Transcript Ch 01

THE U.S. BUSINESS
ENVIRONMENT
THE U.S. BUSINESS
ENVIRONMENT
LEARNING OBJECTIVES
After reading this chapter, you should be able to:
1. Define the nature of U.S. business and identify its main
goals and functions.
2. Describe the external environments of business and
discuss how these environments affect the success or
failure of any organization.
3. Describe the different types of global economic systems
according to the means by which they control the
factors of production.
4. Show how markets, demand, and supply affect resource
distribution in the United States.
2
LEARNING OBJECTIVES
(cont’d)
After reading this chapter, you should be
able to:
5. Identify the elements of private enterprise and
explain the various degrees of competition in
the U.S. economic system.
6. Explain the importance of the economic
environment to business and identify the
factors used to evaluate the performance of an
economic system.
3
What in It for Me?
By understanding these economic forces and
how they interact, you’ll be better able to:
1. Appreciate how managers must contend with the
challenges and opportunities resulting from economic
forces from the standpoint of an employee and a
manager or business owner
2. Understand why prices fluctuate from the
perspective of a consumer
4
Basic Business Concepts
 Business
An organization that provides goods or services that are then
sold to earn profits.
 Profits
The difference between a business’s revenues and its expenses.
The rewards owners get for risking their money and time.
 Consumer Choice and Demand
The freedom of consumers to choose how to satisfy their wants
and needs.
The freedom of business owners to decide how to meet those
wants and needs.
 Opportunity and Enterprise
Success in business requires spotting a promising opportunity
and then developing a good plan for capitalizing on it.
5
Basic Business Concepts
(cont’d)
The Benefits of Business
Provision of goods and services
Employment of workers
Innovation and opportunities
Increased quality of life and standard of living
Enhance personal incomes of owners and
stockholders
Tax payments support government
Support for charities and community leadership
6
The External Environments
of Business
External Environment
Everything outside an organization’s boundaries that
might affect it
the domestic business environment
the global business environment
the technological environment
the political-legal environment
the sociocultural environment
the economic environment
7
The External Environment
(cont’d)
Domestic Business Environment
The environment in which a firm conducts its
operations and derives its revenues by:
Seeking to be close to its customers
Establishing strong relationships with its suppliers
Distinguishing itself from its competitors
8
The External Environment
(cont’d)
Global Business Environment
The international forces that affect a business:
International trade agreements
International economic conditions
Political unrest
International market opportunities
Suppliers
Cultures
Competitors
Currency values
9
The External Environment
(cont’d)
Technological Environment
All the ways by which firms create
value for their constituents:
Human knowledge
Work methods
Physical equipment
Electronics and telecommunications
Various business activity processing
systems
10
The External Environment
(cont’d)
Political-Legal Environment
The regulatory relationship between business and the
government (legal system) and its agencies that
define what organizations can and can’t do:
Product identification laws
Local zoning requirements
Advertising practices
Safety and health considerations
Acceptable standards of business conduct
Pro- or anti-business sentiment in government and
political stability are also important considerations,
especially for international firms.
11
The External Environment
(cont’d)
Sociocultural Environment
The customs, mores, values, and
demographic characteristics of the society in
which an organization functions
Sociocultural processes determine the goods
and services and standards of business
conduct a society is likely to accept
12
The External Environment
(cont’d)
Economic Environment
The relevant conditions that exist in the economic
system in which a company operates
Example:
If an economy is doing well enough that most people have
jobs, a growing company may find it necessary to pay higher
wages and offer more benefits in order to attract workers
from other companies.
If many people in an economy are looking for jobs, a firm
may be able to pay less and offer fewer benefits.
13
Economic Systems
Economic System
A nation’s system for allocating its resources among its
citizens, both individuals and organizations
Factors of Production
Labor: Human resources
Capital: Financial resources
Entrepreneurs: Persons who risk starting a business
Physical resources: Tangible things used to conduct
business
Information resources: Data and other information used
by businesses
14
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.
Market
A mechanism of exchange between buyers and
sellers of a good or service.
15
Planned Economies
Communism
A system Karl Marx envisioned in which
individuals would 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.
16
Market Economies
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.
 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.
17
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
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.
18
Demand and Supply
Demand and Supply Schedule
The relationships among different levels of
demand and supply at different price levels as
obtained from marketing research, historical
data, and other studies of the market.
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.
19
FIGURE 1.2Demand and Supply
20
FIGURE 1.2Demand and Supply (cont’d)
21
Surpluses and Shortages
Surplus
A situation in which the quantity supplied
exceeds the quantity demanded
Causes losses
Shortage
A situation in which the quantity demanded
will be greater than the quantity supplied
Causes lost profits
Invites increased competition
22
Private Enterprise in a
Market Economy
Private Enterprise System
Allows individuals to pursue their own
interests with minimal government restriction.
Elements of a Private Enterprise System
Private property rights
Freedom of choice
Profits
Competition
23
Degrees of Competition
Perfect Competition
Prices are determined by supply and demand
because no single firm is powerful enough to
influence the price of its product.
All firms in an industry are small.
The number of firms in the industry is large.
Principles of perfect competition:
Buyers view all products as identical.
Buyers and sellers know the prices that others are paying
and receiving in the marketplace.
It is easy for firms to enter or leave the market.
Prices are set exclusively by supply and demand and
accepted by both sellers and buyers.
24
Degrees of Competition
(cont’d)
Monopolistic Competition
There are numerous sellers trying to
differentiate their products from those of
competitors so as to have some control over
price.
There are many sellers though fewer than in
pure competition.
Sellers can enter or leave the market easily.
The large number of buyers relative to sellers
applies potential limits to prices.
25
Degrees of Competition
(cont’d)
Oligopoly
An industry with only a few large sellers
Entry by new competitors is hard because large capital
investment is needed.
The actions of one firm can significantly affect the sales
of every other firm in the industry.
The prices of comparable products are usually similar.
As the trend toward globalization continues, most
experts believe that oligopolies will become increasingly
prevalent.
26
Degrees of Competition
(cont’d)
Monopoly
An industry or market that has only one producer (or
else is so dominated by one producer that other firms
cannot compete with it).
The sole supplier enjoys complete control over the prices of its
products; its only constraint is a decrease in consumer demand
due to increased prices.
Natural monopolies: Industries in which one firm can
most efficiently supply all needed goods or services;
typically allowed and regulated by legislated acts and
governmental agencies.
Example: Electric company
27
Economic Indicators
Economic Indicators
Statistics that show whether an economic system is
strengthening, weakening, or remaining stable
Measure key goals of the U.S. economic system:
economic growth and economic stability
Economic growth indicators
Aggregate output, standard of living, gross domestic
product, and productivity
Economic stability indicators
Inflation and unemployment
28
Economic Growth, Aggregate
Output, & Standard of Living
Business Cycle
The pattern of short-term ups and downs (or,
better, expansions and contractions) in an economy.
Aggregate Output
Growth during the business cycle is measured by the
total quantity of goods and services produced by an
economic system during a given period.
Standard of Living
The total quantity and quality of goods and services
that consumers can purchase with the currency used
in their economic system.
29
Economic Indicators
Gross Domestic Product (GDP)
An aggregate output measure of the total value of all
goods and services produced within a given period by
a national economy through domestic factors of
production.
If GDP is going up, aggregate output is going up; if
aggregate output is going up, the nation is experiencing
economic growth.
Gross National Product (GNP)
The total value of all goods and services produced by
a national economy within a given period regardless
of where the factors of production are located.
30
Economic Indicators (cont’d)
Real Growth Rate
The growth rate of GDP adjusted for inflation and
changes in the value of the country’s currency
Growth depends on output increasing at a faster rate than
population.
Real GDP
GDP that has been adjusted to account for changes
in currency values and price changes.
31
Economic Indicators (cont’d)
Nominal GDP
GDP measured in current dollars or with all
components valued at current prices.
GDP per Capita
A reflection of the standard of living: GDP
per capita means GDP per person.
It is a better measure than GDP itself of the
economic well-being of the average person.
32
Growth in the Economic
System (cont’d)
Purchasing Power Parity
The principle that exchange rates are set so
that the prices of similar products in different
countries are about the same.
Indicates what people can buy with the
financial resources allocated to them by their
respective economic systems—a better sense
of standards of living across the globe.
33
FIGURE 1.4Purchasing Power Parity: The Big Mac
Index
34
Growth in the Economic
System (cont’d)
Productivity
A measure of economic growth that
compares how much a system produces with
the resources needed to produce it.
If more product is produced with fewer factors of
production, the price of the product decreases.
The standard of living in an economy improves
through increases in productivity.
35
Growth in the Economic
System (cont’d)
Balance of Trade
The economic value of all the products a
country exports minus the economic value of
its imported products.
Positive balance of trade: When a
country exports (sells to other countries)
more than it imports (buys from other
countries).
Negative balance of trade: When a
country imports more than it exports.
Commonly called a trade deficit.
36
FIGURE 1.5Balance of Trade
How does a trade deficit affect economic growth?
• The deficit exists because the amount of money spent on foreign
products has not been paid in full. In effect, therefore, it is borrowed
money, and borrowed money costs more money in the form of interest.
• The money that flows out of the country to pay off the deficit cannot be
used to invest in productive enterprises, either at home or overseas.
37
Growth in the Economic
System (cont’d)
National Debt
The amount of money that the
government owes its creditors.
Financed by borrowing in the form
of bonds: Securities through which
the government promises to pay
buyers certain amounts of money
by specified future dates.
Government competition with
potential borrowers for available
loan money reduces private
borrowing for investment that
would increase productivity.
38
Growth in the Economic
System (cont’d)
Stability
A condition in which the amount of money available
in an economic system and the quantity of goods and
services produced in it are growing at about the
same rate.
Inflation
Inflation occurs when the amount of money injected
into an economy exceeds the increase in actual
output, resulting in price increases exceeding
purchasing power increases.
Inflation rate: The percentage change in a price index
such as the CPI.
39
Growth in the Economic
System (cont’d)
Consumer Price Index (CPI)
A measure of the prices of typical products
purchased by consumers living in urban areas
Compared against base period—an arbitrarily
selected time period against which other time
periods are compared.
40
Growth in the Economic
System (cont’d)
Unemployment
The level of joblessness among people actively
seeking work in an economic system
Low unemployment—a shortage of labor available for
businesses to hire; results in higher wages.
Higher wages reduce hiring, which increases
unemployment; results in lower wages.
Cyclical Unemployment
Businesses continuing to eliminate jobs during a
business cycle downturn cause more reduced
revenues and further job losses.
41
Growth in the Economic
System (cont’d)
Recession
A period during which aggregate output, as
measured by real GDP, declines
Depression
A prolonged and deep recession
42
Managing the U.S. Economy
Fiscal Policy
The ways in which a government collects and spends
revenues
Tax rates can play an important role in fiscal policy
Monetary Policy
The manner in which a government controls its money
supply
Working mainly through the Federal Reserve System, the
government can influence banks’ willingness to lend money
and prompt interest rates to go up or down.
Stabilization Policy
Coordinating fiscal and monetary policies to smooth
fluctuations in output and unemployment and to stabilize
prices.
43
KEY TERMS
aggregate output
balance of trade
business
business cycle
capital
capitalism
communism
competition
consumer price index
demand
demand and supply schedule
demand curve
depression
domestic business environment
economic environment
economic indicators
economic system
entrepreneur
external environment
factors of production
fiscal policies
global business environment
gross domestic product (GDP)
gross national product (GNP)
inflation
information resources
labor (human resources)
law of demand
44
K E Y T E R M S (cont’d)
law of supply
market
market economy
market price (equilibrium price)
mixed market economy
monetary policies
monopolistic competition
monopoly
national debt
natural monopoly
nominal GDP
oligopoly
perfect competition
physical resources
planned economy
political-legal environment
private enterprise
privatization
productivity
profits
purchasing power parity
real GDP
recession
shortage
socialism
sociological environment
stability
stabilization policy
45
K E Y T E R M S (cont’d)
standard of living
supply
supply curve
surplus
technological environment
unemployment
46