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Fourth Edition PART 1 . . . . . . . . . . . . . . . . . . . . . . . . Understanding the Contemporary Business Environment Copyright ©2003 Prentice Hall, Inc. Chapter 1 Understanding the U.S. Business System Copyright ©2003 Prentice Hall, Inc. 1-2 “In business you get what you want by giving other people what they want.” ~ Alice Foote MacDougall Copyright ©2003 Prentice Hall, Inc. 1-3 Key Topics Nature and goals of US business Global economic systems Supply and demand Private enterprise and competition Evaluating economic performance Status and outlook for the US economy Copyright ©2003 Prentice Hall, Inc. 1-4 What Is Business? An organization that provides goods and services to earn profits Profits: The positive difference between revenues and expenses Copyright ©2003 Prentice Hall, Inc. 1-5 Factors of Production Labor Capital Information Resources Entrepreneurs Copyright ©2003 Prentice Hall, Inc. Physical Resources 1-6 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 Copyright ©2003 Prentice Hall, Inc. 1-7 “Circular Flow in Market Economy” SUPPLY OUTPUT MARKETS DEMAND Goods Services FIRMS • Supply products in output markets • Demand resources in input markets DEMAND Copyright ©2003 Prentice Hall, Inc. HOUSEHOLDS INPUT MARKETS Labor Capital Entrepreneurs Physical Resources Information Resources • Demand products in output markets • Supply resources in input markets SUPPLY 1-8 Capitalism A Fundamentally Market-Based Economy Individuals Choose: Producers Choose: Where to work Who to hire What to buy What to produce How much to pay How much to charge Government supports private ownership and encourages entrepreneurship Copyright ©2003 Prentice Hall, Inc. 1-9 Mixed Economies Planned and Market The economies of most countries include both planned and market elements Worldwide trend toward more market elements Copyright ©2003 Prentice Hall, Inc. 1 - 10 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 Copyright ©2003 Prentice Hall, Inc. 1 - 11 Supply & Demand Drive the US Economic System Supply: The willingness and ability of producers to offer a good or service for sale Law of Supply: Producers will supply (offer) more of a product for sale as its price rises and less as its price drops Copyright ©2003 Prentice Hall, Inc. 1 - 12 Supply & Demand Drive the US Economic System Demand: The willingness and ability of buyers to purchase a good or service Copyright ©2003 Prentice Hall, Inc. Law of Demand: Buyers will demand (purchase) more of a product as its price drops and less as its price increases 1 - 13 Demand & Supply Demand and Supply Schedules Price Quantity of Pizzas Demanded $2 $4 $6 $8 $10 $12 $14 $16 $18 $20 2000 1900 1600 1200 1000 800 600 400 200 100 Copyright ©2003 Prentice Hall, Inc. Quantity of Pizzas Supplied 100 400 600 800 1000 1200 1300 1600 1800 2000 1 - 14 Demand & Supply $20 - Demand Curve 16 14 12 10 - 864- 1600 - 1400 - 1200 - 1000 - 800 - 600 - 400 - 200 - 2000 - 2- 1800 - Price of Pizzas 18 - Quantity of Pizzas Demanded Copyright ©2003 Prentice Hall, Inc. 1 - 15 Demand & Supply $20 - Supply Curve 16 14 12 10 - 86- 2000 - 1800 - 1600 - 1400 - 1200 - 1000 - 800 - 200 - 2- 600 - 4- 400 - Price of Pizzas 18 - Quantity of Pizzas Supplied Copyright ©2003 Prentice Hall, Inc. 1 - 16 Demand & Supply $20 - Price of Pizzas 18 - Demand Curve Supply Curve 16 14 12 - 10 - Equilibrium Price 864- 2000 - 1800 - 1600 - 1400 - 1200 - 1000 - 800 - 600 - 400 - 200 - 2- Quantity of Pizzas per Week Copyright ©2003 Prentice Hall, Inc. 1 - 17 The US Economy is a Private Enterprise System Individuals are free to pursue their own interests without government restriction Four Key Elements: 1. 2. 3. 4. Copyright ©2003 Prentice Hall, Inc. Private Property Rights Freedom of Choice Profits Competition 1 - 18 Competition Competition motivates businesses to produce their products better or cheaper Copyright ©2003 Prentice Hall, Inc. 1 - 19 Degrees of Competition Perfect Monopolistic Characteristic Competition Competition Sample Local farmer Oligopoly Monopoly Stationery store Steel industry Public utility Number of competitors Many Many, but fewer than in perfect competition Few None Ease of entry into industry Easy Fairly easy Difficult Regulated by government Similarity of goods or services offered by competing firms Identical Similar Can be similar or different No directly competing goods/services None Some Some Considerable Level of control over price by individual firms Copyright ©2003 Prentice Hall, Inc. 1 - 20 Understanding Economic Performance KEY CONCEPTS Business Cycle Aggregate Output Standard of Living Gross Domestic Product (GDP) Gross National Product (GNP) Copyright ©2003 Prentice Hall, Inc. 1 - 21 Understanding Economic Performance KEY CONCEPTS Productivity: The amount a system produces compared to the resources needed to produce it Balance of Trade Copyright ©2003 Prentice Hall, Inc. PRODUCTIVITY is impacted by: National Debt 1 - 22 Economic Stability Balanced Growth of Money & Goods Two related factors threaten stability: INFLATION UNEMPLOYMENT Copyright ©2003 Prentice Hall, Inc. 1 - 23 The CPI is a Tool to Measure Inflation House Car Hamburger & Fries 2000 1980 1930 $250,000 $109,000 $25,696 $18,000 $7,871 $1,850 $5.00 $2.19 $.51 Source: Westegg.com/inflation/infl.cgi Copyright ©2003 Prentice Hall, Inc. 1 - 24 Recessions & Depressions Recession: Aggregate output declines, unemployment increases Depression: Severe and long-lasting recession Copyright ©2003 Prentice Hall, Inc. 1 - 25 Managing the US Economy Stabilization Policy: Government policy designed to smooth out fluctuations in the economy Fiscal Policies Monetary Policies Copyright ©2003 Prentice Hall, Inc. 1 - 26 Looking to the Future Three Major Forces: 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 Copyright ©2003 Prentice Hall, Inc. 1 - 27 Projections and Implications for the US Economy Opportunities… Steady economic growth Fewer inflationary surges and lower budget deficits Countries with free trade, innovation, and open financial systems will thrive Successful businesses will be those that quickly master new technology Copyright ©2003 Prentice Hall, Inc. 1 - 28 Projections and Implications for the US Economy Challenges… Growing US trade deficit Disturbing income inequality Steadily increasing consumer debt Limited health insurance Copyright ©2003 Prentice Hall, Inc. 1 - 29 Chapter Review Describe the nature and goals of US business Define the key global economic systems and describe how they control the factors of production Show how demand and supply affect the distribution of resources in the US Identify the elements of private enterprise and the various degrees of competition Explain how to evaluate an economic system Describe the key projections for the US economy Copyright ©2003 Prentice Hall, Inc. 1 - 30