Download Understanding the US Business System

Fourth Edition
PART 1 . . . . . . . . . . . . . . . . . . . . . . . .
Understanding the Contemporary
Business Environment
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Chapter 1
Understanding the
Business System
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“In business you get what
you want by giving other
people what they want.”
~ Alice Foote MacDougall
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Key Topics
Nature and goals of business
Global economic systems
Private enterprise and competition
Evaluating economic performance
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Exercise
Write four things do you know about
business. Write 4 things you would like to
know?
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What Is Business?
An organization that
provides goods and
services to earn profits
Profits:
The positive difference
between revenues and
expenses
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Difference between business and nonprofit organizations?
goals are quite different, the same skills
(management, marketing, finance, etc.) are
needed to be successful in both arenas.
Discussion: What benefits do businesses
offer society?
(goods, services, employment, tax revenue,
technological advances, etc.)
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Factors of Production
Labor
Capital
Information
Resources
Entrepreneurs
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Physical
Resources
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Factors of production
Labor: The people who work for businesses. Labor includes both
physical and mental contributions. A country with a highly educated
workforce is considered rich in this resource.
Capital: The funds needed to create and operate a business. Sources
include personal investment by owners, loans, sale of stock and bonds,
and revenue from the sale of product.
Entrepreneurs: People who are willing to accept the risks that are part
of creating and operating businesses, in return for the potential profits.
Physical resources: Tangible things organizations use in the conduct of
their business. Possibilities include natural resources, raw materials,
office equipment and facilities, computers, transportation and
communication infrastructure, etc.
Information resources: Data and other information used by business.
This factor has become increasingly important in the last decade.
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Exercise: group Discusion
Higher Education service.
list the factors of production that were used to
produce it.
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Two Types of Economic Systems
• Planned Economy
– A centralized government controls all or most factors of
production and makes all or most production and
allocation decisions for the economy.
• Market Economy
– Individual producers and consumers control production
and allocation by creating combinations of supply and
demand.
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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
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“Circular Flow in Market Economy”
SUPPLY
OUTPUT MARKETS
DEMAND
Goods
Services
FIRMS
• Supply products in
output markets
• Demand resources
in input markets
DEMAND
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HOUSEHOLDS
INPUT MARKETS
Labor
Capital
Entrepreneurs
Physical Resources
Information Resources
• Demand products
in output markets
• Supply resources in
input markets
SUPPLY
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Types of Economic Systems
• Planned Economy
- Communism – individuals contribute according
to their abilities and receive benefits according to
their needs.
•The government owns and operates all factors of
production.
•The government assigns people to jobs and owns all
businesses and controls business decisions.
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Types of Economic Systems (cont.)
• Market Economics
• Capitalism
– The government supports private ownership and encourages
entrepreneurship.
– Individuals choose where to work, what to buy, and how much to pay.
– Producers choose who to hire, what to produce, and how much to
charge.
• Market
– A mechanism of exchange between buyers and sellers of a
good or service.
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Types of Economic Systems (cont.)
• Market Economics
• Mixed Market Economy
– Features characteristics of both planned and market
economies.
– Privatization: The process of converting government
enterprises into privately owned companies.
– Socialism: The government owns and operates select
major industries such as banking and transportation.
Smaller businesses are privately owned.
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The Economics of Market Systems
• Demand
– The willingness and ability of buyers to purchase a product (a good or
a service).
• Supply
– The willingness and ability of producers to offer a good or service for
sale.
• The Laws of Demand and Supply in a Market Economy
– Demand: Buyers will purchase (demand) more of a product as its price
drops and less of a product as its price increases.
– Supply: Producers will offer (supply) more of a product for sale as its
price rises and less of a product as its price drops.
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Demand and Supply in a Market Economy
• Demand and Supply Schedule
– The relationships among different levels of demand and
supply at different price levels
•Demand curve: How much product will be demanded (bought) at
different prices.
•Supply curve: How much product will be supplied (offered for sale)
at different prices.
•Market price (equilibrium price): The price at which the quantity of
goods demanded and the quantity of goods supplied are equal.
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exercise
Guess the 4 key elements of free enterprise?
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The Palestinian Economy is a
Private Enterprise System
Individuals are free to pursue their own
interests without government restriction
Four Key Elements:
1.
2.
3.
4.
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Private Property Rights
Freedom of Choice
Profits
Competition
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Competition
Competition motivates
businesses to produce their
products better or cheaper.
Companies that don’t compete
effectively will be forced out of
business.
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Exercise
What is the relationship between standard of
living and quality of life? How is quality of
life evaluated in different countries?
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Measuring growth
It requires a clear understanding of basic economic
indicators and terms:
Business Cycle: Pattern of short-term expansions and
contractions in an economy. When the economy is
expanding, we experience growth, and when the economy is
contracting, we experience recession.
Aggregate output: Total quantity of goods and services
produced by an economic system during a given period.
Standard of living: Total quantity and quality of goods and
services that people can purchase within their economic
system. When output increases faster than the population,
we experience growth in our standard of living.
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So how do we measure the
performance of an economic system?
Gross Domestic Product (GDP): Value of all goods and
services produced by an economic system in a year through
domestic factors of production.
Gross National Product (GNP): Value of all goods and
services produced by an economic system in a year
regardless of where factors of production are located. In
other words, when a Japanese automobile produces cars at
its factory in Tennessee, the profits from that factory are
included in the American GDP, and in the Japanese GNP.
Productivity is the amount a system produces compared to
the resources needed to produce it.
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Recessions & Depressions
Recession:
Aggregate output declines,
unemployment increases.
A recession is usually
measured by two consecutive
quarters of decline in real GDP.
Depression:
Severe and long-lasting
recession
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Managing the Economy
Stabilization Policy:
Government policy designed to smooth out
fluctuations in the economy
Fiscal Policies
Monetary Policies
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Types of Policies
Monetary Policy:
Designed to control the amount of money flowing around the economy (the
money supply).
This policy is used to tackle inflation and balance of payments.
Methods under this policy:
1.
Interest rates:
2.
The government may impose restrictions on financial institutions to affect
borrowing.
3.
The central bank can control bank assets and the amount of lending.
Fiscal policy:
Aims to control the total spending in the economy.
1.
Government spending.
2.
Change in direct taxation.
3.
Change in indirect taxation.
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Looking to the Future
Three Major Forces will drive the global
economy for the next decade what are they?
1. The information revolution will continue to
boost productivity: especially in informationdependent industries such as finance, media,
and trade.
2. Technological breakthroughs will create new
industries:
Increasing globalization will create larger
markets, while fostering tougher competition.
As a result, companies will need to focus more
than ever on innovation and efficiency.
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Review
What are the five factors of production? Is one factor
more important than the others? If so, which one? Why?
The five factors of production are labor, capital,
entrepreneurs, physical resources, and information
resources. All five factors are crucial. However, their
relative importance depends on the product and the
industry. In the software development business, for
example, skilled labor and information resources are
especially important, but the business couldn’t survive
without capital and physical resources (computers), and it
wouldn’t have been launched without an entrepreneur.
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Review
In recent years, many countries have moved from
planned economies to market economies. Why do
you think this has occurred? Can you imagine a
situation that would cause a revival of planned
economies?
The failure of communism—both politically and
economically—has led to an increase in the
number of mixed and market economies. Answers
will vary as to what would cause a resurgence of
planned economies, but the factors might include
a failure of capitalism to effectively distribute
society’s resources, or an unbearable level of
crime and corruption.
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Review
Explain how current economic indicators such as inflation
and unemployment affect you personally. Explain how
they will affect you as a manager.
Answers will vary, but all students should obviously include
prices paid for consumer goods and the availability of
desirable jobs. Managers are affected by inflation because
it tends to drive up the wages they must pay, and by
unemployment because it affects their ability to find
workers. Also, both inflation and unemployment affect
consumer and industrial demand, which play a key role in
management.
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