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Chapter 1
Understanding
the U.S. Business
System
PowerPoint Presentation by Charlie Cook
Copyright © 2005 Prentice Hall, Inc.
All rights reserved.
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 © 2005 Prentice Hall, Inc. All rights reserved.
1–3
What Is “A Business”?
• An organization that
provides goods and
services to earn profits
Profits:
The positive difference
between revenues and
expenses
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1–4
Functions of Business:
From society’s perspective
Choice
Opportunity
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Quality
of Life
Enterprise
1–5
Goals of Business:
From a business perspective
Survival
Growth
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Profit
Social
Responsibility
1–6
Factors of Production used by business
Physical
Resources
Information
Resources
The factors formerly
known as “Land”
Entrepreneurs
Capital
Labor
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1–7
How Are Factors of Production
Allocated?
• Planned Economy:
 An economic system in which the
government owns and operates the
sources of production
 Slicing the pie evenly
• Market Economy:
 An economic system in which buyers
and sellers interact based on freedom
of choice
 “The Invisible Hand” of self interest
 Growing the pie
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1–9
Economic Systems control scale
Socialistic
(Planned Economy)
Communism
Capitalistic
(Market Economy)
Pure
Capitalism
Question: Where do the people enjoy the highest standard
of living with the most equal distribution of wealth?
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1–10
Socialism Toward Capitalism
• Socialism
 A planned economic system in which the government
owns and operates selected sources of production
• Worldwide trend
 Worldwide trend is toward more market elements.
• Privatization:
 The process of converting government enterprises
into privately owned companies
• Some notable exceptions are occurring:
 Venezuela’s President Hugo Chávez’s nationalization
of Venezuela’s oil production is one notable example.
Copyright © 2005 Prentice Hall, Inc. All rights reserved.
1–11
Capitalism:
A Fundamentally Market-Based Economy
Individuals Choose:
• Where to work
• What to buy
• How much to pay
Producers Choose:
• Who to hire
• What to produce
• How much to charge
Government freedoms AND controls
support private ownership and encourage
entrepreneurship and choice
Copyright © 2005 Prentice Hall, Inc. All rights reserved.
1–12
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 © 2005 Prentice Hall, Inc. All rights reserved.
1–14
Supply and Demand Drive the
Capitalistic U.S. 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
• How much would it take
its price drops.
to entice YOU to make
cookies for the class?
Copyright © 2005 Prentice Hall, Inc. All rights reserved.
1–15
Supply and Demand Drive the U.S.
Economic System (cont’d)
• Demand:
 The willingness and ability
of buyers to purchase a
good or service
• Law of Demand:
 Buyers will demand
(purchase) more of a
product as its price drops
and less as its price
increases.
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• How much would you
PAY to buy cookies in
class?
1–16
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 © 2005 Prentice Hall, Inc. All rights reserved.
1–24
The U.S. Economy is a Private
Enterprise System
Four Key Elements:
• Private Property
Rights
• Freedom of Choice
• Profits
• Competition
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• Individuals are free
to pursue their own
interests without
government
restriction.
• Enough government
control is in place to
ensure enforcement
of individual and
business rights
1–25
Competition
• Competition motivates
businesses to produce their
products better and/or cheaper
 Making our product better
 Making ours cheaper
 Why does competition do this?
• Bonus: Competitive Strategies
 Growing the market
 Bicycles
 Vs. Cannibalistic competition
 Politics
Copyright © 2005 Prentice Hall, Inc. All rights reserved.
1–26
Degrees of Competition (p16)
What kind of competitive landscape do I want if:
I amfirm
My
trying
exists
has
tobeen
start
in aaround
sea
a brand
of similar
a new
long company?
time
competitors?
and I am tired of
innovating?
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Table 1–1
1–27
Understanding Economic Performance
Key Concept: The business Cycle
KEY CONCEPTS
• Business Cycle
• Aggregate Output
• Standard of Living
• Gross Domestic Product (GDP)
• Gross National Product (GNP)
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1–28
U.S. GDP and GDP per Capita
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Table 1–2
1–30
Economic Stability:
Balancing Growth
Two related factors threaten
stability:
INFLATION
UNEMPLOYMENT
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1–33
Recessions and Depressions
• Recession:
 Aggregate output
declines,
unemployment
increases
• Depression:
 Severe and longlasting recession
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1–37
Managing the US Economy
• Stabilization Policy:
 Government policy designed to smooth out
fluctuations in the economy
 Fiscal
Policies
 Monetary Policies
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1–38
Evolution of American Business
• Agricultural
• Manufacturing
• Service Industries
• Future???
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1–39
Looking to the Future
Four Major Forces:
• The information revolution
continues evolving.
• Technological breakthroughs
will create new industries.
• Increasing globalization will
create larger markets and
tougher competition.
• Increasing instability in energy
costs create danger and
opportunity
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1–40
What’s next?
• Chapter 1 overview lecture
• Chapter 1 teamwork to solve the assigned
questions.
• Then we will complete a short case study
involving supply and demand that will require
some knowledge of chapter 1.
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1–44
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 © 2005 Prentice Hall, Inc. All rights reserved.
1–45