Business and Economic Foundations

Learning Objectives

  • Define basic concepts:
    • Business
    • Economics
    • Product
    • Profit
  • Explain the importance of studying business.
  • Identify the main participants and activities in business.
  • Describe the role of supply, demand, and competition in a free-enterprise system.
  • Compare the four types of economic systems.
  • Specify why and how the health of the economy is measured.

What is Business?

  • Definition: Business consists of individuals or organizations that aim to earn a profit by providing products that satisfy people's needs.
  • Product: A product can be a good, a service, or an idea.

Why Study Business?

  • To develop skills and acquire knowledge for future career preparation.
  • Relevant regardless of whether you plan to work for a multinational Fortune 500 firm, start your own business, work for a government agency, or manage or volunteer at a nonprofit organization.

The Goal of Business

  • Primary Goal: To earn a profit.
  • Profit Definition: The difference between the cost to make and sell a product and the customer's payment.
  • Example: If a company spends 8.00 to produce and sell a product for 10.00, the profit is 2.00.
  • Formula:
    \text{Profit} = \text{Total Revenue} - \text{Total Costs}

Objectives of Business

  1. Profit
  2. Business Profit
  3. Economic profit
  4. Survival
  5. Growth

Requirements for Earning a Profit

  • Management Skills: To plan, organize, and control business activities.
  • Marketing Expertise: To understand consumer needs and wants.
  • Financial Resources and Skills: To fund, maintain, and expand operations.
  • Ethical and Socially Responsible Conduct: To act in an ethical and socially responsible manner.
  • Adaptability: To adapt to economic, technological, political, and social changes.

Stakeholders

  • Internal Stakeholders:
    • Employees
    • Managers
    • Owners/Shareholders
  • External Stakeholders:
    • Suppliers
    • Customers
    • Creditors
    • Government
    • Society

What is Economics?

  • Definition: Economics is about people's needs and wants.
  • It involves the production, distribution, and consumption of goods and services.
  • Four Main Issues Addressed by Economics
    1. What things to produce and how many.
    2. How to produce them.
    3. Who will receive them.
    4. How much they should cost.

Needs and Wants

  • Need: Something necessary for survival.
  • Want: Something desired but not necessary for survival.
  • Examples of Needs: Education, healthcare, and safety.

Difference between Economics and Business

  • Economics analyzes how individual activities affect a country's progress.
  • Business focuses on how employee and management actions affect company progress and shareholder wealth.

Overview of the Business World

  • Key Elements:
    • Competition
    • Employees
    • Management
    • Economy
    • Finance
    • Owners
    • Customers
    • Marketing
    • Social Responsibility and Ethics
    • Legal, Political, and Regulatory Forces
    • Digital Technology

Management

  • Definition: Developing plans, coordinating employees’ actions, organizing people, and motivating them to achieve the firm’s goals.
  • Functions: Planning, organizing, leading, and controlling.

Marketing

  • Focus: Satisfying customers.
  • Activities: Providing goods and services that meet consumer needs and wants.
  • Marketing Mix (Four P’s):
    • Product
    • Price
    • Place
    • Promotion

Finance

  • Definition: Activities concerned with obtaining money and using it effectively.
  • Professionals: Accountants, stockbrokers, investment advisors, and bankers.

Business Activities and Profits

  • Business activities generate profits essential to individual businesses, local economies, and the global economy.
  • Profits enable businesses to buy raw materials, hire employees, attract capital, and create additional products which fuels the world economy.

Goods and Services

  • Goods: Tangible items you can touch.
  • Services: Actions people do for you or others.

The Economic Foundations of Business

  • Economics: The study of how resources are distributed for the production of goods and services within a social system.
  • Natural Resources: Land, forests, minerals, water, etc.
  • Human Resources: Physical and mental abilities people use to produce goods and services (labor).
  • Financial Resources (Capital): Funds used to acquire natural and human resources.
  • Economic System: A description of how a particular society distributes its resources to produce goods and services.

Economic Systems - Central Issue

  • A central issue of economics is how to fulfill an unlimited demand for goods and services in a world with a limited supply of resources.
  • All economic systems must address these issues:
    1. What goods and services, and how much of each, will satisfy consumer needs?
    2. How will goods and services be produced, who will produce them, and with what resources?
    3. How are the goods and services to be distributed to consumers?

Economic Systems

  • Communism:
    • A Karl Marx society in which the people, without regard to class, own all the nation's resources.
  • Capitalism (Free Enterprise):
    • An economic system in which individuals own and operate the majority of businesses that provide goods and services.
  • Socialism:
    • An economic system in which the government owns and operates basic industries, but individuals own most businesses.
  • Mixed Economies:
    • Economies made up of elements from more than one economic system.

Capitalism (Free Enterprise)

  • Definition: An economic system in which individuals own and operate the majority of businesses providing goods and services.
  • Competition, supply, and demand determine which goods and services are produced, how they are produced, and how they are distributed.
  • Examples: The United States, Canada, Japan, and Australia.

Pure vs. Modified Capitalism

  • Pure Capitalism (Free-Market System): All economic decisions are made without government intervention.
  • Adam Smith (The Wealth of Nations, 1776) believed the “invisible hand of competition” best regulates the economy.

Mixed Economies

  • No country practices a pure form of communism, socialism, or capitalism.
  • Most nations operate as mixed economies with elements from more than one economic system.
  • Examples:
    • Sweden: Most businesses are privately owned.
    • United States: Government operates the postal service and the Tennessee Valley Authority.
    • Great Britain and Mexico: Governments are selling state-run businesses to private entities.

The Free-Enterprise System

  • Many economies (including the United States, Canada, and Japan) are based on free enterprise.
  • Many communist and socialist countries (such as China and Russia) are adopting more free-enterprise principles.
  • Free enterprise allows businesses to succeed or fail based on market demand.
  • Companies that efficiently manufacture and sell products consumers desire are likely to succeed.

Economic Systems - Comparison

  • Communism:
    • Business Ownership: Most businesses are government-owned.
    • Competition: Government controls competition and the economy.
    • Profits: Excess income goes to the government.
    • Product Availability/Price: Limited choice, high prices.
    • Employment Options: Little choice; most work for government.
  • Socialism:
    • Business Ownership: Government owns major industries; individuals own small businesses.
    • Competition: Restricted in major industries; encouraged in small businesses.
    • Profits: Small businesses reinvest profits; government profits go to the government.
    • Product Availability/Price: Some choice; prices set by supply and demand.
    • Employment Options: More choice; many government jobs.
  • Capitalism:
    • Business Ownership: Individuals own all businesses.
    • Competition: Encouraged by market forces and regulations.
    • Profits: Individuals and businesses keep profits after taxes.
    • Product Availability/Price: Wide choice; prices set by supply and demand.
    • Employment Options: Unlimited choice.
  • Example: China has a communist economic system and is one of the largest economies in the world.

Demand & Supply

  • Supply: The number of products (goods and services) that businesses are willing to sell at different prices at a specific time.
  • Demand: The number of goods and services that consumers are willing to buy at different prices at a specific time.

Supply and Demand Relationship

  • Supply: The amount of goods or services available.
  • Demand: The number of people that want the goods and services, and the amount that they want.
  • Demand greater than Supply
  • Supply greater than Demand

Factors Affecting Demand

  1. The price of a commodity (a good or service)
  2. The income (wages) of consumers
  3. The demand for substitute commodities
  4. The demand for other commodities at the same time
  5. Whether people like the commodity

Factors Affecting Supply

  • The price of a commodity
  • The cost of making a good
  • Unexpected Events

Equilibrium Price

  • The price at which the supply of a product equals demand.

Inflation

  • Definition: The general rise in the cost of goods and services over a period of time.
  • Measuring Inflation: Consumer Price Index (CPI).
  • CPI measures the average change in prices of a basket of goods and services, including food, clothing, housing, household goods, alcohol, tobacco, transportation, medical care, and education.

Effects of Inflation

  • Labour unions
  • Wage-Price Spiral (Rising wages increase disposable income raising the demand for goods and causing prices to rise)
  • Economic Crisis
  • Political Instability

Hyperinflation

  • Hyperinflation is rare and often associated with wars, unstable political and economic environments where revenues are insufficient to cover government expenditures and printing more currency becomes a solution.

Factors of Production

  • Land: All natural resources (forest, river, oil, etc.).
  • Labour: Work done by people to make goods and services.
  • Capital: Money and tools used to produce goods and services.
  • Enterprise: The organization of the parts of production.

Employment, Working Conditions & Labour Unions

  • Labour supply and demand
  • If an economy is slowing down or shrinking, the demand for labour decreases.
  • Businesses start to lay off their workers.
  • Labour Law
  • Unfair discrimination and exploitation Labour Unions -when a group of workers get together to obtain, improve, and protect labour rights and working conditions.
  • As a group they have more power to negotiate with their employers.
  • -If a union and employer cannot agree, the union can threaten to go on strike – when workers refuse to work to try and force their employer to improve their conditions.

Economic Indicators

  • To measure the health of an economy, and a country.
  • To find out the standard of living in a country
  • Gross Domestic Product (GDP):
    • The total value of all goods and services produced within a country in one year.
  • Gross Domestic Product per person (GDP per capita):
    • GDP per person divides the GDP by the number of people in the country.

Economic Cycles and Productivity

  • Economies are not stagnant; they expand and contract.
  • Economic Expansion: Occurs when an economy is growing and people are spending more money.
  • Their purchases stimulate the production of goods and services, which in turn stimulates employment Economic Expansion The situation that occurs when an economy is growing and people are spending more money, their purchases stimulate the production of goods and services, which in turn stimulates employment.
  • Economic contraction occurs when spending declines.
  • Businesses cut back on production and lay off workers, and the economy as a whole slows down.
  • Contractions of the economy lead to recession –a decline in production, employment, and income.
  • Recessions are often characterized by rising levels of unemployment, which is measured as the percentage of the population that wants to work but is unable to find jobs.

Depression

  • A severe recession may turn into a depression, in which unemployment is very high, consumer spending is low, and business output is sharply reduced, such as what occurred in the United States in the early 1930s.
  • The most recent recession is often called the Great Recession because it was the longest and the most severe economic decline since the Great Depression.

Gross Domestic Product (GDP) Measuring the Economy

  • Countries measure the state of their economies to determine whether they are expanding or contracting and whether corrective action is necessary to minimize the fluctuations.
  • One commonly used measure is gross domestic product (GDP)– the sum of all goods and services produced in a country during a year.
  • GDP measures only those goods and services made within a country and therefore does not include profits from companies’ overseas operations; it does include profits earned by foreign companies within the country being measured
  • However, it does not take into account the concept of GDP in relation to population (GDP per capita).

Budget Deficit

  • Important indicator of a nation’s economic health
  • The relationship between its spending and income (from taxes)
  • When a nation spends more than it takes in from taxes, it has a budget deficit.
  • In the 1990s, the U.S. government eliminated its long-standing budget deficit by balancing the money spent for social, defense, and other programs with the amount of money taken in from taxes.

How to Evaluate Our Nation's Economy

  • Trade balance: The difference between our exports and our imports. If the balance is negative, as it has been since the mid-1980s, it is called a trade deficit and is generally viewed as unhealthy for our economy.
  • Consumer Price Index: Measures changes in prices of goods and services purchased for consumption by typical urban households.
  • Per capita income: Indicates the income level of "average" Americans. Useful in determining how much "average" consumers spend and how much money Americans are earning.
  • Unemployment rate: Indicates how many working-age Americans are not working who otherwise want to work.
  • Inflation: Monitors price increases in consumer goods and services over specified periods of time. Used to determine if costs of goods and services are exceeding worker compensation over time.
  • Worker productivity: The amount of goods and services produced for each hour worked.

Standard of Living

  • Refers the level of wealth and material comfort that people have available to them.
  • The United States, Germany, Australia, and Norway all have a high standard of living, meaning that most of their citizens are able to afford basic necessities and some degree of comfort.
  • These nations are often characterized by a high GDP per capita.
  • However, a higher GDP per capita does not automatically translate into a higher standard of living.
  • Costs of goods and services is also a factor.
  • The European Union and Japan tend to have higher costs of living than in the United States.
  • Higher prices mean that it costs more to obtain a certain level of comfort than it does in other countries.
  • Countries with low standards of living are usually characterized by poverty, higher unemployment, and lower education rates.

The Nature of Competition

  • Is a vital element in a free enterprise
  • Adam Smith: competition fosters efficiency and low prices by forcing producers to offer the best products at the most reasonable price
  • Those fail to do so are not able to stay in business.
  • Thus competition should improve the quality of the goods and services available or reduce prices
  • It allows for open markets and provides opportunities for both individuals and businesses to successfully compete.
  • Entrepreneurs can discover new technology, ways to lower prices, as well as methods for providing better distribution or services.

Types of Competitive Environments

  • Pure Competition
  • Monopolistic Competition
  • Oligopoly
  • Monopoly

PURE COMPETITION

  • Many Firms
  • Easy Entry / Exit
  • Perfect Information
  • No market power
  • Price Taker
  • Zero Economic Profit in the Long Run
  • Homogeneous Products, e.g., wheat, corn, cotton

Monopolistic Competition

  • The market structure that exists when there are fewer businesses than in a pure competition environment and the differences among the goods they sell are small
  • Aspirin and vacuum cleaners are examples of such goods: differ slightly in packaging, warranty, name, and other characteristics, but all satisfy the same consumer need
  • Businesses has some power over the price they charge coz they can make consumers aware of product differences through advertising
  • Consumers value some features more than others and are often willing to pay higher prices for a product with the features they want
  • E.g., Many consumers are willing to pay higher price for organic fruits and vegetables rather than receive a bargain on nonorganic foods

Oligopoly

  • The market structure that exists when there are very few businesses selling a product
  • Individual businesses have control over their products’ price as each business supplies a large portion of the products sold in the marketplace
  • Prices charged by different firms stay fairly close as a price cut or increase by one company will trigger a similar response from another company.
  • For example, in the airline industry, when one airline cuts fares to boost sales, other airlines quickly follow with rate decreases to remain competitive.

Oligopoly Characteristics

  • Few major sellers
  • Imperfect competition
  • Firms sell identical or differentiated products
  • Entry and exit barriers
  • Rivals aware of what others are doing
  • Non-price competition is common
  • Interdependence

Monopoly Characteristics

  1. Single Seller
    • One Firm controls the vast majority of a market
    • The Firm IS the Industry
  2. Unique good with no close substitutes
  3. "Price Maker"
    • The firm can manipulate the price by changing the quantity it produces (ie. shifting supply to the left).
  4. High Barriers to Entry
    • New firms CANNOT enter market
    • No immediate competitors
    • Firm can make profit in the long-run
  5. Some "Nonprice" Competition
    • Despite having no close competitors, monopolies still advertise their products in an effort to increase demand.

Summary

  • A business is an organization or individual that seeks a profit by providing products that satisfy people’s needs.
  • A product is a good, service, or idea that has both tangible and intangible characteristics that provide satisfaction and benefits.
  • Profit, the basic goal of business, is the difference between what it costs to make and sell a product and what a customer pays for it.
  • The three main participants in business are owners, employees, and customers, but others—government regulators, suppliers, social groups, etc.—are also important.
  • Management involves planning, organizing, and controlling the tasks required to carry out the work of the company.
  • Marketing refers to those activities—research, product development, promotion, pricing, and distribution— designed to provide goods and services that satisfy customers.
  • Finance refers to activities concerned with funding a business and using its funds effectively.
  • Economics is the study of how resources are distributed for the production of goods and services within a social system; an economic system describes how a particular society distributes its resources.
  1. Communism is an economic system in which the people, without regard to class, own all the nation’s resources.
  2. In a socialist system, the government owns and operates basic industries, but individuals own most businesses.
  3. Under capitalism, individuals own and operate the majority of businesses that provide goods and services.
  4. Mixed economies have elements from more than one economic system; most countries have mixed economies.
  • In a free-enterprise system, individuals own and operate the majority of businesses, and the distribution of resources is determined by competition, supply, and demand.
  • Demand is the number of goods and services that consumers are willing to buy at different prices at a specific time.
  • Supply is the number of goods or services that businesses are willing to sell at different prices at a specific time.
  • The price at which the supply of a product equals demand at a specific point in time is the equilibrium price.
  • Competition is the rivalry among businesses to convince consumers to buy goods or services.
  • Four types of competitive environments are pure competition, monopolistic competition, oligopoly, and monopoly.
  • These economic concepts determine how businesses may operate in a particular society and, often, how much they can charge for their products.
  • A country measures the state of its economy to determine whether it is expanding or contracting and whether the country needs to take steps to minimize fluctuations.
  • One commonly used measure is gross domestic product (GDP), the sum of all goods and services produced in a country during a year.
  • A budget deficit occurs when a nation spends more than it takes in from taxes.