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Week 01
Introduction
This week, you will be introduced to the characteristics of U.S. business. You will learn about the effects
of external environments and the different types of global economic systems on business. In addition, you
will gain an understanding of the concepts of markets, demand, and supply, and how they affect
business. You will also learn about the different factors used to evaluate an economic system.
Objectives
 Describe the characteristics of U.S. business and understand its primary objectives.
 Recognize the external environments of business and how these environments can affect an
organization.
 Analyze the different types of global economic systems and their effects on the factors of
production.
 Understand the effect that markets, demand, and supply have on resources, the elements of
private enterprise, and competition in the U.S. economic system.
 Recognize how the economic environment affects business and the factors used to evaluate an
economic system.
Topics
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Characteristics of U.S. Business
External Environments of Business
Types of Global Economic Systems
Market, Demand, and Supply
Effects of Economic Environment
Week Overview
Reggie Wexler has been running a “mom-and-pop” hardware store in a small town for the last ten years.
Among his clientele are those who need very specific and select hardware items found only in his store.
However, over the years, fewer and fewer customers have been visiting the store, preferring to buy the
goods from big box stores.
Based on this information, answer the following questions.
What change should Reggie make to stay in business?
1. He should offer exclusive hardware items.
2. He should compete with the big box stores.
3. He should start a different business.
Correct Answer: He should offer exclusive hardware items. In order to stay in business, Reggie should
modify his selection of products. He should transform his shop into a high-end shop that offers exclusive
hardware items.
Why should Reggie not compete with the big box stores?
1. Reggie may not have the capital required to compete with the big box stores.
2. Big box stores have name recognition and monopolistic competition amongst each other.
3. Reggie may not have the competence required to handle the business of the size of big box
stores.
Big box stores have name recognition and monopolistic competition amongst each other.
Since big box stores have name recognition and a monopolistic competition amongst each either, Reggie
may not be able to compete with them. So, instead of trying to compete with the big box stores, he should
Introduction to Business
Virginia College
Week 01
compete against other stores that sell exclusive hardware items. Although Reggie would have limited
exclusive hardware items, there would be a demand.
As you saw, external factors, such as the big box stores, impacted Reggie Wexler’s business. This week,
you will learn about other such factors that influence businesses. To begin with, let’s learn about the
characteristics of a business.
Characteristics of U.S. Business
Reggie Wexler’s hardware store is an example of a small business. Businesses range in size from small
to medium to large. They share common characteristics.
 Businesses provide goods and services to satisfy the needs of customers.
 Consumers, in turn, create the market and demand for the goods and services produced by
businesses.
 While producing goods and services, businesses create jobs, innovations, and opportunities for
other businesses.
 Businesses produce goods and services to create profit for their owners.
 The exception is those businesses that do not pursue profits, that is, non-profit universities and
government agencies.
External Environments of Business
Consumer demand is a key driver of businesses. However, external environments also exist. They affect
businesses from outside the organization’s boundaries.
All businesses are influenced by external environments. Managers must understand these influences and
take necessary actions to work within them in order to succeed.
The Domestic Business Environment
The environment in which the business operates and produces goods, services, and revenues is called
the domestic business environment.
The Global Business Environment
Introduction to Business
Virginia College
Week 01
Those international forces that affect business, such as international trade agreements, economic
conditions, and political unrest are known as the global business environment.
The Technological Environment
The ways that a firm produces value include human capital, methods, assets, electronics, and processing
systems. These ways of producing value are called the technological environment.
The Political-Legal Environment
The political-legal environment is the relationship between government and business. Most often, it is in
the form of government regulation, that is, what businesses can and cannot do.
The Sociocultural Environment
Businesses are affected by the norms, customs, and demographics of the society in which they function.
These factors make up the sociocultural environment.
The Economic Environment
The economic environment is described as the economic system in which a business operates.
Check Your Knowledge
What are the conditions that affect business in a global business environment?
1. International trade agreements
2. Economic conditions
3. Political unrest
4. Government regulation
Correct Answer: The conditions that affect business in a global business environment are as follows:
 International trade agreements
 Economic conditions
 Political unrest
Types of Global Economic Systems
The economic environment in which a business operates is based on the economic system of the country
the firm calls home. Every country has a different economic system. An economic system is the way a
country allocates resources, or factors of production, among individuals and organizations. Factors of
production include labor, capital, entrepreneurs, physical resources, and information resources. The
essential difference between economic systems is the way the factors of production are allocated. There
are three types of economic systems.
Planned
The planned economic system relies on partial or total government control. North Korea and Iran are
examples of planned economic systems.
Market
In the market economic system, production and allocation are based on demand. The United States and
Canada are examples of market economic systems.
Mixed Market
The mixed market economic system is a combination of planned and market economic systems, that is,
some businesses are privately owned and others are government-owned. France is an example of a
mixed market economic system. There are many privately owned businesses in France, but the
government controls railways, airspace, and telecommunications.
Introduction to Business
Virginia College
Week 01
Market, Demand, and Supply
Market Economic System: A market economic system based on consumer demand is the basis for the
US economy. The market economic system provides businesses with the flexibility to produce and price
goods based on what consumers want and are willing to pay.
Demand and Supply: Consumers create demand through their willingness and ability to purchase goods
and services. Businesses create supply through their willingness and ability to produce goods and
provide services.
Resources: Resources are allocated to those goods and services for which consumers pay higher
prices. When prices drop, resources are diverted to more profitable goods and services.
Private Enterprise System: Market economies rely on a private enterprise system. This allows
companies to pursue their own interests without government restrictions. The elements of a private
enterprise system are private property rights, freedom of choice, profits, and competition.
Types of Competition
Though competition is one of the elements of a private enterprise system, it is further divided into four
categories.
Perfect
It is a perfect competition when
 There are many buyers and sellers.
 Price is determined by supply and demand.
Monopolistic
Monopolistic competition is when there are
 Many sellers but less than there are in perfect competition.
 Many buyers with a focus on brand, design, or advertising, for example, The Gap, Banana
Republic, J. Crew, Abercrombie & Fitch, and Lands’ End.
In an oligopoly competition
 There are very few sellers.
 Large initial capital investment minimizes sellers entering the industry.
The automobile industry is a good example of an oligopoly competition.
Monopoly
In a monopoly competition, one producer controls the prices over an industry or market. The oil industry
in Saudi Arabia is an example of a monopoly.
Monopolies are rare in the United States, but existed in the past. The local telephone company, cable
company, etc. have been monopolies in the past.
Check Your Knowledge
Identify whether the following statements are true or false.
1. A planned economic system relies on partial or total government control.
a. True
Introduction to Business
Virginia College
Week 01
b. False
2. The U.S. economy is a mixed market economic system.
a. True
b. False
3. In a perfect competition, price is determined by supply and demand.
a. True
b. False
4. In a monopolistic competition, there are very few buyers who control the demand of goods and
services.
a. True
b. False
5. Monopolies are very common in the United States.
a. True
b. False
6. In a monopoly competition, large initial capital investment minimizes sellers entering the industry.
a. True
b. False
Correct Answers: The following are the correct answers:
1. A planned economic system relies on partial or total government control: True
2. The U.S. economy is a mixed market economic system: False
3. In a perfect competition, price is determined by supply and demand: True
4. In a monopolistic competition, there are very few buyers who control the demand of goods and
services: False
5. Monopolies are very common in the United States: False
6. In a monopoly competition, large initial capital investment minimizes sellers entering the industry:
False
Effect of Economic Environment
Demand is a key indicator of the market economic system. However, the economic environment factors
into the health of the economy. The economy is volatile and is affected by the economic environment.
Economic indicators offer a look at how the economy is performing. :
 Aggregate output and the standard of living
 Gross domestic product (GDP) and gross national product (GNP)
 Productivity
Economic Stability
Economic stability occurs 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. There are three factors that affect
economic stability:
Inflation
When there are widespread and continuous price increases for goods and services, this results in less
purchasing power for many consumers.
Unemployment
When unemployment is low, the more money consumers spend. Conversely, when unemployment is
high, consumers spend less money.
Recession/Depression
When there is a widespread drop in consumer spending, this is often caused by continued high
unemployment lasting more than a few months.
Introduction to Business
Virginia College
Week 01
An example of a recession in the United States began in 2008. Supply was much greater than consumer
demand. As a result, many companies had massive layoffs. Most economic experts believe that the
recession ended between late in 2010 to early 2011. A depression is a prolonged and severe recession.
The last depression in the United States lasted from 1929–1933.
Policies
The US economy is managed by the government through fiscal and monetary policies. These policies are
used to stabilize the economy.
Fiscal Policy
Fiscal policy involves changes in taxing and spending of the federal government. During a recession, the
government lowers taxes and increases government spending.
Monetary Policy
Monetary policy is controlled the Federal Reserve system. It involves changes in interest rates and the
money supply. During a recession, the Federal Reserve lowers interest rates and increases the money
supply.
Check Your Knowledge
1. Reduced purchasing power for many customers
2. High unemployment
3. Widespread drop in consumer spending
4. Continuous drop in prices for goods and services
Correct Answer: Inflation leads to reduced purchasing power for many customers.
Summary
This week, you covered topics that are critical to businesses from their start-up through ongoing
operations. You were introduced to the characteristics of U.S. business. The effects of external
environments and the different types of global economic systems on business were discussed.
In addition, you gained an understanding of the concepts of markets, demand, and supply, and how they
affect business. You learned about the different factors used to evaluate an economic system.
Introduction to Business
Virginia College