Purpose of Business Chapters 1-7 Midterm Study Guide

Business Definition

An entity that seeks to earn a profit by providing goods or services to others.

Goods vs. Services

Goods are tangible products; services are intangible activities.

Revenue

The total amount of money a business takes in during a given period by selling goods and services.

Profit

The amount of money a business earns above and beyond what it spends for salaries and other expenses.

Loss

Occurs when a business's expenses are more than its revenues.

Risk

The chance an entrepreneur takes of losing time and money on a business that may not prove profitable.

Standard of Living

The amount of goods and services people can buy with the money they have.

Quality of Life

The general well-being of a society in terms of political freedom, natural environment, education, and safety.

Stakeholders

All the people who stand to gain or lose by the policies and activities of a business.

Non Profit Organization

An organization whose goals do not include making a personal profit for its owners or organizers.

Factors of Production

The resources used to create wealth: Land, Labor, Capital, Entrepreneurship, and Knowledge.

Key Factors for Wealth Creation

Entrepreneurship and Knowledge are the two most important factors of production for creating wealth today.

Business Environment

The surrounding factors that either help or hinder the development of businesses.

Economic Environment

How government policies, taxation, and currency stability impact business growth.

Competitive Environment

The pressure on companies to exceed customer expectations through quality, speed, and responsiveness.

Social Environment

Demographic shifts such as an aging population and changing workforce diversity.

Technological Environment

The impact of tools like e-commerce, AI, and information systems on business efficiency.

E-Commerce

The buying and selling of goods over the internet (B2B and B2C).

Productivity

The amount of output you generate given the amount of input (e.g., hours worked).

Demography

The statistical study of the human population with regard to its size, density, age, race, gender, and income.

Empowerment

Giving frontline workers the responsibility, authority, freedom, and training to make quick decisions.

Evolution of U.S. Business

Shifted from an agricultural economy to a manufacturing economy, then to a service economy, and now to an information/digital economy.

Economics

The study of how society chooses to employ resources to produce goods and services and distribute them.

Macroeconomics

The part of economics study that looks at the operation of a nation's economy as a whole.

Microeconomics

The part of economics study that looks at the behavior of people and organizations in particular markets.

Resource Development

The study of how to increase resources and create conditions that will make better use of them.

Adam Smith

Considered the father of modern economics; authored "The Wealth of Nations" in 1776.

Invisible Hand

A phrase coined by Adam Smith to describe the process that turns self-directed gain into social and economic benefits for all.

Capitalism

An economic system in which all or most of the factors of production and distribution are privately owned and operated for profit.

State Capitalism

A combination of freer markets and some government control, prevalent in countries like China.

Four Basic Rights of Capitalism

Right to private property, right to own a business and keep profits, right to freedom of competition, and right to freedom of choice.

Free Market

A market in which decisions about what to produce and in what quantities are made by buyers and sellers negotiating price.

Supply

The quantity of products that manufacturers or owners are willing to sell at different prices at a specific time.

Demand

The quantity of products that people are willing to buy at different prices at a specific time.

Market Price (Equilibrium Point)

The price determined by supply and demand where the quantity demanded equals the quantity supplied.

Perfect Competition

The degree of competition in which there are many sellers in a market and none is large enough to dictate price.

Monopolistic Competition

The degree of competition in which a large number of sellers produce very similar products that buyers perceive as different.

Oligopoly

A degree of competition in which just a few sellers dominate the market (e.g., aircraft manufacturing, wireless networks).

Monopoly

A degree of competition in which only one seller controls the total supply of a product or service.

Socialism

An economic system based on the premise that basic businesses should be owned by the government so profits can be evenly distributed.

Brain Drain

The loss of the best and brightest people to other countries due to high tax rates in socialist nations.

Communism

An economic and political system in which the government makes almost all economic decisions and owns almost all major factors of production.

Free-Market Economies

Economic systems in which market forces largely determine what is produced and who gets it.

Command Economies

Economic systems in which the government largely decides what goods and services will be produced and who gets them.

Mixed Economies

Economic systems in which some allocation of resources is made by the market and some by the government.

Gross Domestic Product (GDP)

The total value of final goods and services produced in a country in a given year.

Unemployment Rate

The percentage of civilians at least 16 years old who are unemployed and tried to find a job within the prior four weeks.

Frictional Unemployment

Unemployment resulting from people quitting because they dislike the job, boss, or conditions, or entering the workforce for the first time.

Structural Unemployment

Unemployment caused by restructuring of firms or mismatch between worker skills and job requirements.

Cyclical Unemployment

Unemployment caused by a recession or downturn in the business cycle.

Inflation

A general rise in the prices of goods and services over time.

Disinflation

A situation in which price increases are slowing (the inflation rate is declining).

Deflation

A situation in which prices are declining.

Stagflation

A situation when the economy is slowing but prices are continuing to increase.

Consumer Price Index (CPI)

Monthly statistics that measure the pace of inflation or deflation by monitoring price changes of a market basket of goods.

Producer Price Index (PPI)

An index that measures prices at the wholesale level.

Business Cycle

The periodic rises and falls that occur in economies over time (Expansion, Peak, Contraction, Trough).

Recession

Two or more consecutive quarters of decline in the GDP.

Depression

A severe recession, usually accompanied by deflation and high unemployment.

Fiscal Policy

The federal government's efforts to keep the economy stable by increasing or decreasing taxes or government spending.

Monetary Policy

The management of the money supply and interest rates by the Federal Reserve Bank.

Global Trade

The exchange of goods and services across international boundaries.

Free Trade

The movement of goods and services among nations without political or economic barriers.

Comparative Advantage

Theory that a country should sell products it produces most efficiently and buy products it cannot produce as efficiently.

Absolute Advantage

The advantage that exists when a country has a monopoly on producing a specific product or can produce it more efficiently than all other countries.

Importing

Buying products from another country.

Exporting

Selling products to another country.

Balance of Trade

The total value of a nation's exports compared to its imports over a particular period.

Trade Surplus

A favorable balance of trade; occurs when a country's exports exceed its imports.

Trade Deficit

An unfavorable balance of trade; occurs when a country's imports exceed its exports.

Balance of Payments

The difference between money coming into a country (from exports) and money leaving the country (for imports) plus other flows.

Dumping

Selling products in a foreign country at lower prices than those charged in the producing country.

Licensing

A global strategy in which a firm (licensor) allows a foreign company to produce its product for a fee (royalty).

Franchising

Selling the rights to use a business name and sell a product or service in a given territory in a specified manner.

Contract Manufacturing

A foreign country's production of private-label goods to which a domestic company then attaches its brand name or trademark (outsourcing).

Joint Venture

A partnership in which two or more companies (often from different countries) join to undertake a major project.

Strategic Alliance

A long-term partnership between two or more companies established to help each company build competitive market advantages.

Foreign Direct Investment (FDI)

The buying of permanent property and businesses in foreign nations.

Foreign Subsidiary

A company owned in a foreign country by another company (called the parent company).

Multinational Corporation (MNC)

An organization that manufactures and markets products in many different countries and has multinational stock ownership and management.

Exchange Rate

The value of one nation's currency relative to the currencies of other countries.

Devaluation

Lowering the value of a nation's currency relative to other currencies by government action.

Sociocultural Forces

Nonverbal communication, religion, values, and language differences that impact foreign market success.

Countertrading

A complex form of bartering in which several countries may trade goods and services for other goods and services.

Trade Protectionism

The use of government regulations to limit the import of goods and services.

Tariff

A tax imposed on imported goods.

Protective Tariff

Import taxes designed to raise the retail price of imported products so that domestic products are competitively priced.

Revenue Tariff

Import taxes designed to raise money for the government.

Import Quota

A limit on the number of products in certain categories that a nation can import.

Embargo

A complete ban on the import or export of a certain product, or the stopping of all trade with a particular country.

General Agreement on Tariffs and Trade (GATT)

A 1948 agreement that established an international forum for negotiating mutual reductions in trade restrictions.

World Trade Organization (WTO)

The international organization that replaced GATT to mediate trade disputes among nations.

Common Market (Trading Bloc)

A regional group of countries that have a common external tariff, no internal tariffs, and coordinated trade laws (e.g., European Union).

NAFTA / USMCA

The trade agreement creating a free-trade area among the United States, Canada, and Mexico.

Offshore Outsourcing

Purchasing goods and services from outside vendors located in foreign countries to lower costs.

Ethics

Standards of moral behavior; accepts behavior as right or wrong as dictated by society.

Compliance-Based Ethics Codes

Ethical standards that emphasize preventing unlawful behavior by increasing control and penalizing wrongdoers.

Integrity-Based Ethics Codes

Ethical standards that define the organization's guiding values, create an environment that supports ethically sound behavior, and stress shared accountability.

Whistleblowers

Insiders who report illegal or unethical behavior within an organization to authorities or management.

Corporate Social Responsibility (CSR)

A business's concern for the welfare of society as a whole.