Fundamentals of Business and Economics

Learning Objectives
1. 2. 3. 4. 5. 6. 7. 8. Define what business is and identify four key social and economic roles that businesses serve. Differentiate between goods-producing and service businesses and list five factors that are contributing to the increase in the number of service businesses. Differentiate between a free-market system and a planned system. Identify the factors that affect demand and those that affect supply. Compare supply and demand curves and explain how they interact to affect price. Discuss the four major economic roles of the U.S. government. Explain how a free-market system monitors its economic performance. Identify five challenges that businesses are facing in the global economy.

Summary of Learning Objectives

1. Define what a business is and identify four key social and economic roles that businesses serve. A business is a profit-seeking activity that provides goods and services to satisfy consumers needs. The driving force behind most businesses is the chance to earn a profit; however, nonprofit organizations exist to provide society with a social or educational service. Businesses serve four key functions: They provide society with necessities; they provide people with jobs and a means to prosper; they pay taxes that are used by the government to provide services for its citizens; and they reinvest their profits in the economy, thereby increasing a nations wealth. Differentiate between goods-producing and service businesses, and list five factors that are contributing to the increase in the number of services businesses. Goods-producing businesses produce tangible goods and tend to be capital intensive; whereas, service businesses produce intangible goods and tend to be labor intensive. The number of service businesses is increasing because: 1. consumers have more disposable income to spend on taking care of themselves 2. many services target consumers needs brought about by changing demographic patterns and lifestyle trends 3. consumers need assistance with using and integrating new technology into their business operations and lifestyle 4. companies are turning to consultants and other professionals for advice to remain competitive 5. in general barriers to entry are lower for service companies than they are for goods-producing businesses.

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Differentiate between a free-market system and a planned system. In a free-market system, individuals have a high degree of freedom to decide what is produced, by whom, and for whom. Moreover, the pursuit of private gain is regarded as a worthwhile goal. In a planned system, governments limit the individuals freedom of choice in order to accomplish government goals, control the allocation of resources, and restrict private ownership to personal and household items. The pursuit of private gain is nonexistent under a planned system. Explain how supply and demand interact to affect price. In the simplest sense, supply and demand affect price in the following manner: When the price goes up, the quantity demanded goes down but the suppliers incentive to produce more goes up. When the price goes down, the quantity demanded increases, whereas the quantity supplied may (or may not) decline. When the interests of buyers and sellers are in balance, an equilibrium price is established. However, adjusting price or supply to meet or spur demand does not guarantee profitability, as the airline example illustrates. The important thing to remember is that in a free-market system, the interaction of supply and demand determines what is produced and in what amounts. Discuss the four major economic roles of the U.S. government. The U.S. government fosters competition by enacting laws and regulations, by enforcing antitrust legislation, and by approving mergers and acquisitions, with the power to block those that might restrain competition. It regulates certain industries where competition would be wasteful or excessive. It protects stakeholders from potentially harmful actions of businesses. And it contributes to economic stability by regulating the money supply and by spending for the public good. Explain how a free-market system monitors its economic performance. Economists evaluate economic performance by monitoring a variety of economic indicators such as unemployment statistics, housing starts, durable-goods orders, and inflation. They compute the consumer price index (CPI) to keep an eye on price changesespecially inflation. In addition, economists measure the productivity of a nation by computing the countrys gross domestic product (GDP)the sum of all goods and services produced by both domestic and foreign companies as long as they are located within a nations boundaries. Identify five challenges that businesses are facing in the global economy. The five challenges identified in the chapter are: 1. producing quality products and services that satisfy customers changing needs 2. starting and managing a small business in todays competitive environment 3. thinking globally and committing to a culturally diverse workforce 4. behaving in an ethically and socially responsible manner 5. keeping pace with technology and electronic commerce.

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Brief Chapter Outline

I. II.

Why Study Business?

(PPT 1-1, PPT 1-2)

What is a Business? A. A profit-seeking activity that provides goods and services that satisfy customers need. B. Profit vs. Nonprofit Organizations C. Factors of Production: 1. Natural resources 2. Human resources 3. Capitol 4. Entrepreneurs 5. Knowledge D. Businesses generally fall into one of two categories: 1. Goods-producing businesses tend to be capital intensive 2. Service-producing businesses tend to be labor intensive E. Five key factors responsible for this continued growth of the Service Sector 1. More disposable income 2. Changing demographic patterns and lifestyles 3. Increasing number of complex goods and new technology 4. Increasing integration of e-commerce 5. Barriers to entry are low

III. What is an Economic System? A. How a society uses its scare resources to produce and distribute goods and services. B. Microeconomics economic behavior among consumers, businesses and industries. C. Macroeconomics larger economic issues D. Types of economic systems: 1. Free-market system individuals have freedom to make business decisions Capitalism Mixed Capitalism 2. Planned System government controls all or most business decisions Communism Socialism 3. The trend towards privatization IV. Microeconomics the Forces of Demand and Supply A. Demand the quantity of a good or service that consumers will buy at a give time at various prices. B. Supply the quantity the producers will provide at a given time are various prices. C. Understanding how demand and supply interact: equilibrium price the point at which the demand and the supply curves meet. V. Macroeconomic issues for the entire economy.

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Competition situation in which two or more suppliers are rivals in pursuit of customers. 1. Pure Competition 2. Monopoly 3. Oligopoly 4. Monopolistic competition 5. Competitive advantage Governments role in free-market economies 1. Fosters competition by enacting laws and regulations. Antitrust Legislation Mergers and Acquisitions 2. Regulates and deregulates various industries 3. Protects stakeholders rights 4. Contributes to economic stability Monetary Policy Fiscal Policy

VI. How a Free-Market System Monitors its Economic Performance A. Economic Indicators B. Measuring Price Changes 1. Inflation and deflation 2. Price Indexes Consumer Price Index (CPI) Producer Price Index (PPI) C. Measuring a Nations Output: 1. Gross domestic product (GDP)
2. Gross national product (GNP)

VII. Challenges of a Global Economy A. Producing quality products and services that satisfy customers changing needs. B. Starting and managing a small business in todays competitive environment. C. Thinking globally and committing to a culturally diverse workforce. D. Behaving in an ethically and socially responsible manner. E. Keeping pace with technology and e-commerce.

Detailed Chapter Outline:

Lecture Notes
I. Why Study Business? A. Business is everywhere. B. To learn how to run a business. C. To develop a business vocabulary. D. To develop skills critical for success in life. E. To be introduced to business careers.
(PPT 1-1, 1-2)

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What is a Business? A. A profit-seeking activity that provides goods and services that satisfy customers need. B. Business serves many functions in society and the economy: 1. Provide us with crucial goods and services, such as food and housing. 2. Create and foster prosperity 3. Generate taxes for public education, transportation, etc. 4. Reinvest profits in the economy, which in turn raises our standard of living and improves our quality of life. C. Profit vs. Nonprofit Organizations (PPT 1-3) 1. Profit organizations earn the difference between production and marketing costs, and product price. 2. Nonprofit organizations provide goods and services, breaking even in the process; however, they still must run effectively and efficiently to continue to serve their customers. D. Factors of Production: the basics used to produce goods and services are called factors of production. Businesses rely on five factors of production to optimize profits: 1. Natural resources assets useful in their natural state (land, minerals, water, and forests). 2. Human resources anyone involved in the production of goods and services 3. Capitol resources such as money, equipment, and buildings necessary for production of goods and services. 4. Entrepreneurs innovative risk-takers who create and operate new businesses 5. Knowledge the collective intelligence of an organization E. Businesses generally fall into one of two categories: (PPT 1-4) 1. Goods-producing businesses may pursue activities such as manufacturing, construction, mining, and agriculture in order to produce goods. a. Most goods-producing businesses are generally Capital-intensive businesses. b. Capital-intensive: require lots of capital, and raw material. Example: airline 2. Service-producing businesses provide intangible products such as finance, insurance, transportation, etc.

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Most service businesses are labor-intensive businesses. Labor intensive: rely mainly on worker skill and knowledge. Example: consulting firms

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Growth of the Service Sector (PPT 1-5) 1. Since mid-1980s, service has been the primary area of growth for the US economy. a. Currently, about half of the 1,000 largest US companies are servicebased. b. Economists project that the growth in the service sector will continue to increase. 2. Five key factors for this continued growth: (PPT 1-6) a. Consumers have more disposable income Baby Boomers (people born between 1946 and 1964) are in their peak earning years with disposable income earmarked for investment, travel, and relaxation. b. Changing demographic patterns and lifestyles more elderly, single, and two-career households require an increasing type and number of services c. Increasing number of complex goods and new technology as more technology is utilized, additional services are needed to support those products. d. Greater need for professional advice to cut costs, refine processes and integrate e-commerce. e. Barriers to entry are lower for Service Businesses than for goods-producing businesses.

III. What is an Economic System? (PPT 1-7) A. An economic system allocates how a society uses its scare resources to produce and distribute goods and services to meet needs. B. Microeconomics economic behavior among consumers, businesses and industries that collectively determines the quantity of goods and services demanded and supplied at various prices. C. Macroeconomics larger economic issues, such as how firms compete, governmental policies, and allocation of resources. D. Types of economic systems the degree to which governments control a countrys resources has spawned a continuum: (PPT 1-8) 1. Free-market system private individuals determine what to produce, how and when to produce, for whom, and at what price. a. Capitalism individuals own and operate the majority of businesses; where competition, supply and demand determine which goods and services are produced Philosophy originated by Adam Smith indicated that the market serves as an invisible hand to ensure that production mirrors the wants of society

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Capitalism requires no outside regulation laissez faire b. Mixed capitalism limited government intervention Pursuit of private gain is regarded as worthwhile and ultimately benefits society as a whole Found in US, Canada, Germany and Japan Planned System government controls all or part of a societys resources and limits the freedom of choice in order to accomplish government goals. a. Communism is the most restrictive planned economy Examples: Cuba and North Korea Almost all resources are under government control Private ownership is restricted to personal items Resource allocation is handled through rigid centralized planning by a handful of government officials who answer the four basic economic questions b. Socialism lies somewhere between capitalism and communism in the degree of economic freedom that it permits. Socialism involves: A relatively high degree of government planning, Government ownership of land and capital resources limited to industries considered vital to common welfare Private ownership and profit restricted to industries less vital to common welfare High taxes for extensive coverage of social services The trend toward privatization a trend towards free-market enterprise systems that allows governments to unload unprofitable businesses for needed cash and to experiment with free-market capitalism

IV. Microeconomics the Forces of Demand and Supply (PPT 1-9, 1-10) A. Understanding Demand the quantity of a good or service that consumers will buy at a given time at various prices. (PPT 1-11) 1. When economy is robust, consumers willing to spend more. 2. When economy falters, discretionary spending is cut 3. Other factors influence demand, including: a. Consumer income b. Consumer preferences c. The price of substitute goods d. The price of complimentary goods e. Advertising and promotions f. Consumer expectations about future prices 4. Price is considered the most important variable to demand. 5. Demand curve shows relationship between amount of product consumers will purchase at various prices. (PPT 1-12, 1-13) B. Understanding Supply the quantity the producers will provide at a given time are various prices. (PPT 1-14)

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In general, a companys willingness to produce or sell an item increases as the price increases. Supply curve shows the relationship between the amount of goods or services a company will provide at various consumer prices.
(PPT 1-15)

Several factors affect a sellers willingness and ability to provide goods at various prices, including: (PPT 1-16) a. The cost of inputs b. The number of competitors c. Advances in technology that allows for more efficient operation

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Understanding how demand and supply interact (equilibrium price) the point at which the supply and the demand curves intersect. (PPT 1-17)

Macroeconomic Issues for the Entire Economy (PPT 1-18) A. Competition in a free-market economy a situation in which two or more suppliers of a product are rivals of the same customer (PPT 1-19) 1. Pure Competition ideal type of competition characterized by: a. A marketplace of multiple buyers and sellers b. A product or service that is nearly identical in features c. Low barriers to entry d. No single firm or group of firms dominates the industry 2. Monopoly a. Only one producer of a product in a given market b. That single producer can, therefore, determine the price 3. Oligopoly a. Situation in which an industry is dominated by only a few providers b. Although few players, competition can be extremely fierce 4. Monopolistic competition a. Large number of sellers b. No single company dominates the market c. Products from competition companies are distinguishable 5. Ways companies compete in a free-market economy a. Competitive advantage what sets one company apart from competition when products start to look alike (PPT 1-20) b. Product innovation B. Governments role in free-market economies (PPT 1-21) 1. Fosters competition by enacting laws and regulations. (PPT 1-22) a. Antitrust legislation limits what businesses can and cannot do, to ensure all competitors an equal chance of producing a product, reaching the market and making a profit b. Mergers and acquisitions government may stipulate requirements companies have to meet to gain approval of M&As 2. Regulates and deregulates various industries (PPT 1-23)

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Regulated industry close government control is substituted for free competition, and competition is either limited or eliminated b. Deregulation allows new industry competitors to enter the market, creates more choices for consumers and keeps prices in check Protects stakeholders rights (PPT 1-24) a. Stakeholders groups affected by a business operations b. Regulatory agencies have been established to encourage businesses to behave ethically and to be socially responsible Contributes to economic stability (PPT 1-25) a. Economic expansion occurs when the economy is growing and people are spending more money b. Economic contraction when spending declines c. Recession a sever downward swing Business cycle a. Recurrent up-and-down swings, which are natural and to some degree predictable; although do cause hardship b. To reduce hardship, government actions have two facets: Monetary Policy - Involves increasing or decreasing the nations money supply to regulate the economy - Changing the reserve requirement - Changing the discount rate - Conducting open-market operations - Establishing selective credit controls - Multiplier effect making a change in one aspect of the system may eventually affect other portions of the system - Circular flow links all economic system elements of U.S. economy Fiscal Policy - Changes in governments revenues and expenditures - Focuses on taxes and government spending

VI. How a Free-Market System Monitors its Economic Performance A. Economic Indicators statistical measurements that are used to monitor and measure economic performance. (PPT 1-26) 1. Unemployment statistics increasing unemployment corresponds to decreased spending 2. Housing starts a. Very sensitive to interest rate changes b. Illustrates where several industries are headed 3. Durable-goods order a. Goods that typically last more than three years b. Rise in durable-goods orders is a positive indicators that business spending is increasing

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Measuring Price Changes (PPT 1-27) 1. Inflation and deflation a. Inflation a steady rise in prices throughout the economy b. Disinflation when the inflation rate begins to decline c. Deflation Sustained fall in the general prices of goods and services Investors postpone purchases in anticipation of lower prices in the future 2. Price Indexes a. Consumer Price Index (CPI) measures the changes in prices of a representative basket of about 400 goods and services purchased by the average consumer Producer Price Index (PPI) measures prices at the producer or wholesales level Measuring a Nations Output: (PPT 1-28) 1. Gross domestic product (GDP) a. Measures a countrys output (production, distribution and use of goods and services) by computing the sum of all goods and services produced for final use in a market during a specified period b. Goods may be produced domestically or in foreign companies, as long as these companies are located within a nations boundaries 2. Gross national product (GNP) (PPT 1-29) a. Less popular measurement b. Excludes the value of production from foreign-owned businesses within a nations boundaries b.

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VII. Challenges of a Global Economy (PPT 1-31) A. Producing quality products and services that satisfy customers changing needs B. Starting and managing a small business in todays competitive environment. 1. Small companies often lack resources to compete 2. Competitors can move in quickly after initial introduction to market 3. So, the challenge is to make product or service that is hard to imitate C. Thinking globally and committing to a culturally diverse workforce. 1. Knowledge is the key in the global economy 2. Globalization the increasing tendency for the world to act and function as one market rather than a series of national ones. 3. To be competitive, companies must commit to a culturally diverse workforce, think globally and adopt global standards of excellence D. Behaving in an ethically and socially responsible manner. E. Keeping pace with technology and e-commerce. 1. New technologies spawn new businesses and transform existing ones. 2. Technology is changing the ways consumers shop

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Forcing all companies to face new competition, explore new business opportunities and adopt new ways of conducting business.