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Chapter 1 - Summary Business Essentials

 Perspectives of Business and Management (Syracuse University)

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Chapter 1

Four forces that affect gas prices: supply, demand, global trends, and uncertainty
I. Define the nature of a business, describe its external environments, and discuss how these
environments affect the success or failure of organizations
A. Business and Profit
1. Profits are the rewards owners get for risking their money and time and they have
the right to pursue their profits in whichever way they please
B. Consumer Choice and Demand
1. Businesses must take into account what consumers want bc if their good/service
isn’t in demand then the business will certainly fail
C. Opportunity and Enterprise
1. Running an effective business means to spot a promise opportunity and then
capitalize on it
D. The Benefits of Business
1. Businesses contribute to eh standard of living for a society
2. They create opportunities for others - jobs
E. The external environments of business
1. External environment​: everything outside an organization’s boundaries that
might affect it - major role in the success or failure of a business
2. How businesses influence their environment
a) Domestic business environment
(1) Where a firm conducts its operations and derives its revenues
(2) Must develop a close relationship with consumers and suppliers
while distinguishing themselves from their competitors
(a) EX. Urban outfitters
(i) Initially located near college campuses- now in
more upscale areas as well
(ii) Strong network of suppliers and it also a
wholesale supplier to other retailers
(iii) Has a clear identity which allows it to compete
effectively
b) Global business environment
(1) International forces that affect a business
(a) International trade agreements, international economic
conditions, political unrest, etc.
(b) EX. Political unrest Middle East 2013
(i) Oil prices began to surge
(ii) Companies took emergency measures to protect
their employees
c) Technological environment
(1) All the ways a firm and create value for their constituents - wtvr
makes the business more attractive

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(2) EX. Urban Outfitters

(a) Relies on information systems that track sales and
inventory levels to be highly responsive to customers
(b) Strong e-commerce sites
d) Political-legal environment
(1) Relationship bw businesses and government - in the form govt
regulation
e) Sociocultural environment
(1) Includes the customs, mores, values, and demographics of the
business’ society
(2) Determines the goods/services and standards of business conduct
a society will accept
f) Economic environment
(1) Conditions in the economic system
(a) EX. unemployment
(i) If unemployment is high companies will pay less
and the opposite
II. Describe the different types of global economic systems according to the means by which they
control the factors of production
A. Economic system: a nation’s system for allocating its resources among its citizens, both
individuals and organizations
B. Factors of Productions
1. FOP: a company’s resources
a) Labor
(1) People who work for a business - aka human resources
b) Capital
(1) Financial resources
c) ​Entrepreneurs
(1) A person who accepts the risks and opportunities
d) ​Physical resources
(1) Any goods a business needs in order to operate
(a) Natural resources, raw material, offices etc
e) Information resources
(1) Data and other information used by businesses
(a) Market forecasts, economic data, knowledge of people
C. Types of Economic Systems
1. Market economies
a) Ownership of both the FOP and the actual business is privately - owned
by entrepreneurs, individual investors and other businesses
b) Market:​ mechanism for exchange bw buyers and sellers
c) Rely on ​capitalism:​ the private ownership of FOP by offering profits as
incentives for entrepreneurship - based on supply and demand

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2. Planned economies
a) FOP and all businesses are owned or controlled by the govt
b) Communism​: govt owns and operates all FOP - makes all decisions
3. Mixed Market Economies
a) Most countries fall in between
b) Privatization:​ the process of converting govt enterprises into privately
owned companies
c) Socialism:​ govt owns and operates selected major industries
III. Show how markets, demand, and supply affect resource distribution in the US, identify the
elements of private enterprise, and explain the various degrees of competition in the US economic
system
A. Demand and Supply in a Market Economy
1. Consumers control supply and demand
B. The Laws of Supply and Demand
1. Demand:​ the willingness and ability of buyer to purchase a product
a) Law of demand:​ buyers will purchase more of a product as its price drops
and less of a product as its price increases (-)
b) Demand curve:​ shows how many products will be demanded at different
prices
2. Supply:​ the willingness and ability of producers to offer a product for sale
a) Law of supply:​ producers will offer more of a product when its price
rises and less of a product when its price drops (+)
b) Supply curve:​ shows how many pizzas will be supplied at different prices
3. Demand and supply schedule:​ obtained from marketing research, historical data,
and other studies of the market - reveal relationship among diff level of d&s at
different price levels
4. ​Market Price/Equilibrium price​: the point at which D&S intersect
a) The price at which quantity of goods supplies and demanded are equal
5. Surplus:​ when the quantity of goods supplied exceeds the quantity demanded
a) Company loses money - pushed prices downwards
6. Shortage:​ the quantity of demanded is more than the quantity supplies
a) Company loses money - bc it could not make those sales - but pushes
prices upward - but not enough to compensate for the loss of sales
C. Private Enterprise and Competition in a Market Economy
1. Private enterprise system​: allows individuals to pursue their own interests with
minimal govt restriction
a) Private property rights:
b) Freedom of choice
c) Profits
d) Competition

D. Degrees of Competition

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1. Perfect competition
a) All firms in an industry must be small
b) The number of firms in the industry must be large
(1) Products are identical
(2) Little control over prices - prices set exclusively by D&S
2. Monopolistic competition
a) Numerous sellers are trying to compete against each other with
SIMILAR products
b) Product differentiation gives sellers some control over price
3. Oligopoly
a) An industry has only a handful of sellers
b) More control than monopolistic competitive firms - but actions of one
firm severely affect the sale of every other firm in the industry
4. Monopoly
a) An industry has only one producer
b) Has complete control over prices
c) Natural Monopolies: industries in which one company can most
efficiently supply all products
IV. Explain the importance of the economic environment to business and identify the factors
used to evaluate the performance of an economic system
A. Economic Growth, Aggregate Output, and Standard of Living
1. Business Cycle: short-term ups and downs
2. Aggregate Output​: the total quantity of goods/services produced in a given period
a) The primary measure of growth in the business cycle
b) When aggregate output increase:
(1) Output per capita increase
(2) More of the goods that people want are supplied
(3) Standard of Living increases
(a) The total quantity and quality of goods ppl can purchase
B. Gross Domestic Product
1. GDP:​ total value of all products produced in a given period through domestic FOP
a) A measure of aggregate output - if one goes up so does the other (+)
2. Gross National Product GNP:​ the total value of all products produced in a given
period ​regardless of where the FOP are located
a) Offshore companies
3. Real Growth Rate
a) Real GDP​: has been adjusted for inflation and changes in the value of the
country’s currency
(1) Sometimes the price changes but aggregate output remains -
must adjust
b) Nominal GDP:​ hasn’t been adjusted
4. GDP per capita​: GDP per individual person
a) GDP/POP. = GDP per capita

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C. Purchase Power Parity​: exchange rates are set so that the prices of similar products in
different countries are about the same
1. Gives us a better sense of SOL across the globe
D. Productivity​: how much a system produces with its resources
1. SOL improves ​only ​through increases in productivity
2. Real GDP growth = growth in productivity
E. Balance of trade:​ exports - imports
1. Positive BOT​: exports more than imports
2. Negative BOT​: imports more than exports
a) Trade deficit
F. National Debt:​ 18.15 trillion increasing at a rate of 2.4 bill per day
1. Govt sells bonds(securities) to raise money
a) More money govt borrows (more bonds it sells) the less money is
available for the private borrowing and investment that increases
productivity
(1) Sells more bonds to combat inflation
G. Economic Stability
1. Stability:​ amount of money and quantity of goods produced are growing at the
same rate
H. Inflation:​ price increases - when amount of money exceeds the aggregate output
1. Consumer Price Index: measures how much ppl are willing to pay for products
2. Deflation: price cuts - economy is shrinking
I. Unemployment​: ppl actively seeking jobs
1. Unemployment increases- wages decrease - less ppl hired - less money in the
economy - prices decrease
2. Unemployment decreases- wages increase - prices increase - purchasing power
decreases
a) business higher fewer workers to combat high wages
b) Raise prices which decreases sales so they will cut back on hiring and
unemployment rises
3. Cyclical unemployment:​ ppl who are currently looking for a job due to a
reduction of labor
J. Recessions and Depressions
1. Recession​: when aggregate output decreases
a) Less labor- less output - lower prices
2. Depression​: prolonged and deep recession

K. Managing the US Economy

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1. Fiscal policies​: collection and spending of ​ revenues

a) Tax rates and Govt spending
(1) Expansionary​ - combat recession
(a) Increase govr spending, reduce taxes
(2) Contractionary​ - combat inflation
(a) Reduce govt’ spending, increase taxes
2. Monetary policies​: controlling money supply
a) Open market operations
(1) Discount rate
(a) interest rate set by FR for lending to other banks
(2) Reserve requirements
(a) the amount of money banks must keep on hand to
prevent them from loaning out too much
(3) buying and selling govt bonds
(a) Public loans money to govt at a variable or fixed IR
b) Expansionary:​ increase money supply - combat recession
(1) Decrease RR&DR, sell bonds
c) Contractionary:​ decreases money supply - combat inflation
(1) Increase RR&DR, buy bonds
3. Stabilization policy:​ govt policy to smooth out fluctuations in output and
unemployment and to stabilize prices

1. Define the nature of U.S. business, describe the external environments of business, and
discuss how these environments affect the success or failure of organizations.

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A ​business​ is an organization that sells goods or services to earn profits. The prospect of earning ​profits​,
the difference between a business’s revenues and expenses, encourages people to open and expand
businesses. Businesses produce most of the goods and services that Americans consume and employ most
working people. A healthy business environment supports innovation and contributes to the quality of life
and standard of living of people in a society.

The ​external environment​ of business refers to everything outside its boundaries that might affect it. Both
the ​domestic​ and the ​global business environment​ affect virtually all businesses. The domestic business
environment is the environment in which a business conducts its operations and derives its revenues. The
global business environment also refers to the international forces that affect a business, for example,
international trade agreements, economic conditions, and political unrest.

The ​technological, political-legal, sociocultural​, and ​economic environments​ are also important. The
technological environment includes all of the ways by which firms create value for their constituents.
Technology includes human knowledge, work methods, physical equipment, electronics,
telecommunications, and various processing systems that are used to perform business functions. The
political-legal environment reflects the relationship between business and government, usually in the form
of government regulation of business. The sociocultural environment includes the customs, mores, values,
and demographic characteristics of the society in which an organization functions. Sociocultural processes
also determine the goods and services that a society is likely to value and accept. The economic
environment refers to the relevant conditions that exist in the economic system in which an organization
functions.
2. Describe the different types of global economic systems according to the means by which they
control the factors of production.

Economic systems differ in the ways in which they manage the five ​factors of production​ (1) ​labor​, or
human resources​, (2) ​capital​, (3) ​entrepreneurship​, (4) ​physical resources​, and (5) ​information resources​.
Labor, or human resources, includes the physical and intellectual contributions people make while
engaged in business. Capital includes all financial resources needed to operate a business. Entrepreneurs
are an essential factor of production. They are the people who accept the risks and opportunities
associated with creating and operating businesses. Virtually every business will rely on physical
resources, the tangible things organizations use to conduct their business. Physical resources include raw
materials, storage and production facilities, computers, and equipment. Finally, information resources are
essential to the success of a business enterprise. Information resources include data and other information
used by business.

Economic systems can be differentiated based on the way that they allocate the factors of production. A
planned economy​ relies on a centralized government to control factors of production and make decisions.
Under ​communism​, the government owns and operates all sources of production. In a ​market economy​,
individuals—producers and consumers—control production and allocation decisions through supply and
demand. A ​market​ is a mechanism for exchange between the buyers and sellers of a particular product or
service. Sellers can charge what they want, and customers can buy what they choose. The political basis

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of market processes is ​capitalism​, which fosters private ownership of the factors of production and
encourages entrepreneurship by offering profits as an incentive. Most countries rely on some form of
mixed market economy​—a system featuring characteristics of both planned and market economies.
Socialism​ may be considered a planned economy or a mixed economy, with government ownership of
selected industries but considerable private ownership, especially among small businesses.

3. Show how markets, 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.

Decisions about what to buy and what to sell are determined by the forces of demand and supply. ​Demand
is the willingness and ability of buyers to purchase a product or service. ​Supply​ is the willingness and
ability of producers to offer a product or service for sale. A ​demand and supply schedule​ reveals the
relationships among different levels of demand and supply at different price levels. The point at which the
demand and supply curves intersect is called the market or equilibrium price. If a seller attempts to sell
above the market price, he will have a surplus where the quantity supplied exceeds the demand at that
price. Conversely, a shortage occurs when a product is sold below the equilibrium price and demand
outstrips supply.

Market economies reflect the operation of a ​private enterprise system​, a system that allows individuals to
pursue their own interests without government restriction. Private enterprise requires the presence of four
elements: (1) private property rights, (2) freedom of choice, (3) profits, and (4) competition. Economists
have identified four degrees of competition in a private enterprise system: (1) ​perfect competition​, (2)
monopolistic competition​, (3) ​oligopoly​, and (4) ​monopoly​. Perfect competition exists when all firms in an
industry are small, there are many of them, and no single firm is powerful enough to influence prices. In
monopolistic competition, numerous sellers try to differentiate their product from that of the other firms.
An oligopoly exists when an industry has only a few sellers. It is usually quite difficult to enter the market
in an oligopoly and the firms tend to be large. A monopoly exists when there is only one seller in a
market. A firm operating in a monopoly has complete control over the price of its products.

4. Explain the importance of the economic environment to business and identify the factors used to
evaluate the performance of an economic system.

Economic indicators​ are statistics that show whether an economic system is strengthening, weakening, or
remaining stable. The overall health of the economic environment—the economic system in which
businesses operate—affects organizations. The two key goals of the U.S. system are ​economic growth​ and
economic stability​. Growth is assessed by ​aggregate output, the total quantity of goods and services
produced by an economic system​. Although gains in productivity can create growth, the ​balance of trade
and the ​national debt can inhibit growth​. While growth is an important goal, some countries may pursue
economic stability. ​Economic stability​ means that 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. The two key

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threats to stability are ​inflation​ and ​unemployment​. The government manages the economy through two
sets of policies: ​fiscal policies​ (such as tax increases) and ​monetary policies​ that focus on controlling the
size of the nation’s money supply.

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