Chapter 1 Notes: Taking Risks and Making Profits within the Dynamic Business Environment

Learning Objectives

  • Describe the relationship between profit and risk, and show how businesses and nonprofit organizations can raise the standard of living for all.

  • Explain how entrepreneurship and the other factors of production contribute to the creation of wealth.

  • Analyze the effects of the economic environment and taxes on businesses.

  • Describe the effects of technology on businesses.

What If You Had $1 Million?

  • Reflection prompt: What would you do with $1,000,000? (Page title:
    WHAT IF YOU HAD $1 MILLION? WHAT WOULD YOU DO WITH IT?)

The Value of Understanding Business

  • Acknowledgement that $1,000,000 is not enough to live on for the rest of your life.

  • You must understand business concepts to maximize its usefulness.

Goods

  • Goods are tangible products.

  • Examples: computers, food, clothing, cars, appliances.

Services

  • Services are intangible products (that can’t be held in your hand).

  • Examples: education, health care, insurance, recreation, travel and tourism.

Entrepreneur

  • A person who risks time and money to start and manage a business.

Class Poll: Famous Entrepreneur

  • Activity: Name a famous entrepreneur and briefly tell his/her story.

Revenue, Profit, and Loss

  • Revenue: Total amount of money a business takes in during a given period by selling goods and services.

  • Profit: Amount of money a business earns above and beyond what it spends for salaries and other expenses.

  • Loss: When a business’s expenses are more than its revenues.

  • Relationship note: Profit is not the same as revenue; loss occurs when costs exceed revenues.

Risk, Standard of Living, and Quality of Life

  • 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, health care, safety, leisure, and rewards that add to the satisfaction and joy that other goods and services provide.

Stakeholders

  • All the people who stand to gain or lose by the policies and activities of a business and whose concerns the business needs to address.

Outsourcing and Insourcing

  • Outsourcing: Contracting with other companies (often in other countries) to do some functions of a firm, such as production or accounting.

  • Insourcing: When foreign companies set up design and production facilities in the United States.

Important Points to Write Down (Revenue vs Profit)

  • Revenue is the total amount of money a business takes in during a given period.

  • Profit is the amount of money a business earns above and beyond what it spends for salaries and other expenses during a given period.

Important Points to Write Down (Standard of Living vs Quality of Life)

  • Standard of Living: The amount of goods and services a person can buy with the money they have.

  • Quality of Life: The general well-being of society in terms of political freedom, natural environment, education, health care, safety, leisure, and rewards that add to the satisfaction and joy that other goods and services provide.

Important Points to Write Down (Risk, Stakeholders, Outsourcing, Insourcing)

  • Risk: The chance an entrepreneur takes in losing time and money on a business that may not prove profitable.

  • Usually, entrepreneurs willing to take the most risk make the highest profit.

  • Stakeholders: All the people who stand to gain or lose by the policies and activities of a business and whose concerns the business needs to address.

  • Outsourcing: Contracting with other companies (often in other countries) to do some or all the functions of a firm, like its production or accounting tasks.

  • Insourcing: When foreign companies set up design and production facilities in the United States.

Entrepreneurship: The Positives and Negatives

  • Positives:

    • Freedom to Succeed

    • Make Your Own Decisions

    • Possible Wealth

  • Negatives:

    • Freedom to Fail

    • No Paid Vacations

    • No Health Insurance

The Five Factors of Production

  • The five resources used to create wealth.

  • It has been determined that what makes "rich" countries rich is entrepreneurship and knowledge.

  • The five factors: Land, Labor, Capital, Entrepreneurship, Knowledge.

Advantages and Trade-offs of Working for Others vs. Being an Entrepreneur

  • Working for others:

    • Someone else assumes entrepreneurial risk.

    • Benefits provided (life and health insurance, vacation time, etc.).

  • Being an entrepreneur:

    • Freedom to make your own decisions.

    • Potential for wealth creation.

    • Sacrifices: loss of benefits like health insurance and paid vacations.

The Business Environment: Five Elements

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

  • Five elements:
    1) Economic and legal environment
    2) Technological environment
    3) Competitive environment
    4) Social environment
    5) Global business environment

Government Promotion of Entrepreneurship

  • Four ways government can promote entrepreneurship:

    1. Allow private ownership of businesses.

    2. Pass laws that enable businesspeople to write enforceable contracts.

    3. Establish a currency that’s tradable in world markets.

    4. Minimize corruption.

The "Changing" Business Environment

  • Elements of change include:

    • Technology changes

    • Identity theft

    • Changing demographics

    • Changes in diversity

    • Climate change

    • War and Terrorism

Effectiveness, Efficiency, and Productivity

  • Effectiveness: The ability to produce the desired results.

  • Efficiency: The ability to produce goods and services while using the least amount possible of resources.

  • Productivity: The amount of output an individual, team, or company can generate given the amount of input (for example, hours worked).

Important Points to Write Down (Effectiveness, Efficiency, Productivity)

  • Four government-driven notes:

    • Allow private ownership of business.

    • Pass laws enabling enforceable contracts.

    • Establish tradable currency in world markets.

    • Minimize corruption in business and in government.

  • Definitions:

    • Effectiveness: Producing the desired results.

    • Efficiency: Producing goods and services with the least resources.

    • Productivity: Output generated per unit of input (e.g., hours worked).

Important Points to Write Down (Empowerment and Economic Issues)

  • Empowerment: Allowing workers to make decisions essential to producing high-quality goods and services.

  • Major issues affecting the economy today include Technology changes, identity theft, changing demographics, diversity, climate change, war, and terrorism.

Video Case Study: TaskRabbit Keeps the Gig Economy Hopping

  • Source: CNBC, 11/24.

  • Focus: The gig economy and companies like TaskRabbit as part of the U.S. economy.

Video Case Study Questions

  • Do you think the gig economy and companies such as TaskRabbit will remain a permanent part of the U.S. economy? Why or why not?

  • What do you think is the most attractive feature of working for a company such as TaskRabbit?

Additional Notes on Formulas and Key Terms

  • Profit formula: P = R - C where R is Revenue and C is Costs/Expenses.

  • Revenue: R = ext{sum of money from selling goods/services over a period}.

  • Loss: occurs when L = C - R > 0, i.e., expenses exceed revenues.

  • Productivity: ext{Productivity} = rac{ ext{Output}}{ ext{Input}}.

  • The five factors of production (Land, Labor, Capital, Entrepreneurship, Knowledge) model wealth creation; entrepreneurship and knowledge are highlighted as especially important for creating wealth.

  • Standard of Living vs Quality of Life distinctions were clarified and defined as above.