Transcript Business Essentials 6e

1
The Contemporary Business World
Business
Essentials
6e
Ronald J. Ebert
Ricky W. Griffin
1
THE U.S. BUSINESS ENVIRONMENT
PowerPoint Presentation by Charlie Cook
The University of West Alabama
LEARNING OBJECTIVES
After reading this chapter, you should be able to:
1.
2.
3.
4.
5.
6.
Define the nature of U.S. business and identify its main goals
and functions.
Describe the external environments of business and discuss how
these environments affect the success or failure of any
organization.
Describe the different types of global economic systems
according to the means by which they control the factors of
production.
Show how markets, demand, and supply affect resource
distribution in the United States.
Identify the elements of private enterprise and explain the various
degrees of competition in the U.S. economic system.
Explain the importance of the economic environment to business
and identify the factors used to evaluate the performance of an
economic system
What is 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
3. Figure out how likely a certain business environment
will help you out
Thought questions
Who (among you) is thinking of starting their own
business?
Who is looking out for businesses?
Is competition a good thing?
Competition motivates businesses to produce
their products better or cheaper
The U.S. Economy is a Private
Enterprise System
Four Key Elements:
Private Property
Rights
Freedom of Choice
Profits
Competition
Individuals are free
to pursue their own
interests without
government
restriction.
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.
Basic Business Concepts (cont’d)
The Benefits of Business
1. Provision of goods and services
2. Employment of workers
3. Innovation and opportunities
4. Increased quality of life and standard of living
5. Enhance personal incomes of owners and
stockholders
6. Tax payments support government
7. Support for charities and community leadership
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
The External Environment (cont’d)
Domestic Business Environment
The environment in which a firm conducts
and its operations derives its revenues by:
 Seeking to be close to its customers
 Establishing strong relationships with its suppliers
 Distinguishing itself from its competitors
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
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
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 – beanie babies example
Local zoning requirements
Advertising practices
Safety and health considerations
Acceptable standards of business conduct
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
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.
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
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.
Market 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.
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.
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.
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.
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
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
(a) Excess Supply
Price of
Ice-Cream
Cone
Supply
Surplus
$2.50
2.00
Shortage
Demand
0
4
Quantity
demanded
7
10
Quantity
supplied
Quantity of
Ice-Cream
Cones
Copyright©2003 Southwestern/Thomson Learning
Degrees of Competition
1. Perfect
2. Monopolistic
3. Oligopoly
4. Monopoly
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.

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.
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.
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
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
Economic Growth, Aggregate Output,
and 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.
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.
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.
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.
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.
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.
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.
FIGURE 1.5
Balance 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.
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.
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.
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.
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 causes more reduced revenues and further job
losses.
Recession
 A period during which aggregate output, as measured by real
GDP, declines
Depression
 A prolonged and deep recession.
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.