COMM 1800 Chapter 1 (WIP)

·       Business, Profit, and the External Environment

o   Business – Organization that provides goods or services to earn profits

o   Profit – Difference between a business’s revenue and expenses

§  Main incentive or opening and operating a business

§  Distinguishes businesses from other organizations like Universities, Hospitals, etc. (non-profit-seeking)

o   Businesses must take consumer choice (demand) into account when running/opening

§  Businesses supply goods that are demanded (leads to opportunities)

o   Benefits of Business

§  Produce goods and services for consumption

§  Partake in innovation

§  Contributes to quality of life/standard of living in society

§  Enhance incomes of stockholders/owners

§  Taxes support government

§  Often support charities

o   Costs of Business

§  Some harmful to Earth’s environment

§  Ethical concerns (unacceptable business practices

·       External Environments of Business

o   All businesses operate in a larger external environment

§  External environment (EE) – Everything outside an organization’s boundaries that might affect it

o   EE must be understood by business to ensure success

o   Businesses can also influence EE

·       Types of EEs

o   Domestic Business Environment – Where the firm conducts its operations and derives its revenues

§  Businesses (in this environment) can form close relationships with customers/suppliers and distinguish themselves from competitors

§  Ex: American Eagle is located close to college campuses/shopping malls, has strong supplier relationships. Leads to business with clear identity and one that is competitive

o   Global Business Environment – The international forces that affect a business

§  Includes trade agreements, political unrest, international economic conditions, etc.

§  Ex: COVID-19 Pandemic led to low gas prices, led OPEC to take more proactive role in managing price of oil

§  Other Ex: American Eagle has stores in many different countries, so they must contend with language, cultural, and currency barriers

o   Technological Environment – All the ways by which firms create value for their constituents

§  Technology = Human knowledge/capital, methods of work, equipment, etc.

§  Ex: American Eagle has info system that tracks sales and inventory, leads to highly responsive service

o   Political-Legal Environment – Relationship between business and government

§  Usually involves regulation, where government tells businesses what they can’t do

§  Ex: American Eagle was sued three times by Abercrombie and Fitch for Copyright Infringement, but won

§  Rapidly pressing issue in this environment is privacy

o   Sociocultural Environment – Customs, mores, values, and demographic characteristics of the society in which the organization functions

§  Businesses respond to societal conditions from this environment

§  Ex: American Eagle primarily targets high-school/college students, but has released other brands that appeal to older/younger audiences

o   Economic Environment – Relevant conditions that exist in the economic system in which a company operates

§  Conditions include wages, economic health, unemployment, etc.

§  Ex: American Eagle has been facing intense competition from online retailers due to in-person workers demanding higher wages

·       Factors of Production – Resources utilized in the production of goods/services. Includes labor, capital, entrepreneurs, physical resources, and information resources

o   Labor – Physical and mental capabilities of people as they contribute to economic production

o   Capital – Funds needed to create and operate a business enterprise

§  Ex: Starbucks investor Howard Schultz utilized capital to purchase Starbucks Coffee. Eventually, he made the company public to raise more money

o   Entrepreneur – Businessperson or individual who accepts the risks and opportunities involved in creating and operating a new business venture

§  Ex: Howard Schultz accepted the risks associated with the growth of Starbucks

§  Most economic systems encourage entrepreneurship

o   Physical resources – Tangible items that organizations use in the conduct of their business

§  Includes natural/raw materials, offices, storage/production facilities, etc.

§  Ex: Starbucks utilizes coffee makers/beans, paper products for packaging, and storage facilities for storing products

o   Information Resources – Data and other information used by businesses

§  Include market forecasts, specialized knowledge of people, economic data, etc.

§  Results in creation of new info or repackaging of info for customers

§  Ex: Starbucks utilizes information resources when deciding where to drop new outlets

·       Economic Systems

o   Economic System – A nation’s system for allocating its resources among its citizens

o   Differ primarily based on who owns the means of production\

o   Types of Economic Systems

§  Planned Economy – Relies on government to control all factors of production and to make all production/allocation decisions

·       Communism (Karl Marx) – Political system in which government owns and operates all factors of production

o   Government assigns people to jobs, decides what and how much is made, what price to charge, etc.

o   Marx expected that government would eventually wither away, and workers would take charge of production factors

·       Socialism – Where government owns and operates only selected major sources of production

o   Banking, transportation, steel, oil, etc.

§  Small businesses are privately owned

o   Healthcare measures in the USA are often criticized as “socialist”

§  Market Economy – Where individuals control production and allocation decisions through supply and demand

·       Market – Where buyers and sellers trade for goods and services

·       Price/Quantity is controlled by supply and demand

·       Producers and consumers (with limits) are free to sell and buy as they choose

·       Creates shared value

·       Capitalism – Systems that sanctions the private ownership of the factors of production and encourages entrepreneurship by offering profits as an incentive

·       Mixed-Market Economies – Economics system featuring characteristics of both planned and market economies

o   Market economies + Restrictions

o   Ex: US Economy

·       Privatization – Process of converting government enterprises into privately owned companies

o   Ex: In Poland, the national airline was sold to private investors

o   Meant to boost efficiency, reduce payroll, and achieve profitability

·       Supply and Demand

o   Demand – willingness and ability of buyers to purchase a good or service

§  Law of Demand – All else equal, quantity demanded rises as price goes down and vice versa

o   Supply – willingness and ability of sellers to offer a good or service

§  Law of Supply – All else equal, quantity supplied rises as price goes up and vice versa

o   Demand and Supply Schedule – assessment of relationships among different levels of demand and supply at different price levels

o   Demand Curve – Graph showing how many units of a product will be demanded at different prices

o   Supply Curve – Graph showing how many units of a product will be supplied at different prices

o   Market Price (Equilibrium Price) – Profit-maximizing price at which quantity demanded = quantity supplied

·       Private Enterprise – Economic System that allows individuals to pursue their own interests without undue governmental restriction

o   Elements of Private Enterprise:

§  Private Property Rights

§  Freedom of Choice

§  Profits

§  Competition - Vying among businesses for the same resources or customers

o   Degrees of Competition

o   Perfect Competition – Characterized by small firms, large quantity of sellers, and identical products

§  Ex: Local Farmer

§  Firms are viewed as identical by buyers

§  Buyers/Sellers know prices others are paying/receiving

§  Easy for firms to enter/leave the market

§  Prices set exclusively by supply/demand

o   Monopolistic Competition – Characterized by many buyers/sellers (not as much as perfect competition) and similar but not identical products

§  Ex: Office supply store

§  Firms have control over prices

§  Firms can be large or small

§  Firms can enter/leave market easily

o   Oligopoly – Characterized by a handful of large firms with the power to influence price of their products

§  Ex: Steel

§  Actions of one firm can affect sales of other firms

·       One firm cuts price, others are likely to do the same

o   Monopoly – Characterized by only one producer that sets the price of products

§  Ex: Public utilities

§  Firm is only constrained by reduction in consumer demand

§  Sherman Antitrust Act (1890) and Clayton Act (1914) forbid many types of monopolies and regulate prices

§  Natural Monopoly – Industry in which one company can most efficiently supply all needed goods or services

o   Economic Indicators – Statistics that help assess the performance of an economy

o   Business Cycle – Short-term pattern of economic expansions and contractions

§  Measured by Aggregate Output – Total quantity of goods and services produced by an economics system during a given period

·       Growth depends on output increasing at a faster rate than production

·       When output grows quicker than population, output per capita (quantity of goods/services per person) goes up and more goods/services that people want are provided

·       Leads to improved Standard of Living – Total quantity and quality of goods/services people can purchase with the currency used in their economic system

o   Gross Domestic Product (GDP) – Total value of all goods/services produced within a given period by a national economy through domestic factors of production

§  Measure of aggregate output

§  If GDP is going up, so is aggregate output (generally). Nation experiences economic growth

o   Gross National Product (GNP) – Total value of all goods/services produced by a national economy within a given period regardless of where the factors of production are located

§  Ex: Ford cars produced in Brazil would be part of the US’ GNP, but Brazil’s GDP

o   GDP per Capita – GDP divided by population

o   Real GDP – GDP adjusted to account for changes in currency values and price changes

§  Used to combat misleading GDP figures

o   Nominal GDP – GDP measured in current dollars or with all components valued at a current price

o   Purchasing Power Parity (PPP) – The principle that exchange rates are set so that the prices of similar products in different countries are about the same

o   Productivity – A measure of economic growth that compares how much a system produces with the resources needed to produce it

§  Ex: 1 US Worker and 1 Dollar making 10 balls in 8 hours is more productive than 1.2 German Workers and 1.5 dollars making 10 balls in 8 hours

o   Balance of Trade – Economic value of all products a country exports minus the economic value of all products it imports

§  Positive BOT = exports more than imports

§  Negative BOT = imports more than exports (trade deficit)

o   National Debt – Amount of money a government owes its creditors

§  Can be limited through legislation (debt ceiling)

o   Stability – Condition in which money available and quantity of goods/services are increasing at about the same rate

§  Chief goal of an economic system

o   Inflation – widespread price increases occur in an economic system

§  Generally better than deflation, as it signals a dwindling economy

o   Consumer Price Index (CPI) – measure of the prices of typical products purchased by consumers living in urban areas

§  Has more than doubled from 100 to 256.6 since 1982

o   Unemployment – level of joblessness among people actively seeking to work

§  Unemployment problems:

·       If wages are too high, businesses will hire less workers. Unemployment up

·       Businesses could raise prices to counter this but won’t be able to sell as many products. Hiring cuts will then occur, ad unemployment will go up

o   Recession – period during which aggregate output declines

o   Depression – a prolonged and deep recession

o   Fiscal Policies – Policies utilized by a government regarding how it collects and spends revenue

§  Ex: Obama’s tax system overhaul

o   Monetary Policies – Policy used to control the size of its money supply

o   Stabilization policy – Government economic policy intended to smooth out fluctuations in output and unemployment and to stabilize prices