Intro to Business - Chapter 1 Vocabulary
Key Terms and Definitions
- Business: organization that provides goods or services to earn profits
- Profits: a business’s earned sales revenues minus its incurred expenses
- External Environment: everything outside an organization’s boundaries that might affect it
- Synonyms: Business = Organization = Firm = Company
External Environments of Business
- Domestic: in which a firm conducts operations and generates revenues
- Global: international forces such as trade agreements, international economic conditions, and political unrest
- Technological: including work methods, electronics and telecommunications
- Political-Legal Environment: the relationship between business and government
- Sociocultural Environment: includes the personal and demographic characteristics of society
- The Economic Environment: conditions that exist in, or the state of the economy
Factors of Production
- Labor (Human Resources): the physical and intellectual contributions of people
- Capital: the financial resources needed to operate a business
- An Entrepreneur: who accepts the risks and spots opportunities to create a new business
- Physical resources (2/2): tangible items including natural resources, buildings, machinery and tools needed to operate
- Information resources (2/2): data and other information such as market forecasts and economic data
Demand and Supply in a Market Economy
- Market Economy: aims to create shared value between businesses and customers
- 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 product for sale
- Surplus: occurs when
- Shortage: occurs when
Demand and Supply Curves and Equilibrium
- Demand Curve: shows the relationship between price and the quantity demanded; typically downward-sloping (as price falls, quantity demanded rises)
- Supply Curve: shows the relationship between price and the quantity supplied; typically upward-sloping (as price rises, quantity supplied rises)
- Equilibrium Price: the price at which quantity demanded = quantity supplied
- In the pizza example (from the diagram): the typical price range is shown from $1 to $10, with an equilibrium price indicated as P^* = 5.50
- Key takeaway: Equilibrium price guides pricing, production, and inventory decisions
- Branding and pricing: brands may price their product higher or lower based on product characteristics, perceived value, and/or marketing efforts
Equilibrium Price / Market Price
- Market Price (Equilibrium): price at which quantity demanded = quantity supplied, for a category or type of product
- Uses: guides company pricing, production, and inventory decisions
- Practical note: branding and product characteristics can cause deviations from a single market-clearing price due to perceived value and marketing
Connections and Real-World Relevance
- External environment factors influence business strategy and decisions (domestic/global conditions, technology, politics, culture, and economics)
- The factors of production define what resources are needed to produce goods/services and how value is created
- Demand and supply concepts underpin pricing strategy, output decisions, and inventory management in real firms
- Equilibrium concepts illustrate how markets can allocate resources efficiently, while recognizing that real-world factors (frictions, regulations, expectations) can create deviations
- Demand curve concept: Qd = fd(P), typically decreasing in price
- Supply curve concept: Qs = fs(P), typically increasing in price
- Equilibrium condition: Qd(P^) = Qs(P^)
- Surplus condition: Qs(P) > Qd(P)
- Shortage condition: Qd(P) > Qs(P)
- Equilibrium price (example): P^* = 5.50 (pizza diagram reference)
- Market price definition: price at which quantity demanded equals quantity supplied
- Practical implication: pricing, production, and inventory decisions are guided by the equilibrium interaction of demand and supply
Summary Takeaways
- A business is any organization that provides goods or services to earn profits; profits equal revenues minus expenses
- The external environment comprises domestic, global, technological, political-legal, sociocultural, and economic factors that affect business
- Production requires resources: Labor, Capital, Entrepreneurs, Physical resources, and Information resources
- In a market economy, demand and supply determine prices; the intersection sets the equilibrium price where markets clear
- Real-world pricing strategies are influenced by product characteristics, perceived value, and marketing, which can move prices away from the pure equilibrium
