Download 1- MGT131

Chapter One
Exploring the
World of Business
Chapter Overview
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Learning Objectives
1. Discuss your future in the world of business.
2. Define business and identify potential risks and
rewards.
3. Describe the two types of economic systems:
capitalism and command economy.
4. Identify the ways to measure economic
performance.
5. Outline the four types of competition.
6. Summarize the development of America’s business
system.
7. Discuss the challenges that American businesses
will encounter in the future.
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Your Future in the Changing
World of Business
• Free enterprise
– Individuals are free to decide what to
produce, how to produce it, and at
what price to sell it
• What does it take to succeed in
business?
– Have a dream—know what you want
– Adapt to changes in the
environment—work hard to turn your
dreams into reality
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Why Study Business?
•
•
•
•
For help in choosing a career
To be a successful employee
To start your own business
To become a better informed consumer
and investor
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Tips for Studying Business
• Textbook
– Learning objectives
– Examples: Inside Business, Boxed features, Photos,
Spotlight features, Video Cases
– Margin notes
– Figures and tables
– Using the Internet
– Summary, key terms list, questions, exercises
• Business Bonus Pack: Your Guide to an “A”
– Audio Review CDs, HM eStudy CD
• Website
– ACE Self-Tests, Flashcards
• Study Guide
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Using the Internet
The textbook website is your connection to more
business information and study tools to help you
succeed in this course. Go to the publisher’s
website:
http://college.hmco.com/students
Go to the course area for Business and select
the textbook website for Pride/Hughes/Kapoor
Business 8/e or one of the Resource Centers to
find updates, ACE self-tests, flashcards, links to
companies, a research center, a career center,
and more.
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Business: A Definition
• The organized effort of individuals to
produce and sell, for a profit, the goods
and services that satisfy society’s needs
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The Organized Effort of Individuals
Combining Resources
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Classification of Businesses
• Manufacturing businesses
–Process various materials into tangible goods
• Service businesses
–Produce services (e.g., haircuts, legal
advice, or tax preparation)
• Marketing intermediaries
–Buy products from manufacturers and resell
them
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Satisfying Needs
• 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
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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.
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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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Economic Systems
• Economics
– The study of how wealth (anything of value) is
created and distributed
• Economy
– The system through which a society creates and
distributes wealth
• Differences in economic systems
– Who owns the the factors of production?
•
•
•
•
Land and natural resources
Labor
Capital
Entrepreneurship
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Economic Systems (cont’d)
• Differences in economic systems (cont’d)
– How they answer the four basic economic questions
• 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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Types of Economic Systems
• Capitalism
– 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
• 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
– Businesses and individuals decide what to produce and
buy; the market determines quantities sold and prices
• Limited role of government
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Types of Economic Systems (cont’d)
• Capitalism in the United States
– Mixed economy with elements of capitalism and
socialism
– Households
• Consumers of goods and services
• Resource owners of some factors of production
– Businesses
• Produce goods and services to exchange for revenues
(money)
• Use revenues to purchase factors of production
– Governments
• 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
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The Circular Flow in Our Mixed Economy
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Types of Economies (cont’d)
• Command Economies
– Economic systems in which the government
decides what will be produced, how it will be
produced, who gets what is produced, and who
owns and controls the major factors of production
– Socialism
• 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
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Types of Economies (cont’d)
• Command economies (cont’d)
– Communism
• 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.
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Debate Issue: Should there be less government
involvement in the United States economic system?
YES
• 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.
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NO
• 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 that need the
encouragement provided by
government regulations.
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Measuring Economic Performance
• Productivity
– The average level of output per worker per
hour
• Economic indicators
– Gross domestic product (GDP)
• The total value of all goods and services
produced by all people within the boundaries of
a country during a one-year period
– Inflation
• A general rise in the level of prices
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GDP in Current and Inflation-Adjusted Dollars
Source: U.S. Bureau of Economic Analysis website at www.bea.gov, February 1, 2003.
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Common Measures Used to Evaluate a
Nation’s Economic Health
• Balance of Trade
– The total value of a nation’s exports minus the
total value of its imports over a specific period of
time
• Consumer Price Index (CPI)
– A monthly index that measures the changes in
prices of a fixed basket of goods purchased by a
typical consumer
• Inflation Rate
– The increase in prices of goods and services over
a period of time; usually calculated on a monthly
or annual basis
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Common Measures Used to Evaluate a
Nation’s Economic Health (cont’d)
• Prime Interest Rate
– The lowest rate that banks charge their most
creditworthy customers
• Producer Price Index (PPI)
– A monthly index that measures prices at the
wholesale level
• Productivity Rate
– An economic measure that tracks the increase
and decrease in the average level of output per
worker
• Unemployment Rate
– The percentage of a nation’s labor force
unemployed at any time
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The Business Cycle
• The recurrence of periods of growth and
recession in a nation’s economic activity
– 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
– Monetary Policies
• Federal Reserve decisions that determine the
size of the supply of money in the nation and
the level of interest rates
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The Business Cycle (cont’d)
– 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
– Federal Deficit
• A shortfall created when the federal
government spends more in a fiscal year than it
receives
– National Debt
• The total of all federal deficits
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Types of Competition
• Rivalry among businesses for sales to
potential customers
• 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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Supply Curve and Demand Curve
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Types of Competition (cont’d)
• 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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Types of Competition (cont’d)
• Oligopoly
– 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
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Types of Competition (cont’d)
• Monopoly
– A market (or industry) with only one seller
– Natural monopoly
• 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
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Class Exercise
• Choose a product that would be sold in
each of the four types of competitive
situations below. Also list the name of a
specific firm in your area that would sell
the product.
– Pure competition
– Monopolistic competition
– Oligopoly
– Monopoly
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Time Line of American Business
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Time Line of American Business (cont’d)
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The Development of American Business
• The Colonial Period
– Barter system
• A system of exchange in which goods or services are
traded directly for other goods and/or services without
using money
– Domestic system
• A method of manufacturing in which an entrepreneur
distributes raw materials to various homes, where
families would process them into finished goods to be
offered for sale by the merchant entrepreneur
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The Development of American Business
(cont’d)
• The Industrial Revolution
– Factory system
• A system of manufacturing in which all the
materials, machinery, and workers required to
manufacture a product are assembled in one
place
– Specialization
• The separation of a manufacturing process into
distinct tasks and the assignment of different
tasks to different individuals
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The Development of American Business
(cont’d)
• Early Twentieth Century
– Rapid growth of large industries (automobiles, steel,
oil, chemical) and the mass production of consumer
goods
– Large business ownership shifts from individuals to
shareholders
– New advertising and selling methods promote “buy
now and pay later” time payment plans for costly
durable goods
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The Development of American Business
(cont’d)
• The Great Depression and Recovery
– The Roaring Twenties ended with the 1929 stock
market crash
– The unemployment rate from 1931 through 1939 varied
from 16% to 25%
– The value of goods and services produced dropped by
almost 50%
– Government intervention became necessary to get the
economy moving again
– World War II spurred economic activity and
technological growth that continued after the war
– The U.S. standard of living and the production of goods
and services continued to rise through the 1960s
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The Development of American Business
(cont’d)
• The Late Twentieth Century
– A shortage of crude oil in the mid-1970s increased
the cost of energy, causing increases in the annual
rate of inflation to beyond 10% through the early
1980s
– The U.S. economy in the early 1990s was a period
of economic improvement and growth fueled by
introduction of information technologies, cost
cutting, and the increased efficiency and flexibility
of business.
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The Development of American Business
(cont’d)
• The New Millennium
– Technology becomes affordable
– Growth in services industries and global trade
– Although many economic indicators are strong,
there is a feeling of pessimism, a large number of
business failures, high unemployment, terrorist
threats
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The Challenges Ahead
• How can we encourage Iraq to establish a
democratic and free society and resolve possible
conflict with North Korea and other countries
throughout the world?
• How can we create a more stable economy and
create new jobs for those who want to work?
• How can we restore the public’s trust in corporate
financial matters?
• How can we meet the challenges of managing
culturally diverse work forces to address the needs of
a culturally diverse marketplace?
• How can we make American manufacturers more
productive and more competitive with foreign
producers who have lower labor costs?
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The Challenges Ahead (cont’d)
• How can we encourage an entrepreneurial spirit in
large, established corporations?
• How can we preserve the benefits of competition in
our American economic system?
• How can we encourage economic growth and at the
same time continue to conserve natural resources
and protect our environment?
• How can we finance additional investment spending
on information technology and replacement of
obsolete machinery and equipment?
• How can we best market American-made products in
foreign nations?
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The Challenges Ahead (cont’d)
• How much government involvement in our economy
is necessary for its continued well-being? In what
areas should there be less involvement? In what
areas, more?
• How can we evaluate the long-term economic costs
and benefits of existing and proposed government
programs?
• How can we meet the needs of the less fortunate?
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Chapter Quiz
1. Target Discount stores would be an example of a(n)
a)
b)
c)
d)
e)
manufacturer.
marketing intermediary.
service business.
wholesaler.
agent retailer.
2. A person who risks his or her time, effort, and money to
start a business is a(n)
a)
b)
c)
d)
e)
laissez faire manager.
employee.
entrepreneur.
capital specialist.
factor of production.
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Chapter Quiz (cont’d)
3. A __________ is an economic system in which businesses
and individuals make the decisions about what to produce
and what to buy, and the market determines how much is
sold and at what prices.
a)
b)
c)
d)
e)
service economy
manufacturer economy
command economy
market economy
wholesaler economy
4. Which of the following is not one of the four stages in the
business cycle?
a)
b)
c)
d)
e)
peak
market demand
recession
trough
recovery
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Chapter Quiz (cont’d)
5. The process of developing and promoting differences
between one’s products and all similar products is referred
to as
a)
b)
c)
d)
e)
product differentiation.
monopoly situation.
equilibrium process.
industrial differentiation.
specialization.
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Answers to Chapter Quiz
1. Target Discount stores would be an example of a(n)
a)
b)
c)
d)
e)
manufacturer.
marketing intermediary.
service business.
wholesaler.
agent retailer.
2. A person who risks his or her time, effort, and money to
start a business is a(n)
a)
b)
c)
d)
e)
laissez faire manager.
employee.
entrepreneur.
capital specialist.
factor of production.
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1 - 49
Answers to Chapter Quiz (cont’d)
3. A __________ is an economic system in which businesses
and individuals make the decisions about what to produce
and what to buy, and the market determines how much is
sold and at what prices.
a)
b)
c)
d)
e)
service economy
manufacturer economy
command economy
market economy
wholesaler economy
4. Which of the following is not one of the four stages in the
business cycle?
a)
b)
c)
d)
e)
peak
market demand
recession
trough
recovery
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1 - 50
Answers to Chapter Quiz (cont’d)
5. The process of developing and promoting differences
between one’s products and all similar products is referred
to as
a)
b)
c)
d)
e)
product differentiation.
monopoly situation.
equilibrium process.
industrial differentiation.
specialization.
Copyright © Houghton Mifflin Company. All rights reserved.
1 - 51