Download 1. The World of Business:

1 & 3. Business and the
Economy
Understanding Business and the
Context in Which it Operates
1
Why Study Business?
• To become a better-informed consumer and
investor
• For help in choosing a career
• To be a successful employee
• To start your own business
2
Business: A Definition
• Business consists of:
– The profit-seeking activities of those engaged in
purchasing or selling goods and services to satisfy
society’s needs and wants.
• Satisfying needs wants
– Ultimate objective of every firm
• Business profit
– What remains after business expenses are deducted
from sales revenue
3
Economic Systems
• Economics: The study of how wealth is created &
distributed
– Macroeconomics: national economic issues
– Microeconomics: consumers, individual businesses
• Factors of production: Four inputs to economic
systems
–
–
–
–
Natural resources
Human resources
Capital
Entrepreneurship
4
Measuring Economic
Performance
• Economic indicators
– Productivity measures
• Gross domestic product (GDP)
• Gross national product (GNP)
– Price indexes
• Consumer price index (CPI)
• Producer price index (PPI)
– Employment statistics
• Labor force, employment, unemployment
5
More on Economic Systems
• Can be capitalistic, command/planned, or
“mixed”
• Address four basic economic questions:
– Which & how many goods & services will be
produced?
– How will they be produced?
– For whom will they be produced?
– Who owns & controls the factors of
production?
6
Capitalism: The Private
Enterprise System
• Theories of Adam Smith (Wealth of Nations, 1776)
– Society’s interests are best served when the individuals
within society are allowed to pursue their own selfinterest
• Based on four principles:
– Creation of wealth is the concern of private individuals,
not government
– Owners of resources should be free to determine how
they are used
– Economic freedom ensures existence of competitive
markets (market economy)
7
– Government should act only as rule-maker/umpire
Capitalism: The Private
Enterprise System (Cont.)
• Basic rights of capitalist system:
– Right to private property
– Right of business owners to the profits (after
taxes) generated by their activities
– Freedom of choice (employment, purchases,
investments)
– Public (i.e, government) sets rules to protect
competition
8
Market Forces at Work in the
Capitalist System
• Supply & demand
– Prices influenced by competition
– Prices usually respond to forces of supply &
demand
9
Supply
• Quantities of good/service that producers
will provide on particular date at various
prices
• Law of supply:
– Sellers supply more at higher price, less at
lower
10
Demand
• Amount of good/service that consumers will
buy on that date at various prices
• Law of demand:
– Buyers buy more at lower price, less at higher
11
Theory Of Supply & Demand
• Quantity supplied & quantity demanded
interact continuously
• Balance between them is reflected by
current price
12
Supply, Demand, & Profit
Motive
• Interact to regulate
– What is produced
– Amounts produced
• Consumers get what they want & producers
earn a profit
13
Relationship Between Supply
And Demand
• Demand curve: relationship between price
and quantity demanded
• Supply curve: relationship between price
and quantity provided
• Equilibrium point: intersection of supply &
demand curves
14
Demand Curve
• Changes in quantity demanded
– Movement along curve
• Changes in demand
– Curve shifts to right (demand increased) or left
(demand decreased)
– Influences: preferences, incomes, substitute
prices, no. buyers
15
Supply Curve
• Changes in quantity supplied
– Movement along curve
– Independent of demand
• Changes in supply
– Curve shifts to left (lowered supply) or right
(increased supply)
– Influence: factors of production
16
Equilibrium Point
• Point at which demand and supply curves
intersect
• Identifies prevailing market price
• Discrepancies between market &
equilibrium price are self- correcting
17
Types of Competition in the
Capitalist System
•
•
•
•
Pure competition
Monopolistic competition
Oligopoly
Monopoly
18
Pure Competition
•
•
•
•
Products identical
Perfect information
No entity large enough to influence prices
E.g., markets for agricultural commodities
19
Monopolistic Competition
• Products not identical
– Product differentiation possible
– Use of branding, etc.
•
•
•
•
Many buyers & sellers
Imperfect information
Some government regulation
E.g., consumer goods markets
20
Oligopoly
•
•
•
•
•
•
Products: similar or different
Few, large sellers; many small buyers
Sellers match rivals’ prices
Market entry expensive
Government watches closely
E.g., steel, automobile markets
21
Monopoly
• One seller; many small buyers
• Seller controls products & prices--no
competition
• Seller keeps other firms from competing
• True monopolies illegal
• E.g., utilities (legal; regulated)
22
Other Economic Systems:
Command/Planned & Mixed
• Socialism
• Communism
• “Mixed” economies
23
Socialism
•
•
•
•
High degree government planning
Government owns some of land & capital
Government involvement limited
Private ownership permitted
24
Communism
• Allows least degree economic freedom
• Public ownership of factors of production
• Planned resource allocation
25
Mixed Economies
• Many communist & socialist economies
have capitalist elements
– Some relaxing of central control
– Increased privatization
• Capitalist economies often have socialist
elements
26
Business Cycle
• Pattern of expansion and contraction
through which our economy flows
• Characterized by:
–
–
–
–
Prosperity
Inflation: Recession
Depression
Recovery
27
Employment Act of 1946
• First formal statement of economic goals &
federal government’s responsibility for
economic progress
• Brought about by concerns following
depression and WWII
• Effort to “flatten” the effects of the business
cycle
28
Federal Economic
Responsibilities
• Promote maximum employment
• Promote maximum production
• Promote maximum purchasing power
29
Maximum Employment
• Goal:full employment of able, willing, &
seeking
• Full employment does not equal 0%
unemployment
– Worker mobility
– Worker layoffs & retraining
– Unrealistic worker hopes
30
Four Categories Of
Unemployment
• Frictional
• Seasonal
• Cyclical
• Structural
31
Maximum Production (Economic
Growth)
• Generally understood to be 4% production
growth per year
• Increased efficiency
– Increased production
– Conservation of input resources
32
Maximum Purchasing Power
(Stable Prices)
• Control of inflation
– Demand-pull
– Cost-push
– Hyperinflation
• Goal historically considered attained when
prices rise at 2-3% per year
33
Monetary Policy
• Increase/decrease money supply
– Expansionary
– Restrictive
• Controlled by “The Fed”
– Adjusts % deposits of member banks
– Adjusts interest rates
34
Fiscal Policy
• Government influences economic activity
through
– Taxation
– Spending
• Policy manifested in federal budget
35