Download Chapter One: Section One

Chapter One: Section One: Getting Down to Business
Business- activity that provides goods and services to consumers for the purpose of
making a profit
 Profit-difference between the revenue that the company brings in from selling
goods and services and the costs of generating this revenue.
Not-for-profit (non-profit) Business- organization that has a purpose than returning
profits to owners- provision of social or educational services
Three participants in business- owners, employees, customers
 Owners invest money into business, create/polish the business idea, bring together
resources (money, people) needed to turn idea into business, hire employees
 Employees work for the company and help the company reach their goals
 Customers-goal of the company to obtain, satisfy and keep customers to purchase
goods and services
Five functional areas in business-management, operations, marketing, accounting and
finance
 Management-planning, organizing, directing and controlling resources to achieve
company goals-setting goals/strategies, staffing, organizing activities/resources,
decision making, performance evaluations, corrective action
 Operations- design and overseeing of processes that convert resources into goods
and services- quality controls, timely operations
 Marketing-identifying and responding to customer needs, develop benefits and
features of products, price and quality evaluation and controls, promotion and
delivery of products, keeping and attracting customers, satisfying customer needs
 Accounting- provide managers with accurate, relevant and timely financial
information-measuring, summarizing and communicating financial and
managerial information and advise
o Financial Accountants-financial statements for internal and external use to
assess the financial strength of the company
o Managerial Accountants-preparation of internal reports to track cost of
materials and other production process expenses
 Finance- activities involving planning for, obtaining and managing company
funds obtaining capital, paying off debt, investments in resources
External forces that influence business-economy, government, consumer trends, and
public pressure to act as good corporate citizens
Chapter One: Section Two: What is Economics
Economics-the study of how scarce resources are used to produce outputs-goods and
services- that are distributed among people. Resources-inputs used to produce outputsland and other natural resources, labor (physical/mental), capital (buildings, equipment,
money), entrepreneurship
Factors of Production- resources consisting of land, labor, capital (money, buildings,
equipment), and entrepreneurial skills combined to produce goods and services.
Economists study- the interactions between households and businesses and look at ways
in which the factors of production are combined to produce goods and services that
people need- answering the following three questions:
 What goods and services should be produced to meet consumer needs? Quantity?
And when they should be produced.
 How goods and services should be produced? Who should produce them? What
resources should be used/combined (including technology) to produce them?
 Who should receive the goods and services produced? How should the be
allocated among consumers?
Economic Systems- means by which a society makes decisions about allocating resources
to produce and distribute products Planned System- government asserted controls over the allocation of goods and
services
o Communism- economic system featuring the highest level of government
control over allocation and distribution
o Socialism- economic system falling between communism and capitalism
in terms of government control over allocation and distribution
 Free Market System- system in which most businesses are owned, operated and
controlled by individuals
o Capitalism- economic system featuring the lowest level of government
control over allocation and distribution
Economic System Continuum
Planned Systems---------------------------------------------------------------------------Free Market Systems
Communism
Socialism
Capitalism
High degree of government control
Low Degree of government control
High level of social services
Low level of social services

Mixed Market System- system that relies on both markets and government to
allocate resources- laissez-faire vs government intervention when needed
o Government intervention in health care, transportation, automobile
production
o Communist countries allowing for forms of capitalism

Privatization-process of converting government owned businesses to private
ownership
Chapter One Section 3: Perfect Competition-Supply & Demand
Perfect Competition Market-Market in which many consumers buy standardized products
from numerous small businesses
Supply- quantity of product that sellers are willing to sell at various prices
 Supply Curve- graph showing the quantity of product that will be offered for sale
at various prices
Demand-quantity of a product that buyers are willing to purchase at various prices
 Demand Curve- graph showing the quantity of a product being bought at certain
prices
Equilibrium Price- Price at which buyers are willing to buy exactly the amount that
sellers are willing to sell
Chapter One Section 4: Monopolistic Competition- Monopoly/Oligopoly
Four types of competition- perfect competition, monopolistic competition, oligopoly and
monopoly
Monopolistic Competition- Market in which many sellers supply differentiated products
 Products differentiated by- quality, style, convenience, location and brand name.
 Customer loyalty can be effected by price
 Companies have limited control over price
 Coke/Pepsi, Les Schwab/WalMart, Ice Burg/Fast Eddie’s
Oligopoly: market in which few sellers supply a large portion of all the products sold in a
marketplace
 Business start up costs are prohibitive
 Larger firms hold sizeable portion of the market
 Ford/Chevy, United Airlines/American Airlines, Microsoft/Apple
Monopoly- market in which there is only one seller supplying products at regulated
prices (government regulation, US limits number and sets criteria for allowance of
monopolies
 Natural Monopoly-monopoly, in which, because of the industry’s importance to
society, one seller is permitted to supply products without competition
o Government regulation/rules that govern costs, equitable service, service
to all even if not cost effective
o Examples- Utilities-gas, electric, cable, phone

Legal Monopoly-monopoly in which one seller supplies a product or technology
to which it holds a patent
o US limited patent to 20 years during which time no other companies can
use/sell the product without the inventor/patent holder’s permission
o Patent time frame used to defray heavy costs for research and
development of the product- encourages innovation/risk taking
o Examples- Polaroid Cameras, Wii Systems, Kindle
Chapter One Section 5: Measuring the Health of the Economy
Three shared economic goals of the world economy:
 Economic growth
 High employment
 Price Stability
Gross Domestic Product (GDP): measure of the market value of all goods and services
produced by a nation’s economy in a given year (GDP goes up-economy is growing,
GDP goes down-economy is contracting)
Business Cycle: pattern of expansion and contraction (ups and downs) in an economy
(typically in cycles of three to five years divided in four phases (typically irregular)
prosperity, recession, depression and recovery:
 Prosperity- economy expands, unemployment is low, incomes rise, consumers
buy more products, business respond by increasing production, innovation and
risk taking take place to offer new and better products
 Recession- economic slow down measure by decline in Gross Domestic
Productivity, economic slow down, increased unemployment rates, lower incomes
and less spending, business revenues decline, innovation and risk taking to
develop new and better products begins to decline (usually measured by a GDP
decline of at least two quarters)
 Depression- severe and long-lasting recession where factors of economic
slowdown, high unemployment rates, lower incomes/spending and business
revenue declines reach critical levels (checks and balances place on the economic
systems by governments make this stage of occurrence rare and unlikely. Most
cycles go from recession into recovery)
 Recovery- transition of recession (or depression0 cycles where the economy starts
to grow again- GDP rises, economy expands, unemployment levels start and
continue to lower, income and spending starts to rise, business revenue increases
and market innovation and risk taking returns.
Full Employment: occurs when everyone who wants to work has a job. Most statistics
identify full employment when at least 95% of those wanting work are employed
Unemployment Rate: measures the percentage of the labor force that’s unemployed and
actively seeking work. An important measure of economic health, employment effects
both supply and demand and ultimately the GNP.
Price Stability: conditions under which prices for products remain fairly constant- the
average of the prices for goods and services doesn’t change or changes very little
 Inflation- rise of overall price levels- higher costs for consumers, sellers have a
harder time selling products and sales plummet.
 Deflation (rarely happens): decrease in overall price levels
Consumer Price Index (CPI): index that measures inflation by measuring the prices of
goods purchased by a typical consumer- reported monthly to the Bureau of Labor
Statistics CPI measures a hypothetical basket of goods such as food, housing, clothing,
medical care, appliances, automobiles, etc. purchased by a typical family.
Economic Indicator: a statistic that provides information about trends in the economythere is a multiple of economic indicators too large to track so economists limit their
studies to a select few:
 Lagging Economic Indicator- statistical data that measures economic trends after
(a few months) the overall economy has changed (ie. Average length of
unemployment)
 Leading Economic Indicator- statistical data that predict the status of the economy
three to twelve months in the future-viewing indicators from various sectors of the
economy- labor (new UI claims), manufacturing (new products/growth/
expansion/downsizing), housing (house starts, new home investments, real estate).
Consumer Confidence Index- measure of optimism that consumers express about the
economy as they go about their daily lives- opinions on the health of the economy,
consumer plans for future purchases- posted on CNNMoney.com – Business, Economy
and Consumer Confidence
 Private research firm The Conference Board publishes the US leading index to get
an idea how leading economic indicators are effecting the economy
Chapter One Section 6: Governments Role in Managing the Economy
Monetary Policy: efforts exerted by the Federal Reserve System (the “Fed”) to regulate
the nation’s money supply
 Regulation of money supply
 Regulation of level of interest rates-raise or lower short term interest rates
 Inflationary problems- money supply is limited and interest rates go up to slow
spending and production resulting in lower prices (by theory)
 Recessionary problems- increase money supply and lower interest rates to
encourage consumer spending and business growth (again by theory)
Fiscal Policy: governmental use of taxation and spending to influence economic
conditions- both taxation and governmental spending can be used to increase or decrease
the total supply of money in the economy
 Inflationary problems- government will decrease spending and/or increase taxes
to help reduce spending by businesses and consumers helping bring prices down
and reducing the threats of inflation (by theory)
 Recessionary problems-government will increase spending and/or lower taxes to
help put money in the hands of consumers and businesses to help stimulate the
economy (again by theory)
 When the government takes in more taxes than it spends out in goods and services
(for defense, transportation, social services) the result is a budget surplus; If they
spend more than they take in, in taxes, we have a budget deficit. This deficit is
called the national debt and it has continued to sharply increase since the 1980’s
current figures show over $13 trillion in national debt (go to the web for national
debt clock for real time figures.
Macroeconomics: the study of the economy as a whole- economic wide effect of
inflation, overall trends in imports/exports, overall level of activity in the economy
Microeconomics: the study of economic choices made by individual businesses and
consumers- prices consumers are willing to pay for specific items, the understanding of
supply and demand systems.
Cases and Problems