getting more output with the same or less
input, can increase productivity. This will also lead to mass production. Mass production involves producing a large number of standardised items (like cars, ready to wear clothing, toys,
and hamburgers) through standardisation, mechanisation, and specialisation on an assembly line.
CHALLENGES FACING BUSINESS
PRODUCTIVITY CHALLENGE
 Replacing outdated plants and equipment
 Investing in research and development
 finding new applications for robots
 Developing new ways to manage employees
 Cutting layers of management and getting worker involvement
GLOBAL CHALLENGE
This is global competition. Firms now must compete throughout the world for sale of their goods
and services at home and abroad. With the European Community taking measures to restrict
imports from non-member countries, business is getting tighter. More and more Turkish firms are
either opening shops or production lines in other countries to compete with the world leaders.
QUALITY CHALLENGE
In simple words we can say that quality
is “without defects and variations”. Doing
something good the first time and everytime.
W. Edward Deming is most important when
we talk about quality. Deming worked in Japan
in the 1940’s to teach the Japanese managers’
quality control. His approach was a total
quality approach; “every department and
everyone in those departments should be
responsible for making sure that their
production is of the required high quality”.
His approach can briefly be summarised
in the Deming circle: Planning the product
well, making it right, checking customers
reaction to the product, testing and making
necessary changes to meet customer’s needs
DEMOGRAPHIC (nüfus) and CULTURAL CHALLENGE
Demography is the study of population
statistics such as the number of births,
deaths, marriages and age grouping.
Business firms must adjust to realities
such as changes in population due to
movement from rural areas to the cities,
aging population, growing of racial and
ethnic diversity in the country.
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ENVIRONMENTAL CHALLENGE
The increased concern of the public on environmental issues such as pollution of the air and waters,
green house effect of the atmosphere and the threat
of some gasses on the ozone layer, has caused the
businesses to take precautions in cleaning their
waste and showing more care for the nature. Where
the firms do not exhibit this concern, the governments step in with their rules, regulations and laws to
provide a better and safer iving place for its people.
This, ofcourse, is costly in most cases and the vusinesses have to cover the expense as part of their
service to the society.
FIRST ENVIRONMENTAL ACTIVISM OF 2000
Chairman of the Nature Warriors Environmental
Group, Zafer Murat Çetintaş, stated in his talk at the
first environmental activism of 2000, ”Turkey is looted by the profit seekers and the environmentalists
who stand firm to stop this sacking is slendered by
this group.” Çetintaş further added; “Despite all our
efforts, we strongly protest the ministers who call
us ‘retarded’ and return it to its owner. We will
shower these ministers who defend the outdated
nuclear power plants with eggs. Ayşe Altıok.
(Milliyet Jan 03, 2000)
SOCIAL RESPONSIBILITY and ETHICS CHALLENGE
More and more firms are being required to deal with social responsibility and to put such activities
into their planning’s. Government regulations interfere when firms only seek profit as their main
aim. Regulations for clean air forces the firms to follow the requirements for placing filters on their
stacks. All production firms around the Izmit bay are now required to have water treatment facilities before disposing the wastewater to the sea.
TECHNOLOGY CHALLENGE
This challenge is using science to produce new products and perform planned tasks in new, better
and more effective ways. The challenge is to be able to translate more of the scientific know-how
developed by researchers and universities, into marketable products. To keep abreast with these
scientific developments and technological improvements will cause increase of expenses of the
firms.
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DISCUSSION
1. What is the main differenve between capitalism and socalism?
2. What is the main role of competition in free-market economy?
3. In free-market economy governments do not interfere with businesses. However in some
cases they do this. In your opinion, should they interfere under certain circumstances and
why?
4. Discuss how productivity can help a nation fight the inflation?
KEY WORDS
business
business cycle
capitalism
challenge
competition
communism
demand
demographic
economic systems
entrepreneur
eguilibrium price
factors of production
fiscal policy
free enterprise
global
gross domestic product
gross national product
human resources
inflation
macroeconomics
microeconomics
monetary policy
monopolistic competition
monopoly
natural resources
oligopoly
private enterprise
privitisation
profit
pure competition
risk
socialism
standard of living
supply
technology
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GROSS NATIONAL PRODUCT
1992
1993
1994
1995
1996
GNP at Current Rates
(Million of TL)
1,103,843
1,997,323
3,887,903
(Millions of USD)
90,344
97,667
91,809
At 1987 Rates
(Millions of USD)
160,372
181,443
107,234
GNP/C (USD)
3,255
2,707.5
3004.1
2,192.7
7,854,900
2,759
3,079
Source: General Directorate of Treasury and
Foreign Trade - 06 October 1995
AS OF OCTOBER 1995:
TOTAL COST OF;
1.500,000 CIVIL SERVANTS
500,000 SEE WORKERS
227 Billion TL.
235
Billion
TL.
OF THE TOP 500 ESTABLISHMENTS;
429 PRIVATE COMPANIES HAVE
293,000 WORKERS
79 SEE COMPANIES HAVE
303,000 WORKERS
SHARE OF SALARIES FROM THE ADDED VALUE;
IN THE PRIVATE SECTOR
IN THE SEE
42%
91%
LOSSES AND BUDGET DEFICITS CAUSED BY SEE IS
26% OF THE GNP
WHILE THEIR PRODUCTION SHARE TO THE GNP IS
7.5%
Source: SABAH Newspaper
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AGE DISTRIBUTION IN TURKEY ACCORDING TO THE 1990
CENSUS:

Population of Turkey

By ages
12.22%
56,473,037
5 –
9
6,899,206
10 – 14
6,891,399
13,790,605
12.20%
24.42%
15 – 19
6,216,469
11.01%
20 – 24
5,095,504
25 – 29
4,813,127
9.02%
8.52%
30 – 49
12,565,956
49 – 64
5,574,782
65 +
2,417,363
9.87%
4,28%
19
22.25%
CHAPTER 1
Review Questions
A) Fill-in-the-blanks in the following statements:
1. ________________ is the profit seeking activities that are organized and directed to provide
goods and services to customers.
2. ___________________ are all the persons who are effected by the actions of the firm.
3. The factors of production are the basic inputs of any productive system are: __________ ,
______________ , _______________ and __________________ .
4. Macroeconomics is the study of the overall operation of an economic system.
_________________ is the study of the economic activities of the decision-making units with-in
an economic system.
5. The law of ____________________ is a principle that states that as the price of a good or
service goes up, the quantity supplied goes up.
6. The _________________ ________ is the price at which the quantity demanded by buyers is
equal to the quantity supplied by the suppliers.
7. An economic system is the framework of arrangements for carrying out ______________ and
_______________ process.
8. __________________ competition is a type of market structure in which there are many
small sellers, many small buyers, a homogeneous product, easy to enter and easy to exit and
there is perfect information in the hands of buyers and sellers.
9. _______________ is an economic system in which the citizens collectively own all of the
country’s productive capacity.
10. A mixed economy is a blend of private enterprise ________________ ______________ ,
and government planning .
11. ___________ _________________ ________________ is the sum of the market values of
all final goods and services that are produced by a nation during a given year.
B) Place a circle (O) around the correct answer in the following statements:
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1. The fluctuation in the level of economic activity that an economy goes through over a time
refers to:
a) depression
b) recession
c) confession
d) business cycle
e) lunar cycle
2. Profit is equal to:
a) expenses minus the sales revenue.
b) sales revenue minus taxes.
c) sales revenue minus expense.
d) “gross income” from sales.
e) “extra” costs.
3. The concept of social responsibility is best identified in business firms that:
a) always earns a profit for its owners.
b) always acts in ways that advance the firm and serve society.
c) always provide satisfying quality goods and services for their customers.
d) always pays taxes and provides jobs.
e) all of the above.
3. As a factor of production, coal, iron ore, water are called:
a) land.
b) labor.
c) capital.
d) entrepreneurship.
4. The law of demand is a principle which states that:
a) as the price of a good or service goes down, the quantity demanded goes down.
b) as the price of a good or service goes down, the quantity demanded remains
un-changed
c) as the price of a good or service goes up, the quantity demanded goes down.
d) as the price of a good or service goes up, the quantity demanded remains
un-changed.
5. Exchange is defined as:
a) Changing one country’s currency to another
b) Giving up one job to get another well paying job
c) A trade, or giving up one thing to get another
d) Changing from one economic system to another
6. Which of the following is NOT identified as a major feature of capitalism?
a) Private ownership of property
b) Choice of occupation
c) Profit incentive
d) The extensive role of government
7. Market structure in which a few firms account for the bulk of an industry’s sale is called:
a) A monopolistic competition.
b) A pure competition
c) An oligopoly
d) A monopoly
8. Socialism is an economic system in which the government:
a) handles much economic planning.
b) does not own the nation’s major economic resources.
c) imposes low taxes upon its citizens.
d) does not own basic major industries.
9. Inflation;
a) may cause a reduction in the price of goods and services.
b) has no effect on Gross Domestic Product (GDP).
c) is an increase in the price of goods and services.
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d) may be reflected in the price of goods and not services
10. Each of the following represents a major challenge facing business in the 1990s, EXCEPT:
a)
b)
c)
d)
the productivity challenge, the global challenge, the quality challenge.
the demographic and cultural challenge, the environmental challenge.
the democratic challenge.
the social responsibility and ethics challenge, and the technology challenge.
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