Download Market Economy

Chapter 1
The Environment of
Business
Key Contents
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Business
Business Environment
Political / legal
 Economic
 Technological
 Social / cultural
 International
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Business
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The organization:
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A group of people, with common purpose
Providing goods and services
 to satisfy customer requirements
 in order to maximize profit
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An enterprise, commercial entity, or firm in
either the private or the public sector, concerned
with providing products or services to satisfy
customer requirements.
The process:

The organized effort of individuals to produce
and sell, for profit, the products and services
that satisfy society’s needs.
The Organized Effort of
Individuals
3-Satisfying Customer Needs
2-Providing Goods and Services
1-Combining Resources
Satisfying Needs
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People buy goods and services not just to
own them, but to satisfy particular needs
Businesses that understand customer needs,
and work to satisfy those needs, are usually
successful
Business
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The goal: Satisfying customer needs
The means: Providing goods and services
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Process: production (operations)
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manufacture, process, assemble, create, ……
Factors of production (Inputs: Resources )
(N, L, K, E)
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Land and Natural resources
Labor
Capital
Entrepreneurship
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A person who risks time, effort, and money to start and
operate a business
Outputs: Goods and services (marketing & logistics)

sales, promotion, distribution, services, …
Business Profit

The purposes of profit
To reward business owners for producing
goods and services consumers want
 As payment for business owners assuming
the risks of ownership
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Stakeholders
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All of the different people or groups or
people who are affected by the policies and
decisions made by an organization
The Relationship Between Sales
Revenue and Profit

Profit is what remains after all business
expenses have been deducted from sales
revenue. A loss (negative profit) results when
a firm’s expenses are greater than its
revenues.
The Goal

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Maximize Profit by satisfying customer
requirement
Profit: revenues – costs
Revenues: sales volume x price
 Costs:
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costs of goods sold (COGS);
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Inputs: Resources (L, K, N, E) (logistics)
Purchase/procurement/sourcing, transportation,
warehousing, handling, ……
Expenses:

selling, general, administrative, depreciations, …
Business: activities
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purchase, sale , lease, and rental of personal
or real property;
Manufacturing, processing, and/or
marketing of products, commodities, or any
other personal property;
sale of services to the public;
the activities of providing goods and
services
Business Functions/Subjects
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Purchase/procurement/
sourcing
Warehousing
Handling
Transportation
Operations
Sales/promotion
Distribution
After sale services
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Management
Human Resources
Finance
Production
Marketing
Logistics
Accounting
International
E-commerce
Business: setup & run
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Forms of Business Ownership
Organization Structure and Behavior
Human Resources
Finance
Production
Marketing
Logistics
Accounting
International
Business Environment: legal, social, cultural
Business Environment
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Social / cultural
Technological
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Current standards and future trend of
industry specific technology
Economic
Political / legal
International
Social and Cultural
Social structure
 Values and traditions
 Beliefs and religions
 Life styles and purchase habits
 Others
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Political / Legal
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Political Stability (government, racial
conflicts, terrorists, …)
Political System (democracy, human
rights, …)
Laws and Regulations toward Business (in
general, to specific industries, …)
Legal system (procedures, efficiency,
favorability, …)
others
Economic
Economics
 Economic System
 Economic Performance (macro)
 Industry specific environment (micro)
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Economics
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Economy
 The system through which a society creates and
distributes wealth
Economics
 The study of how wealth (anything of value) is
created and distributed
Microeconomics
 The study of the decisions made by individuals
and businesses
Macroeconomics
 The study of the national economy and the
global economy
Economic Systems
Basic Economic Questions to Answer:
(What? How? For Whom? Who?)
What goods and services will be produced?
 How will they be produced?
 For whom will they be produced?
 Who owns and controls the major factors of
production?
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Market Economy (Capitalism)
Planned (Command) Economy (Socialism
and Communism)
Mixed Economy (private and public)
Market Economy
(Capitalism)

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An economic system in which individuals
own and operate the majority of businesses
that provide goods and services
Derived from Adam Smith’s laissez-faire
capitalism in which a society’s best interests
are served by individuals pursuing their own
self-interest (the invisible hand)
Free Capitalism
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Creation of wealth is the concern of private
individuals
Resources used to create wealth must be
privately owned
Economic freedom ensures the existence of
a free market economy
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Businesses and individuals decide what to
produce and buy; the market determines
quantities sold and prices
Limited role of government
Basic Assumptions for Adam
Smith’s Laissez-Faire Capitalism
Insert Figure 1.3, p. XX
Planned Economy
(Socialism)
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Key industries (e.g., transportation, utilities, and
banking) are owned and controlled by the
government
Small-scale private businesses may be permitted
and workers may choose their own occupations
Production is based on national goals, and
distribution is controlled by the state
Intent is the equitable distribution of income,
elimination of poverty, social services to all who
need them, elimination of the economic waste of
capitalistic competition
Command Economy
(Communism)
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All factors of production are owned and controlled
by the government as proxy for ownership by all
citizens
Production is based on centralized state planning
to meet the needs of the state and not necessarily
the needs of its citizens
The state dictates occupational choices and sets
prices and wages
Intent is to create Karl Marx’s concept of a
classless society where all contribute according to
their ability and receive benefits according to their
needs.
Mixed Economy
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with elements of capitalism and socialism
Households (private)
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Businesses (partly private, partly public)
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Consumers of goods and services
Resource owners of some factors of production
Produce goods and services to exchange for revenues
(money)
Use revenues to purchase factors of production
Governments (public)

In exchange for taxes, governments provide public
services that would not be provided by business or would
be produced only for those who could afford them
The Circular Flow in Mixed Economy
Debate Issue: Should There Be Less
Government Involvement?
YES
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Today, there are too many
government controls that
inhibit business owners.
The added costs of
adhering to government
regulations are passed on
to consumers in the form
of higher prices.
There is no need for all the
government rules and
regulations because
business owners are
socially responsible.
NO
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Without adequate government
controls, business would take
advantage of consumers.

While government rules and
regulations cost money, the
added safety and protection are
well worth the money.

While the majority of business
owners may be socially
responsible, there are some who
need the encouragement
provided by government
regulations.
The Proper Role of Government
Major economic entity?
 Administrative authority?
 Service provider?
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Measuring Economic Performance
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Productivity
The average level of output per worker per hour
 May change with capital input and technology
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Economic growth:
aggregate output, GDP, standard of living
Economic health:
Economic Stability:
business cycle, inflation, unemployment
Economic Growth
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Gross domestic product (GDP)
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The total value of all goods and services
produced by all people within the
boundaries of a country during a one-year
period
National income
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The total income earned by various
segments of the population, including
employees, self-employed individuals,
corporations, and other type of income
GDP in Current and
Inflation-Adjusted Dollars
Source: U.S. Bureau of Economic Analysis website at www.bea.gov, accessed
September 14, 2008.
.
Consumer Price Index
1982 – 1984 = 100
Year
Annual Average
Percent Change
2000
172.2
+3.4%
2001
177.1
+2.8%
2002
179.9
+1.6%
2003
184.0
+2.3%
2004
188.9
+2.7%
2005
195.3
+3.4%
2006
201.6
+3.2%
2007
207.3
+2.8%
2008
215.4
+3.8%
Source: Bureau of Labor Statistics,
ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt, accessed February 17, 2009.
Measuring Economic Health
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Inflation rate
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Prime interest rate
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An economic statistic that tracks the increase in prices
of goods and services over a period of time; usually
calculated on a monthly or annual basis
The lowest interest rate that banks charge their most
creditworthy customers
Productivity rate
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An economic measure that tracks the increase and
decrease in the average level of output per worker
Measuring Economic Health
(cont’d)
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Unemployment rate
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The percentage of a nation’s labor force
unemployed at any time
Unemployment
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Unemployed:
in the labor force;
 actively looking for a job and do not have one
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Measuring Economic Health
(cont’d)
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New housing starts
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Bank credit
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A statistics that measures the lending activity of
commercial financial institutions
Corporate profits
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The total number of new homes started during a
specific time period.
The total amount of profits made by corporations over
selected time periods
Balance of trade
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The total value of a nation’s exports minus the total
value of its imports over a specific period of time
The Business Cycle

The recurrence of periods of growth and
recession in a nation’s economic activity

Recession – depression - recovery - expansion
 Recession: two consecutive three-month
periods of decline in a country’s gross
domestic product
 Depression: a severe recession that lasts
longer than a recession
The Business Cycle (cont’d)
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Monetary policies
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Federal Reserve decisions that determine the size of
the supply of money in the nation and the level of
interest rates Fiscal policy
Government influence on the amount of savings
and expenditures; accomplished by altering the
tax structure and by changing the levels of
government spending
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Federal deficit
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A shortfall created when the federal government spends more
in a fiscal year than it receives
National debt
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The total of all federal deficits
Types of Competition

Rivalry among businesses for sales to
potential customers
 Perfect
(or pure) competition
 Monopolistic competition
 Oligopoly
 Monopoly
Perfect (or pure) competition

The market situation in which there are
many buyers and sellers of a product, and
no single buyer or seller is powerful enough
to affect the price of that product
Supply: The quantity of a product that
producers are willing to sell at each of various
prices
 Demand: The quantity of a product that buyers
are willing to purchase at each of various prices
 Market Price (Equilibrium): The price at which
the quantity demanded is exactly equal to the
quantity supplied
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Monopolistic competition
A market situation where there are
many buyers along with a relatively
larger number of sellers who
differentiate their products from the
products of competitors
 Product differentiation
 The process of developing and
promoting differences between one’s
products and all similar products
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Oligopoly
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A market situation (or industry) in which there are
few sellers
 E.g., automobile manufacturers, car rental
agencies, and farm implement industries
Sizable investments are required to enter into the
market
Each seller has considerable control over price
The market actions of one seller can have a strong
effect on competitors
Monopoly
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A market (or industry) with only one seller
Natural monopoly
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An industry requiring huge investments in capital and
within which duplication of facilities would be wasteful
and thus not in the public interest
Legal monopoly (limited monopoly)

A monopoly created when the federal government issues
a copyright, patent, or trademark protecting the owners
of written materials, ideas, or product brands from
unauthorized use by competitors