copyright ©2002 prentice hall, inc. part 1........................ introducing the contemporary...
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Copyright ©2002 Prentice Hall, Inc.Copyright ©2002 Prentice Hall, Inc.
PART 1 . . . . . . . . . . . . . . . . . . . . . . . .Introducing the Contemporary Business Environment
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Chapter 1Chapter 1
Understanding the U.S. Business
System
Understanding the U.S. Business
System
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Outline
The Concept of Business and the Concept of Profit
Economic Systems Around the World
The U.S. Economic System
Evaluating Economic Systems
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Learning Objectives After reading this chapter, you should be able to:
Define the nature of U.S. business and identify its main goals.
Describe different types of global economic systems by how they control the factors of production through input and output markets.
Show how demand and supply affect resource distribution in the United States.
Identify the elements of private enterprise and explain the various degrees of competition in the U.S. economic system.
Explain the criteria for evaluating the success of an economic system in meeting its goals and show how the federal government attempts to manage the U.S. economy.
Discuss the current economic picture in the United States and summarize expert opinions about its future.
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The Concept of Business and the Concept of Profit
Business
An organization that provides goods or services to earn profits
Profits
The difference between a business’s revenues and its expenses
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Economic Systems Around the World
Economic SystemA nation’s system for allocating its resources among its citizens
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Factors of Production
Resources used in the production of goods and services
Resources used in the production of goods and services
Four traditional factors of production:
1. Natural Resources
2. Labor
3. Capital
4. Entrepreneurs
Newer perspectives include:
5. Physical Resources
6. Information Resources
Newer perspectives include:
5. Physical Resources
6. Information Resources
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Factors of Production
Natural Resources
Materials supplied by nature (such as land, water, mineral deposits, and trees)
Labor (or Human Resources)
Physical and mental capabilities of people as they contribute to economic production
Capital
Funds needed to create and operate a business enterprise
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Factors of Production
Entrepreneur
Person who starts a new business or makes the decisions that expand a small business
Physical Resources
Tangible things organizations use in the conduct of their business
Information Resources
Data and other information used by a business
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Types of Economic Systems
Planned Economy
Centralized government controls all or most factors of production and makes all or most production and allocation decisions
Market Economy
Individuals control production and allocation decisions through supply and demand
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Planned Economies
Communism Planned economic system in which the government owns and operates all major sources of production
SocialismPlanned economic system in which the government owns and operates selected major sources of production
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Market EconomiesMarket
Mechanism for exchange between buyers and sellers of a particular good or service
Input Market Firms buy resources from supplier households
Output Market Firms supply goods and services in response to demand on the part of households
CapitalismMarket economy that provides for private ownership of production and encourages entrepreneurship by offering profits as an incentive
“Pure Market Economy”
1-13
OUTPUT MARKETSGoods
Services
INPUT MARKETSLabor
CapitalEntrepreneurs
Physical ResourcesInformation Resources
HOUSEHOLDS• Demand products in
output markets• Supply resources in
input markets
FIRMS• Supply products in
output markets• Demand resources
in input markets
DEMANDDEMAND
DEMANDDEMAND SUPPLYSUPPLY
SUPPLYSUPPLY
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Mixed Market Economies
PrivatizationProcess of converting government enterprises into privately owned companies
SocialismPlanned economic system in which the government owns and operates only selected major sources of production
Economic system featuring characteristics of both planned and market economies Economic system featuring characteristics of both planned and market economies
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The U.S. Economic System
Understanding the complex nature of the U.S. economic system is essential to understanding the
environment in which U.S. businesses operate.
Understanding the complex nature of the U.S. economic system is essential to understanding the
environment in which U.S. businesses operate.
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Markets, Demand, & Supply
DemandThe willingness and ability of buyers to purchase a good or service
SupplyThe willingness and ability of producers to offer a good or service for sale
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The Laws of Demand & Supply
Law of DemandPrinciple that buyers will purchase (demand) more of a product as its price drops and less as its price increases
Law of SupplyPrinciple that producers will offer (supply) more of a product for sale as its price rises and less as its price drops
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The Laws of Demand & Supply
Demand and Supply ScheduleAssessment of the relationships between different levels of demand and supply at different price levels
Demand CurveGraph showing how many units of a product will be demanded (bought) at different prices
Supply CurveGraph showing how many units of a product will be supplied (offered for sale) at different prices
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The Laws of Demand & Supply
Market Price (or Equilibrium Price)Profit-maximizing price at which the quantity of goods demanded and the quantity of goods supplied are equal
SurplusSituation in which quantity supplied exceeds quantity demanded
ShortageSituation in which quantity demanded exceeds quantity supplied
Demand and Supply Schedules
Quantity of Quantity ofPrice Pizzas Demanded Pizzas Supplied
$2 2000 100$4 1900 400$6 1600 600$8 1200 800
$10 1000 1000$12 800 1200$14 600 1300$16 400 1600$18 200 1800$20 100 2000
Demand & Supply
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Demand & Supply
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Demand & Supply
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Demand & Supply
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Pri
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Equilibrium Price
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Private Enterprise
Economic system that allows individuals to pursue their own interests without
undue governmental restriction
Economic system that allows individuals to pursue their own interests without
undue governmental restriction
Four elements of private enterprise:
1. Private Property Rights
2. Freedom of Choice
3. Profits
4. Competition
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Private EnterprisePrivate Property Rights
The right to buy, own, use, and sell almost any form of property
Freedom of ChoiceThe right to sell your labor to the employer you choose, purchase products you want to buy, choose what to produce or who to hire, etc.
ProfitsAnticipated profits play a large part in individuals’ choices of what goods or services to produce
CompetitionVying among businesses for the same resources or customers
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Degrees of Competition
Pure CompetitionMarket or industry characterized by numerous small firms producing an identical product
Monopolistic CompetitionMarket or industry characterized by numerous buyers and relatively numerous sellers trying to differentiate their products from those of competitors
Oligopoly Market or industry characterized by a handful of (generally large) sellers with the power to influence the prices of their products
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Degrees of Competition
MonopolyMarket or industry in which there is only one producer, which can therefore set the prices of its products
Natural Monopoly
Industry in which one company can most efficiently supply all needed goods or services
Natural Monopoly
Industry in which one company can most efficiently supply all needed goods or services
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Evaluating Economic Systems
Nearly every economic system has three broad goals:
Stability
Full Employment
Growth
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Economic GoalsStability
Condition in which the balance between the money available in an economy and the goods produced in it are growing at about the same rate
InflationPhenomenon of widespread price increases throughout an economic system
RecessionPeriod characterized by decreases in employment, income, and production
DepressionParticularly severe and long-lasting recession
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Economic Goals
Full EmploymentEveryone who wants to work has an opportunity to do so
UnemploymentLevel of joblessness among people actively seeking work
Knowledge WorkersSkilled employees in high-tech industries
GrowthIncrease in the amount of goods and services produced by a nation’s resources
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Assessing Economic Performance
Gross National Product (GNP)The value of all goods and services produced by an economic system in a year regardless of where the factors of production are located
Real Gross National Product (real GNP)Gross national product adjusted for inflation and changes in the value of a country’s currency
Gross Domestic Product (GDP)The value of all goods and services produced in a year by a nation’s economy through domestic factors of production
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Assessing Economic Performance
ProductivityMeasure of economic growth that compares how much a system produces with the resources needed to produce it
Balance of TradeThe difference between a country’s exports to and imports from other counties
Budget DeficitSituation in which a government body spends more money than it takes in
National DebtTotal amount that a nation owes its creditors
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Managing the U.S. Economy
Fiscal PoliciesGovernment economic policies that determine how the government collects and spends its revenues
Monetary PoliciesGovernment economic policies that determine the size of a nation’s money supply
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The Global Economy in the 21st Century
The United States is riding the crest of a long-term economic boom. Growth has been strong, and unemployment and inflation remain low.
The United States is riding the crest of a long-term economic boom. Growth has been strong, and unemployment and inflation remain low.
What forces will drive the economy for the next decade?What forces will drive the economy for the next decade?
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Three Major Forces
1. The information revolution will continue to enhance productivity across all sectors of the economy, but most notably in such information-dependent industries as finance, media, and wholesale and retail trade.
2. New technological breakthroughs in such areas as biotechnology will create entirely new industries.
3. Increasing globalization will create much larger markets while also fostering tougher competition among global businesses; as a result, companies will need to focus even more on innovation and cost cutting.
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Projected Trends & Patterns1. The economy will maintain strong and consistent
growth rates, perhaps exceeding 3 percent per year. New technological breakthroughs in such areas as biotechnology will create entirely new industries.
2. Inflationary surges and large budget deficits will become less likely.
3. Countries that encourage free trade, innovation, and open financial systems will prosper.
4. The most successful businesses will be those that are able most effectively to master new technologies and keep abreast of their competitors.