Chapter Overview Businesses are organizations that produce or sell goods or services to make a profit. Each business must operate in the context of its economic system. Economic systems differ in terms of who owns or controls the five basic factors of production: labor, capital, entrepreneurs, physical resources, and information resources. In planned economies, the government controls all or most factors. In market economies, individuals and businesses control the factors of production and engage in free exchange. he !.". is a market economy, based on the principles of capitalism, and propelled by the forces of demand and supply. #emand is the willingness and ability of buyers to purchase a good or service. "upply is the willingness and ability of suppliers to offer goods and services for sale. $arket e%uilibrium is the price at which the %uantity demanded and the %uantity supplied is e%ual. &undamentally, the !.". economy is a private enterprise system, incorporating four key elements: private property rights, freedom of choice, profits, and competition. #egrees of competition vary from perfect competition, to monopolistic competition, to oligopoly, to monopoly. he basic goals of the !.". economic system are growth and stability. 'erformance indicators include aggregate output, standard of living, gross domestic product, and productivity. (rowth and stability can be threatened by inflation and unemployment, which the government influences through fiscal and monetary policies. Chapter Objectives 1. #efine the nature of !.". business and identify its main goals. 2. #escribe different types of global economic systems according to the means by which they control the factors of production through input and output markets. 3. "how how demand and supply affect resource distribution in the !.". 4. Identify the elements of private enterprise and explain the various degrees of competition in the !.". economic system. 5. Explain the importance of the economic environment to business and identify the factors used to evaluate the performance of an economic system. ) REFERENCE OU!"NE *pening +ase: $egawatt ,aundering and *ther Bright Ideas I. he +oncept of Business and the +oncept of 'rofit -. +onsumer +hoice and #emand B. *pportunity and Enterprise +. .uality of ,ife II. he !.". Economic "ystem -. &actors of 'roduction ). ,abor /. +apital 0. Entrepreneurs 1. 'hysical 2esources 3. Information 2esources B. ypes of Economic "ystems ). 'lanned Economies /. $arket Economies a. Input and *utput $arkets b. +apitalism c. $ixed $arket Economies d. "ocialism III. he Economics of a $arket "ystem -. #emand and "upply in a $arket Economy B. he ,aws of #emand and "upply ). he #emand and "upply "chedule /. #emand and "upply +urves 0. "urpluses and "hortages +. 'rivate Enterprise and +ompetition in a $arket Economy #. #egrees of +ompetition ). 'erfect +ompetition /. $onopolistic +ompetition 0. *ligopoly 1. $onopoly I4. !nderstanding Economic 'erformance -. Economic (rowth ). -ggregate *utput and "tandard of ,iving /. (ross #omestic 'roduct 5(#'6 0. 'roductivity B. Economic "tability +. $anaging the !.". Economy ). &iscal 'olicies /. $onetary 'olicies / !ECURE OU!"NE ". he C#ncept #$ Business and the C#ncept #$ %r#$it &Use %#wer%#int 1.'.( - business is an organization that provides goods and services to earn profits. %r#$its are the difference between a business7 revenues and expenses. ). C#nsumer Ch#ice and *emand In a capitalistic system like that of the !nited "tates, consumers have freedom of choice. In turn, businesses must take into account consumer demand in their pursuit of profits. B. Opp#rtunity and Enterprise !nmet consumer demands provide promising opportunities for potential business success. C. +ua,ity #$ !i$e 8ew forms of technology, service businesses, and international opportunities keep production, consumption, and employment growing indefinitely, creating a healthy business climate that contributes directly to our %uality of life. N#tes- .................................................................. .................................................................. .................................................................. "". he U.S. Ec#n#mic System -n ec#n#mic system is a nation7s system for allocating its resources among its individual citizens and organizations. ). Fact#rs #$ %r#ducti#n &Use %#wer%#int 1./.( - basic difference between economic systems is the way in which they manage their resources, known as $act#rs #$ pr#ducti#n. 1. !ab#r. he human resource element in businesses, ,ab#r includes the physical and intellectual contributions people make while engaged in economic production. 0 0. Capita,. he financial resources needed to operate an enterprise are known as capita,. 1. Entrepreneurs. -n entrepreneur is an individual who accepts the risks and opportunities entailed by creating and operating a new business. '. %hysica, Res#urces. he tangible things that organizations use to conduct their business are physica, res#urces. /. "n$#rmati#n Res#urces. Businesses rely on in$#rmati#n res#urces, such as market forecasts, the specialized knowledge of people, and economic data. B. ypes #$ Ec#n#mic Systems &Use %#wer%#int 1.23 1.43 1.53 1.63 1.17.( Economic systems vary, depending on how the factors of production are managed. 1. %,anned Ec#n#mies. hese systems rely on partial or total government control of the factors of production. 9ith c#mmunism, as currently operating in +uba, 8orth :orea, and the 'eople7s 2epublic of +hina ; all sources of production are owned and operated by the government. 0. 8ar9et Ec#n#mies. 'roducers and consumers control production and allocation decisions through supply and demand. a. "nput and Output 8ar9ets. &irms buy resources from households in an input mar9et< firms supply goods and services in response to household demand in an #utput mar9et. b. Capita,ism. he political basis of a market economy is capita,ism, which sanctions the private ownership of the factors of production and encourages entrepreneurship by offering profits as incentives. c. 8i:ed 8ar9et Ec#n#mies. his type of economy features characteristics of both planned and market economies< many countries are moving from planned systems to mixed market 1 systems through privati;ati#n, which involves the transformation of government=controlled businesses into privately owned enterprises. d. S#cia,ism. In this partially planned system, the government owns and operates selected ma>or industries. N#tes- .................................................................. .................................................................. .................................................................. """. he Ec#n#mics #$ a 8ar9et System &Use %#wer%#int 1.11.( $arket systems allow businesses the flexibility to decide what to produce, how much to produce, and what price to charge< customers are a driving force in market systems since they decide what to buy and at what price. #emand and supply are the predominant forces that guide decisions about what to buy and what to sell. ). *emand and Supp,y in a 8ar9et Ec#n#my Billions of exchanges take place every day between businesses and individuals< between businesses< and among individuals, businesses, and governments. Exchanges conducted in one area often affect exchanges elsewhere. B. he !aws #$ *emand and Supp,y &Use %#wer%#int 1.10 < 1.12.( *emand is the willingness and ability of buyers to purchase a product< supp,y is the willingness and ability of producers to offer a good or service for sale. he ,aw #$ demand states that buyers will purchase more of a product as its price drops< the ,aw #$ supp,y states that producers will offer more of a product for sale as its price increases. 1. he *emand and Supp,y Schedu,e. he demand and supp,y schedu,e indicates how much of a product will be sold at various prices. 0. *emand and Supp,y Curves. - demand curve shows how many products will be demanded at different prices< a supp,y curve shows how many products will be 3 supplied at various prices. he point at which the curves intersect is the e=ui,ibrium price. 1. Surp,uses and Sh#rtages. 9ith a surp,us, the %uantity supplied exceeds the %uantity demanded< %uantity demanded exceeds %uantity supplied with a sh#rtage. C. %rivate Enterprise and C#mpetiti#n in a 8ar9et Ec#n#my &Use %#wer%#int 1.143 1.15.( Individuals pursue their own interests with minimal government restriction in a private enterprise system< such a system re%uires private property rights, freedom of choice, profits, and competition. C#mpetiti#n occurs when two or more businesses vie for the same resources or customers. *. *egrees #$ C#mpetiti#n &Use %#wer%#int 1.16.( Economists have identified four degrees of competition in a private enterprise system. 1. %er$ect C#mpetiti#n. $any small firms exist in an industry< no single firm is powerful enough to influence price. 0. 8#n#p#,istic C#mpetiti#n. &ew sellers but many buyers exist, so buyers focus on numerous differentiation strategies, such as brand names, design, and advertising. 1. O,ig#p#,y. -n industry has only a handful of sellers< market entry is difficult because large capital investment is needed. '. 8#n#p#,y. -n industry or market has only one producer< that producer en>oys complete control over price. N#tes- .................................................................. .................................................................. .................................................................. ">. Understanding Ec#n#mic %er$#rmance wo goals of the !.". economic system are ec#n#mic gr#wth and ec#n#mic stabi,ity. ). Ec#n#mic ?r#wth &Use %#wer%#int 1.073 1.01.( ? Economic growth can be measured with the following tools: 1. )ggregate Output and Standard #$ !iving. )ggregate #utput is the total %uantity of goods and services produced by an economic system during a given period< an increase in the amount of goods and services that consumers can purchase with their currency represents an increase in the standard #$ ,iving. 0. ?r#ss *#mestic %r#duct &?*%(. he ?*% is the total value of all goods and services produced within a given period through domestic factors of production< (#' is a measurement of aggregate output. 1. %r#ductivity. %r#ductivity compares how much a system produces with the resources needed to produce it< increases in productivity yield increases in the standard of living. a. Ba,ance #$ rade. his represents the difference between a country7s imports and exports. - favorable balance results when the value of a country7s exports is greater than its imports< that is, more money is flowing into the country as a result of exporting. b. Nati#na, *ebt. - country7s nati#na, debt is the amount of money that is owed to creditors. he !nited "tates has been spending more money than what it has taken in, creating a budget deficit. B. Ec#n#mic Stabi,ity &Use %#wer%#int 1.003 1.013 1.0'.( Stabi,ity results when the amount of money available in an economic system and the %uantity of goods and services produced in it are growing at about the same rate. 1. "n$,ati#n. "n$,ati#n occurs when widespread price increases plague an economic system< the amount of money in the economic system exceeds the amount of actual output. Inflation can be measured by the c#nsumer price inde: &C%"(, which weighs prices of typical products purchased by consumers living in urban areas. @ 0. Unemp,#yment. Unemp,#yment is the level of >oblessness among people actively seeking work in an economic system< when unemployment is high, a surplus of available workers exists. !nemployment is sometimes a symptom of a recessi#n, when aggregate output declines, or of a depressi#n, a prolonged and deep recession. C. 8anaging the U.S. Ec#n#my &Use %#wer%#int 1.0/.( 1. Fisca, %#,icies. Fisca, p#,icies manage the collection and spending of revenues< tax increases can function as fiscal policies. 0. 8#netary %#,icies. 8#netary p#,icies focus on controlling the size of the nation7s money supply. he government can influence banks to lend money< it can also influence the supply of money by manipulating interest rates. N#tes- .................................................................. .................................................................. .................................................................. )nswers t# +uesti#ns and E:ercises +uesti#ns $#r Review 1. @hat are the $ive $act#rs #$ pr#ducti#nA "s #ne $act#r m#re imp#rtant than the #thersA "$ s#3 which #neA @hyA he five factors of production are labor, capital, entrepreneurs, physical resources, and information resources. -ll five factors are crucial. Aowever, their relative importance depends on the product and the industry. In the software development business, for example, skilled labor and information resources are especially important, but the business could not survive without capital and physical resources, and it would not have been launched without an entrepreneur. 0. @hat is a demand curveA ) supp,y curveA @hat is the term $#r the p#int at which they intersectA - demand curve shows how many products will be purchased at different prices. - supply curve shows how many products will be offered for sale at different prices. #emand increases as price decreases< whereas, supply B increases as price increases. 9hen both curves are plotted on the same graph, the point at which they intersect is the e%uilibrium price< this is the price at which the %uantity of goods demanded and the %uantity of goods supplied are e%ual. 1. @hat is ?*%A Rea, ?*%A @hat d#es each measureA (#' is gross domestic product, and it measures the total value of all goods and services produced in a year by a nation7s economy through domestic factors of production. 2eal (#' is (#' ad>usted for inflation. Both measure annual performance of a given economy. '. @hy is in$,ati#n b#th g##d and badA B#w d#es the g#vernment try t# c#ntr#, itA Inflation is both good and bad because it can lead to a spiral of rising wages chasing rising prices, which decreases the standard of living. It is good because at moderate levels, it can signal the beginning of a period of growth for the economy. $onetary policy, particularly the ability to ad>ust interest rates, is government7s most powerful tool to control inflation. +uesti#ns $#r )na,ysis /. "n recent years3 many c#untries have m#ved $r#m p,anned ec#n#mies t# mar9et ec#n#mies. @hy d# y#u thin9 this has #ccurredA Can y#u envisi#n a situati#n that w#u,d cause a resurgence #$ p,anned ec#n#miesA he failure of communism ; both politically and economically ; has led to an increase in the number of mixed and market economies. -nswers will vary as to what would cause a resurgence of planned economies, but the factors might include a failure of capitalism to effectively distribute society7s resources, or an unbearable level of crime and corruption. 2. Cite an instance in which a surp,us #$ a pr#duct ,ed t# decreased prices. Cite an instance in which a sh#rtage ,ed t# increased prices. @hat eventua,,y happened in each caseA @hyA -nswers will vary. Aowever, the recent 'okemon craze provides a good example of a shortage followed by a surplus. - few years ago, 'okemon trading cards were big up to astronomical levels, often )C=/C times the list price. 8ow, 'okemon cards and other products are selling for less than half price as stores attempt to clear out their excess inventory. In fact, any clearance sale illustrates the concept of surplus driving down prices. he classic example of a shortage driving prices up was the oil shortage of the )D@Cs. -nother example is scalpers selling concert tickets at inflated D prices. In all of these cases, the market eventually determines a price at which all the supply can be sold. 4. E:p,ain h#w current ec#n#mic indicat#rs such as in$,ati#n and unemp,#yment a$$ect y#u pers#na,,y. E:p,ain h#w they wi,, a$$ect y#u as a manager. -nswers will vary, but all students should obviously include prices paid for consumer goods and the availability of desirable >obs. $anagers are affected by inflation because it tends to drive up the wages they must pay, and by unemployment because it affects their ability to find workers. -lso, both inflation and unemployment affect consumer and industrial demand, which play a key role in management. 5. )t $irst g,ance3 it might seem as th#ugh the g#a,s #$ ec#n#mic gr#wth and stabi,ity are inc#nsistent with #ne an#ther. B#w can y#u rec#nci,e this apparent inc#nsistencyA - nation7s economic growth can be measured through its aggregate output, resulting standard of living, gross domestic product, and productivity. Each of these elements can directly impact each other. Economic stability, on the other hand, refers to the condition in which the amount of money available in an economic system and the %uantity of goods and services produced in it are growing at the same rate. )pp,icati#n E:ercises 6. >isit a ,#ca, sh#pping ma,, #r sh#pping area. !ist each st#re that y#u see and determine what degree #$ c#mpetiti#n it $aces in the immediate envir#nment. F#r e:amp,e3 i$ there is #n,y #ne st#re in the ma,, that se,,s sh#es3 that st#re represents a m#n#p#,y. N#te the businesses with direct c#mpetit#rs &e.g. tw# jewe,ry st#res( and describe h#w they c#mpete with #ne an#ther. -nswers will vary. "tudents should focus on the criteria for competition discussed in the chapter. 17. "nterview a business #wner #r seni#r manager. )s9 this individua, t# describe $#r y#u the $#,,#wing things- &1( what business $uncti#ns3 i$ any3 he #r she #uts#urcesC &0( whether #r n#t he #r she is $#cusing m#re attenti#n #n business pr#cess managementC and &1( h#w the events #$ September 113 07713 have a$$ected his #r her w#r9. "tudents7 answers will vary. "tudents will learn that operations for customized products are less likely to be outsourced than those of standardized products. In addition, the effects of "eptember )) on )C businesses geographically distant from 8ew Eork may have been more directly felt by their customers or suppliers nearer to 8ew Eork, though businesses across the country and around the world felt the economic repercussions of the event. )nswers t# E:ercising D#ur Ethics 1. @hat are the r#,es #$ supp,y3 demand3 and c#mpetiti#n in this scenari#A "ince prescription drugs are essentially the same regardless of the supplier, the market has determined an e%uilibrium price at which supply and demand are e%ual. +ompetition keeps the price in check. *ne or the other of the pharmacies could raise its prices only if it offered additional services that differentiated its products enough that consumers were willing to pay extra. Aowever, the owner of the competing pharmacy needs to keep in mind that if he raises prices too high, other suppliers will find a way into the market. 0. @hat are the under,ying ethica, issuesA he success of our economic system is based on competition and choice. By engaging in collusion the pharmacy owners are inhibiting the fair operation of the market. his is especially ugly, given that for many people prescription drugs are crucial to achieving or maintaining health. By colluding, the pharmacy owners would be forcing the weakest residents of the town to pay exorbitant prices, at least in the short term. 1. @hat w#u,d y#u d# i$ y#u were actua,,y $aced with this situati#nA -nswers will vary, but students should at least acknowledge the ethical issues. )nswers t# Bui,ding D#ur Business S9i,,s 1. *iscuss the r#,e that vari#us inducements #ther than price might p,ay in a$$ecting demand and supp,y in this mar9et. "uppliers who provide extras such as email, web pages, chat rooms, instant messaging, news, weather, travel directions, shopping networks, etc. will be able to pump up demand. In order to provide these additional services, suppliers will need to invest in the necessary technology, e%uipment, and staff. hey would do well to focus their spending on those extras that would create loyalty, making it more difficult for consumers to change services based on price alone. )) 0. "s it a,ways in a c#mpanyEs best interest t# $eature the ,#west pricesA 8o, not when competition is based on speed of delivery, %uality of goods or services, wide selection, personalized service, premium image, or some other non=monetary factor. 1. Eventua,,y3 what $#rm #$ c#mpetiti#n is ,i9e,y t# characteri;e this mar9etA It may be difficult to speculate. "tudents7 answers will vary. C,assr##m )ctivities ). -sk each student to identify three or four businesses in his or her community. hen ask each student to identify the degree of competition, as discussed in class, which is associated with each business. "tudents should also identify the number of immediate competitors, the ease of entry into the market, the similarity of goods and services offered by each business, and the level of control each business has over price. /. $any mixed andFor planned economies have adopted elements of capitalism in recent years. -sk students to research one such country and discuss the changing focus on the elements of private enterprise ; private property rights, freedom of choice, profits, and competition ; after the transition in the country. Aungary, 'oland, the former "oviet !nion, and the +zech 2epublic are a few suggestions to consider. )/