Ebert Ch01 Instru

1
The Contemporary Business World
Business Essentials
Ronald J. Ebert Ricky W. Griffin
6e
1 THE U.S. BUSINESS ENVIRONMENT

2007 Prentice Hall, Inc. All rights reserved. PowerPoint Presentation by Charlie Cook The University of West Alabama
LEARNING OBJECTIVES After reading this chapter, you should be able to:
1. Define the nature of U.S. business and identify its
main goals and functions.

2. Describe the external environments of business and
discuss how these environments affect the success or failure of any organization.
3. Describe the different types of global economic
systems according to the means by which they control the factors of production.
4. Show how markets, demand, and supply affect
resource distribution in the United States.
2007 Prentice Hall, Inc. All rights reserved.
12
L E A R N I N G O B J E C T I V E S (contd) After reading this chapter, you should be able to:

5. Identify the elements of private enterprise and explain
the various degrees of competition in the U.S. economic system.

6. Explain the importance of the economic environment
to business and identify the factors used to evaluate the performance of an economic system.
13
What in It for Me?

By understanding these economic forces and how they interact, youll be better able to:
1. Appreciate how managers must contend with the
challenges and opportunities resulting from economic forces from the standpoint of an employee and a manager or business owner
2. Understand why prices fluctuate from the
perspective of a consumer
14
Basic Business Concepts

Business
An organization that provides goods or services that are then sold to
earn profits.
Profits
The difference between a businesss revenues and its expenses. The
rewards owners get for risking their money and time.
Consumer Choice and Demand

The freedom of consumers to choose how to satisfy their wants and
needs.
The freedom of business owners to decide how to meet those wants
and needs.
Opportunity and Enterprise

Success in business requires spotting a promising opportunity and
then developing a good plan for capitalizing on it.
15
Basic Business Concepts (contd)

The Benefits of Business
Provision of goods and services Employment of workers Innovation and opportunities Increased quality of life and standard of living Enhance personal incomes of owners and
stockholders
Tax payments support government Support for charities and community leadership
16
The External Environments of Business

External Environment
Everything outside an organizations boundaries that
might affect it
the domestic business environment

the global business environment the technological environment the political-legal environment the sociocultural environment the economic environment
17
The External Environment (contd)

Domestic Business Environment
The environment in which a firm conducts its
operations and derives its revenues by:
Seeking to be close to its customers

Establishing strong relationships with its suppliers Distinguishing itself from its competitors
18

Global Business Environment
The international forces that affect a business:

International trade agreements International economic conditions Political unrest International market opportunities
Suppliers
Cultures Competitors
Currency values
19

Technological Environment
All the ways by which firms create
value for their constituents:
Human knowledge
Work methods Physical equipment
Electronics and telecommunications

Various business activity processing systems
110

Political-Legal Environment
The regulatory relationship between business and
the government (legal system) and its agencies that define what organizations can and cant do:

Product identification laws Local zoning requirements Advertising practices Safety and health considerations Acceptable standards of business conduct
Pro- or anti-business sentiment in government and
political stability are also important considerations, especially for international firms.
2007 Prentice Hall, Inc. All rights reserved. 111

Sociocultural Environment
The customs, mores, values, and demographic
characteristics of the society in which an organization functions

Sociocultural processes determine the goods and
services and standards of business conduct a society is likely to accept
112

Economic Environment
The relevant conditions that exist in the economic
system in which a company operates

Example:
If an economy is doing well enough that most people have jobs, a growing company may find it necessary to pay higher wages and offer more benefits in order to attract workers from other companies. If many people in an economy are looking for jobs, a firm may be able to pay less and offer fewer benefits.
113
Economic Systems
Economic System
A nations system for allocating its resources among
its citizens, both individuals and organizations
Factors of Production
Labor: Human resources Capital: Financial resources
Entrepreneurs: Persons who risk starting a business

Physical resources: Tangible things used to conduct
business
Information resources: Data and other information
used by businesses
Types of Economic Systems

Planned Economy
A centralized government controls all or most factors
of production and makes all or most production and allocation decisions for the economy.
Market Economy
Individual producers and consumers control
production and allocation by creating combinations of supply and demand.
Market
A mechanism of exchange between buyers and
sellers of a good or service.
115
Planned Economies
Communism
A system Karl Marx envisioned in which individuals
would contribute according to their abilities and receive benefits according to their needs.
The government owns and operates all factors of production. The government assigns people to jobs and owns all businesses and controls business decisions.
116
Market Economies
Capitalism
The government supports private ownership and encourages
entrepreneurship. Individuals choose where to work, what to buy, and how much to pay. Producers choose who to hire, what to produce, and how much to charge.
Mixed Market Economy

Features characteristics of both planned and market economies
Privatization: The process of converting government
enterprises into privately owned companies.

Socialism: The government owns and operates select major
industries such as banking and transportation. Smaller businesses are privately owned.
The Economics of Market Systems

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 good or
service for sale.
The Laws of Demand and Supply

Demand: Buyers will purchase (demand) more of a product as
its price drops and less of a product as its price increases.

Supply: Producers will offer (supply) more of a product for sale
as its price rises and less of a product as its price drops.
118
Demand and Supply

Demand and Supply Schedule
The relationships among different levels of demand
and supply at different price levels as obtained from marketing research, historical data, and other studies of the market.
Demand curve: How much product will be demanded (bought) at different prices.
Supply curve: How much product will be supplied (offered for sale) at different prices.
Market price (equilibrium price): The price at which the quantity of goods demanded and the quantity of goods supplied are equal.
119
FIGURE 1.2
Demand and Supply
120
FIGURE 1.2
Demand and Supply (contd)
121
Surpluses and Shortages

Surplus
A situation in which the quantity supplied exceeds
the quantity demanded
Causes losses
Shortage
A situation in which the quantity demanded will be
greater than the quantity supplied

Causes lost profits Invites increased competition
122
Private Enterprise in a Market Economy

Private Enterprise System
Allows individuals to pursue their own interests with
minimal government restriction.
Elements of a Private Enterprise System

Private property rights Freedom of choice
Profits
Competition
123
Degrees of Competition
Perfect Competition
Prices are determined by supply and demand
because no single firm is powerful enough to influence the price of its product.
All firms in an industry are small. The number of firms in the industry is large.
Principles of perfect competition:

Buyers view all products as identical. Buyers and sellers know the prices that others are paying and receiving in the marketplace. It is easy for firms to enter or leave the market. Prices are set exclusively by supply and demand and accepted by both sellers and buyers.
Degrees of Competition (contd)

Monopolistic Competition
There are numerous sellers trying to differentiate
their products from those of competitors so as to have some control over price.
There are many sellers though fewer than in pure
competition.
Sellers can enter or leave the market easily. The large number of buyers relative to sellers applies
potential limits to prices.
125

Oligopoly
An industry with only a few large sellers Entry by new competitors is hard because large
capital investment is needed.

The actions of one firm can significantly affect the
sales of every other firm in the industry.

The prices of comparable products are usually
similar.
As the trend toward globalization continues, most
experts believe that oligopolies will become increasingly prevalent.


Monopoly
An industry or market that has only one producer (or
else is so dominated by one producer that other firms cannot compete with it).
The sole supplier enjoys complete control over the prices of its products; its only constraint is a decrease in consumer demand due to increased prices.
Natural monopolies: Industries in which one firm
can most efficiently supply all needed goods or services; typically allowed and regulated by legislated acts and governmental agencies.
Example: Electric company

127
Economic Indicators
Economic Indicators
Statistics that show whether an economic system is
strengthening, weakening, or remaining stable

Measure key goals of the U.S. economic system:
economic growth and economic stability

Economic growth indicators
Aggregate output, standard of living, gross domestic product, and productivity
Economic stability indicators
Inflation and unemployment
128
Economic Growth, Aggregate Output, and Standard of Living

Business Cycle
The pattern of short-term ups and downs (or, better,
expansions and contractions) in an economy.
Aggregate Output
Growth during the business cycle is measured by the
total quantity of goods and services produced by an economic system during a given period.
Standard of Living
The total quantity and quality of goods and services
that consumers can purchase with the currency used in their economic system.
Economic Indicators
Gross Domestic Product (GDP)
An aggregate output measure of the total value of all
goods and services produced within a given period by a national economy through domestic factors of production.
If GDP is going up, aggregate output is going up; if aggregate output is going up, the nation is experiencing economic growth.
Gross National Product (GNP)

The total value of all goods and services produced
by a national economy within a given period regardless of where the factors of production are located.
Economic Indicators (contd)

Real Growth Rate
The growth rate of GDP adjusted for inflation and
changes in the value of the countrys currency
Growth depends on output increasing at a faster rate than population.
Real GDP
GDP that has been adjusted to account for changes
in currency values and price changes.
131
Economic Indicators (contd)

Nominal GDP
GDP measured in current dollars or with all
components valued at current prices.
GDP per Capita

A reflection of the standard of living: GDP per capita
means GDP per person. It is a better measure than GDP itself of the economic well-being of the average person.
132
Growth in the Economic System (contd)

Purchasing Power Parity
The principle that exchange rates are set so that the
prices of similar products in different countries are about the same. Indicates what people can buy with the financial resources allocated to them by their respective economic systemsa better sense of standards of living across the globe.
133
FIGURE 1.4
Purchasing Power Parity: The Big Mac Index
134

Productivity
A measure of economic growth that compares how
much a system produces with the resources needed to produce it.
If more product is produced with fewer factors of production, the price of the product decreases. The standard of living in an economy improves through increases in productivity.
135

Balance of Trade
The economic value of all the products a country
exports minus the economic value of its imported products.

Positive
balance of trade: When a country exports (sells to other countries) more than it imports (buys from other countries).
Negative
balance of trade: When a country imports more than it exports. Commonly called a trade deficit.
136
FIGURE 1.5
Balance of Trade
How does a trade deficit affect economic growth?

The deficit exists because the amount of money spent on foreign products has not been paid in full. In effect, therefore, it is borrowed money, and borrowed money costs more money in the form of interest. The money that flows out of the country to pay off the deficit cannot be used to invest in productive enterprises, either at home or overseas.
137

National Debt
The amount of money that the
government owes its creditors.
Financed by borrowing in the form of bonds: Securities through which the government promises to pay buyers certain amounts of money by specified future dates.
Government competition with potential borrowers for available loan money reduces private borrowing for investment that would increase productivity.
138

Stability
A condition in which the amount of money available
in an economic system and the quantity of goods and services produced in it are growing at about the same rate.
Inflation
Inflation occurs when the amount of money injected
into an economy exceeds the increase in actual output, resulting in price increases exceeding purchasing power increases.
Inflation rate: The percentage change in a price index such as the CPI.
139

Consumer Price Index (CPI)
A measure of the prices of typical products
purchased by consumers living in urban areas
Compared against base periodan arbitrarily selected time period against which other time periods are compared.
140

Unemployment
The level of joblessness among people actively
seeking work in an economic system
Low unemploymenta shortage of labor available for businesses to hire; results in higher wages.
Higher wages reduce hiring, which increases unemployment; results in lower wages.
Cyclical Unemployment
Businesses continuing to eliminate jobs during a
business cycle downturn cause more reduced revenues and further job losses.
141

Recession
A period during which aggregate output, as
measured by real GDP, declines
Depression
A prolonged and deep recession
142
Managing the U.S. Economy

Fiscal Policy
The ways in which a government collects and spends revenues Tax rates can play an important role in fiscal policy
Monetary Policy
The manner in which a government controls its money supply Working mainly through the Federal Reserve System, the
government can influence banks willingness to lend money and prompt interest rates to go up or down.
Stabilization Policy
Coordinating fiscal and monetary policies to smooth fluctuations
in output and unemployment and to stabilize prices.
143
KEY TERMS
aggregate output balance of trade business business cycle capital capitalism communism competition consumer price index demand demand and supply schedule demand curve depression domestic business environment
economic environment economic indicators economic system entrepreneur external environment factors of production fiscal policies global business environment gross domestic product (GDP) gross national product (GNP) inflation information resources labor (human resources) law of demand
144
K E Y T E R M S (contd)
law of supply market market economy market price (equilibrium price) mixed market economy monetary policies monopolistic competition monopoly national debt natural monopoly nominal GDP oligopoly perfect competition physical resources
planned economy political-legal environment private enterprise privatization productivity profits purchasing power parity real GDP recession shortage socialism sociological environment stability stabilization policy
145
K E Y T E R M S (contd)
standard of living supply supply curve surplus technological environment unemployment
146

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1

The Contemporary Business World

1 THE U.S. BUSINESS ENVIRONMENT

main goals and functions.

resource distribution in the United States.

2007 Prentice Hall, Inc. All rights reserved.

L E A R N I N G O B J E C T I V E S (contd) After reading this chapter, you should be able to:

the various degrees of competition in the U.S. economic system.

2007 Prentice Hall, Inc. All rights reserved.

What in It for Me?

2007 Prentice Hall, Inc. All rights reserved.

Basic Business Concepts

rewards owners get for risking their money and time.

Consumer Choice and Demand

Opportunity and Enterprise

then developing a good plan for capitalizing on it.

2007 Prentice Hall, Inc. All rights reserved.

Basic Business Concepts (contd)

2007 Prentice Hall, Inc. All rights reserved.

The External Environments of Business

the domestic business environment

2007 Prentice Hall, Inc. All rights reserved.

The External Environment (contd)

operations and derives its revenues by:

Seeking to be close to its customers

2007 Prentice Hall, Inc. All rights reserved.

The External Environment (contd)

2007 Prentice Hall, Inc. All rights reserved.

The External Environment (contd)

value for their constituents:

Electronics and telecommunications

2007 Prentice Hall, Inc. All rights reserved.

The External Environment (contd)

Pro- or anti-business sentiment in government and

The External Environment (contd)

characteristics of the society in which an organization functions

services and standards of business conduct a society is likely to accept

2007 Prentice Hall, Inc. All rights reserved.

The External Environment (contd)

system in which a company operates

2007 Prentice Hall, Inc. All rights reserved.

its citizens, both individuals and organizations

Entrepreneurs: Persons who risk starting a business

Types of Economic Systems

production and allocation by creating combinations of supply and demand.

sellers of a good or service.

2007 Prentice Hall, Inc. All rights reserved.

2007 Prentice Hall, Inc. All rights reserved.

Mixed Market Economy

enterprises into privately owned companies.

The Economics of Market Systems

service for sale.

The Laws of Demand and Supply

its price drops and less of a product as its price increases.

as its price rises and less of a product as its price drops.

2007 Prentice Hall, Inc. All rights reserved.

Demand and Supply

2007 Prentice Hall, Inc. All rights reserved.

Demand and Supply

2007 Prentice Hall, Inc. All rights reserved.

Demand and Supply (contd)

2007 Prentice Hall, Inc. All rights reserved.

Surpluses and Shortages

the quantity demanded