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Chapter 1
Exploring the World
of Business and
Economics
Learning Objectives
1. Discuss your future in the world of business.
2. Define business and identify potential risks and rewards.
3. Define economics and describe the two types of economic
systems: capitalism and command economy.
4. Identify the ways to measure economic performance.
5. Examine the four different phases in the typical business
cycle.
6. Outline the four types of competition.
7. Summarize the factors that affect the business environment
and the challenges American businesses will encounter in
the future.
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Chapter 1 | Slide 2
Free Enterprise
“
…the system of business in which
individuals are free to decide what
to produce, how to produce it,
and at what price to sell it.
“
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Chapter 1 | Slide 3
Your Future in the
Changing World of Business
• What do you want?
• Why do you want it?
• Write it down!
“Success is a journey,
not just a destination.”
Joe Dudley
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Chapter 1 | Slide 4
Median Yearly Income
Who Makes the Most Money?
Source: 2009 Statistical Abstract of the United States, p. 443
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Chapter 1 | Slide 5
Cultural (Workplace) Diversity
“
“
…differences among people in a workforce
owing to race, ethnicity, and gender.
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Chapter 1 | Slide 6
Text Features
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Learning Objectives
Inside Business
Margin Notes
Boxed Features
Spotlight
End-of-Chapter
Materials
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Chapter 1 | Slide 7
Pathway to Success in This Course
1.
2.
3.
4.
5.
6.
7.
Prepare before you go to class.
Read the chapter.
Underline or highlight important concepts.
Take notes.
Apply the concepts.
Practice critical thinking.
Prepare for exams.
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Chapter 1 | Slide 8
Business
“
…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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Chapter 1 | Slide 9
Figure 1.1: Combining Resources
A business must combine all four resources effectively to be successful.
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Chapter 1 | Slide 10
Ultimate Objective of Every Firm
“
“
…to satisfy the needs of its customers.
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Chapter 1 | Slide 11
Business Profit
Sales Revenue
- Business Expenses
Profit (Loss)*
*Profit becomes property of its owners
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Chapter 1 | Slide 12
Stakeholders
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“
“
…all the different people or groups
of people who are affected by the
policies, decisions, and activities
made by an organization.
Chapter 1 | Slide 13
Business Ownership Risks
 Not being paid
 Loss of whatever
is invested in the
business
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Chapter 1 | Slide 14
Paths to E-Profits
$ Amazon
 Free shipping
 Outside merchants =
commission
$ eBay
 Online auction
 Commission
 Online telephone
communications
$ Google
 Search engine
 Paid advertising links
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Chapter 1 | Slide 15
Economics
“
“
…the study of how wealth* is
created and distributed.**
*
wealth is “anything of value, including products
produced and sold by business”
**distribution is “who gets what”
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Chapter 1 | Slide 16
Economy
“
…the way in which
people deal with the creation and
distribution of wealth.
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Chapter 1 | Slide 17
Economic Perspectives

Microeconomics
The study of decisions made by
 Individuals
 Businesses

Macroeconomics
The study of
 National economy
 Global economy
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Chapter 1 | Slide 18
Factors of Production
“
“
…resources used to produce
goods and services.




Land/natural resources
Labor
Capital
Entrepreneurship
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Chapter 1 | Slide 19
Types of Economic Systems
 Capitalism




Free Enterprise
Adam Smith (Wealth of Nations)
The Invisible Hand
Laissez-Faire Capitalism
 Command
 Socialism
 Communism (Karl Marx)
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Chapter 1 | Slide 20
Economic Systems Differ
• Economic systems differ depending on the
answers to four basic economic questions
about nation’s economic activity
1.
2.
3.
4.
What and how much will be produced?
How will it be produced?
For whom will it be produced?
Who owns/controls factors of production?
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Chapter 1 | Slide 21
Capitalism
“
…individuals own and operate
the majority of businesses that
provide goods and services.
“
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Chapter 1 | Slide 22
Adam Smith
Wealth of Nations (1776)
 Society pursues self-interest
 People work hard if
• Earn more pay
• Earn more profit
 Capitalism promotes good of
community
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Chapter 1 | Slide 23
Invisible Hand
“
...describes how an individual’s
own personal gain benefits others
and a nation’s economy.
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Chapter 1 | Slide 24
Figure 1.3: Assumptions for
Laissez-Faire Capitalism
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Chapter 1 | Slide 25
U.S. = Mixed Economy
“
…an economy that exhibits elements
of both capitalism and socialism.
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Chapter 1 | Slide 26
Figure 1.4: Circular Flow
in Mixed Economy
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Chapter 1 | Slide 27
Command Economy
“
…government decides what goods
and services will be produced, how
they will be produced, for whom
available goods and services will be
produced, and who owns and controls
the major factors of production.
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Chapter 1 | Slide 28
Command Economies
Socialism
Communism
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Chapter 1 | Slide 29
Socialism
 Key industries owned/controlled by government
 Land, buildings, and raw materials may be
property of state
 Private ownership permitted to varying degrees
 People choose own occupations
 National goals determine what/how produced
 Uses taxes, rents, and wages to control distribution
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Chapter 1 | Slide 30
Communism
 Karl Marx ─ Father
 Advocated classless society
 Citizens own all economic resources
 Workers contribute based on ability and receive
benefits based on need
 Examples ─ North Korea, China
 Centralized planning ─ sets prices and wages
 Emphasis on government needs ─ not consumers
 No job choice ─ professionals better off than
factory workers
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Chapter 1 | Slide 31
Measuring
Economic Performance
Economic Indicators





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

Balance of Trade
Corporate Profits
Inflation Rate
National Income
New Housing Starts
Prime Interest Rate
Productivity Rate
Unemployment Rate
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Chapter 1 | Slide 32
Productivity
…the average level of
“
output per worker per hour.
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Chapter 1 | Slide 33
Figure 1.5: GDP in Current Dollars and
in Inflation-Adjusted Dollars
Source: U.S. Bureau of Economic Analysis website at www.bea.gov, accessed September 14, 2008
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Chapter 1 | Slide 34
Table 1.2: 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
 Corporate profits
The total amount of profits made by corporations
over selected time periods
 Inflation rate
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
(cont.)
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Chapter 1 | Slide 35
Table 1.2: Common Measures Used to
Evaluate a Nation’s Economic Health (cont.)
 National income
The total income earned by various segments of the
population, including employees, self-employed
individuals, corporations, and other types of income
 New housing starts
The total number of new homes started during a
specific time period
 Prime interest rate
The lowest interest rate that banks charge their most
credit-worthy customers
(cont.)
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Chapter 1 | Slide 36
Table 1.2: Common Measures Used to
Evaluate a Nation’s Economic Health (cont.)
 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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Chapter 1 | Slide 37
Business Cycle
“
…the recurrence of periods
of growth and recession in a
nation’s economic activity.
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Chapter 1 | Slide 38
Government Actions in
Recession/Depression
 Monetary Policy
Determines size of money supply and
interest rates
 Fiscal Policy
Influences amount of savings and
expenditures by altering tax structure
and government spending
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Chapter 1 | Slide 39
Federal Deficit
“
…a shortfall created when the
federal government spends more
in a fiscal year than it receives.
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Chapter 1 | Slide 40
Figure 1.6: Supply Curve
and Demand Curve
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Chapter 1 | Slide 41
Table 1.3: Four Different
Types of Competition
The number of firms determines the degree of competition within an industry.
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Chapter 1 | Slide 42
Product Differentiation
“
…the process of developing
and promoting differences between
one’s products and all similar products.
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Chapter 1 | Slide 43
Standard of Living
“
…a loose subjective measure of
how well off an individual or a society is
mainly in terms of want satisfaction
through goods and services.
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Chapter 1 | Slide 44
Figure 1.7:
Time Line of
American Business
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Chapter 1 | Slide 45
The Challenges Ahead
1. How can we create a more stable economy and create
new jobs?
2. How can we restore the public’s confidence in the
banking and financial industries?
3. How can we regulate banks, savings and loan
associations, credit unions, and other financial institutions
to prevent the type of abuses that led to an economic
crisis?
4. How can we encourage Iraq and Afghanistan to establish
a democratic and free society and resolve possible
conflict with North Korea and other countries throughout
the world?
(cont.)
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Chapter 1 | Slide 46
The Challenges Ahead (cont.)
5. How can we meet the challenges of managing culturally
diverse workforces to address the needs of a culturally
diverse marketplace?
6. How can we make American firms more productive and
more competitive with foreign firms that have lower labor
costs?
7. How can we preserve the benefits of competition and
small businesses in our American economic system?
8. How can we encourage economic growth and at the
same time continue to conserve natural resources and
sustain our environment?
(cont.)
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Chapter 1 | Slide 47
The Challenges Ahead (cont.)
9. How can we meet the needs of two-income
families, single parents, older Americans, and
the less fortunate who need health care and
social programs to exist?
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Chapter 1 | Slide 48