UNIT 5

ECONOMICS
 PART 1
NC CTE 5.01: Understand fundamental economic concepts to obtain a foundation for employment in business.
Distinguish between economic goods and services

• Want - A desire for something that may or may not be required

Describe two basic types of wants
• Economic want - Desires for items that can only be obtained by spending money
• Noneconomic want - Desires for things that can be obtained without spending
money (e.g., fresh air and sunshine).
Discuss the characteristics of wants.
• Unlimited: Everyone always has them. That includes individuals, businesses, and
governments.
• Changeable: Wants change. Think of things that children want vs. what teens
wants vs. what adults want vs. what senior citizens want.
• Competing: Everyone must choose which wants to satisfy at any one time
because resources are limited. We don’t have enough resources to satisfy all
needs at the same time.
Distinguish between economic goods and services

• Goods - Tangible objects that can be manufactured or produced for resale

• Services - A desire for something that may or may not be required
• Consumer goods - Tangible items produced for personal use.
• Industrial goods - Tangible items that will be consumed by industrial users
Explain the concept of economic resources

• Economic resources - The human and natural resources and capital goods used to
produce goods and services
Define and describe resources in economics.
Any items that can be used to produce goods and services. Categories:
• Natural resources: Items that are found in nature that are used to produce goods
and services. Examples include trees, air, and land.
• Human resources: People. In economics, they are valued for the physical and
mental work that they do to produce goods and services. They include anyone
who works.
• Capital goods: All of the manufactured or constructed items that are used to
produce goods and services (e.g., buildings, equipment, transportation systems).

• Factors of production - Productive resources; human and natural resources and

capital goods
Explain the concept of economic resources

Discuss reasons for limited resources.

• Natural resources: There simply are not enough resources available to satisfy everyone. We
depend on the earth for practically all of our natural resources. As the world’s population
increases, there will be more and more people making use of those resources. As a result, there
will be fewer resources per person.
Some natural resources are difficult or costly to obtain. For example, wind power can be difficult
to capture when the wind isn’t blowing. Some developing countries lack the technology to tap
their natural resources. And finally, weather conditions and the environment affect the supply of
some natural resources.
• Human resources: Only some of the world’s people are willing and able to work. Others,
especially those who are young, disabled, or elderly, are not part of the workforce.
Many parts of the world experience worker shortages in such professions as nursing and welding.
This may be due to a lack of special training, or the people may not live in the geographic region
where the job opportunities exist.
• Capital resources: In some parts of the world, capital resources are limited due to a lack of
technology. In under-developed societies, people still use primitive hand tools rather than
mechanized machinery to produce goods and services. As a result, they produce fewer goods and
services than we do in our society and those that they produce are for personal use rather than
for capital goods.
Describe the concepts of economics and economic activities

• Economics - The study of how to meet unlimited, competing wants with limited resources
• Scarcity - A condition resulting from the gap between unlimited wants for goods and services and
limited resources
• Economizing - The process of deciding which goods and services will be purchased or provided so
that the most satisfaction can be obtained; deciding how scarce resources will be used
• Opportunity cost - The benefit that is lost when you decide to use scarce resources for one purpose
rather than for another
• Trade-offs - Giving up all or a part of one thing in order to get something else
Describe the concepts of economics and economic activities

What is scarcity?
• This is the gap between unlimited wants for goods and services and limited resources. Economics is
sometimes called the study of scarcity. Goods and services are said to be scarce, or limited, because not
everyone can have everything s/he wants
• The only ways to eliminate scarcity are to find unlimited resources or to limit human needs and wants.
Neither one can happen.
Discuss the fact that scarcity requires economic choices.
• Involves allocating resources: Resources must be directed to their best use.
• Involves economizing: The process of deciding which goods and services to purchase or provide so that
the most satisfaction can be obtained is known as economizing.
• Involves opportunity costs: When we economize, we decide how scarce resources will be used. When
people, governments, and businesses make decisions about allocating their resources, they feel that they
will gain more satisfaction from one choice rather than from another. When a choice is made about the
best use of resources, the next-best alternative that is given up is called the opportunity cost of that
choice. This is the benefit that is lost from making one choice vs. another.
• Involves tradeoffs: This means that individuals, businesses, and governments must be willing to give up
all or a part of one thing to get something else. The trade-offs that everyone is willing to accept should
be based on the opportunity costs involved.
The three economic questions that all
societies must answer
To use scarce resources efficiently, all societies must answer three basic economic
questions:
What to produce?
• They must determine what and how many goods and services to produce. They must decide how to
allocate their limited resources between the production of capital goods and consumer goods.
How will products be produced?
• Most goods and services can be produced in a variety of ways. Societies must decide the best, most
efficient ways to use their limited resources to produce products
How to allocate products?
• Societies must determine how the goods and services will be divided among people. They need to
decide how individuals, businesses, and governments will share products.
Explain the relationship between economics and decision making.
• The heart of economics is decision-making—choosing among alternatives. The
objective of studying economics is to prepare for effective decision-making and
responsible citizenship in society.
Describe the concepts of economics and economic activities

• Consumption - The process or activity of using goods and services

• Consumer - Anyone who uses goods and services
• Production - The economic process or activity of producing goods and services.
• Producer - The people who make or provide goods and services.
• Exchange - The process of trading one good/service for another
• Distribution - A marketing/business function that is responsible for moving, storing, locating,
and/or transferring ownership of goods and services
Describe the concepts of economics and economic activities

Describe major economic activities.

Today, people rely on others to provide them with at least some of the goods and services they desire. As a result, goods, services and
resources must move, or flow, from one person to another. The following four economic activities make that movement possible.
• Consumption
This is the ultimate goal of all economic activity. It is the process or activity of using goods and services. Anyone who used goods and
services is a consumer. People consume goods and services to satisfy their wants and desires.
• Production
For consumption to occur, goods and services must be produced. Individuals who make or provide goods and services are called
producers. They transform natural, human, and capital resources into more valuable goods and services for consumers. Examples of
producers: hairstylists, clothing manufacturers, farmers
• Exchange
Resource owners—people and organizations who provide human resources, natural resources, or capital goods for use in
production—require some form of payment for the use of their resources. Usually, this payment is in the form of money—wages,
salaries, profits for human resources; interest or rent for capital goods; etc.
After acquiring enough resources from resource owners, producers are able to produce goods and services. Consumers make money
payments to the producers for the goods and services. This money payment is the price of the good or service.
• Distribution
This is the process or activity by which income is divided among resource owners and producers. Money received by resource owners
and producers is known as income. Resource owners use their money to buy more goods and services. Producers use their income to
buy more resources. Those receiving larger incomes are able to buy more goods, services, and resources than those with lower
incomes.
Resource owners must feel that their incomes are large enough so that they will continue to supply resources. If they decided that
their incomes weren’t sufficient, they may choose not to share their resources with producers. This would cause production to cease.
Likewise, producers must receive enough income to continue making or providing goods and services. If they decided their incomes
weren’t sufficient, they might choose not to make goods and services. In that case, consumption would cease. This results in a tug of
war between resource owners and producers over how to divide the income they receive from consumers. The manner in which
resource owners and producers divide their income depends on the type of economic system that exists.
Determine economic utilities created by business and marketing

• Utility - Usefulness; capable of satisfying wants and needs.

• Useful products make our lives better. They provide us with something worthwhile. They have utility—usefulness.
• Utility is about satisfying wants and needs. If customers are satisfied with what a product offers because it fulfills a desire, the
product has utility. If not, the product lacks utility.
• Form utility - Usefulness created by altering or changing the form or shape of a good to make it more useful to the consumer
• Form utility and task utility
• A product’s form is whatever is tangible—whatever can be touched or noticed by the senses.
• Includes styles, scents, flavors, texture, sounds, and colors
• All the “touchable” parts of a good
• Marketers change “touchable” goods’ parts to create or increase utility.
• Form utility is the usefulness created by altering or changing the form or shape of a good to make it more useful to
consumers.
• Task utility is the usefulness created by altering or changing the characteristics of a service to make it more useful to
consumers.
• Marketers change what they are doing to be helpful or useful.
• Place utility - Usefulness created by making sure that goods or services are available at the place where they are needed or wanted
by consumers.
• Place utility
• Place is the right location for products—on the shelf, in the showroom, at the warehouse, etc.
Determine economic utilities created by business and marketing

Time utility - Usefulness created when products are made available at the time they are needed or wanted by
consumers or to complete specific business activities.
• Time utility
• Involves getting the timing right to make products available to consumers
• Accomplished by: looking ahead to determine the timelines needed by the businesses that process a product on its way to
consumers
• Marketers have to make changes when to avoid or to correct problem timing.
• Time utility is the usefulness created when products are made available at the time they are needed or wanted by consumers.
Possession utility - Usefulness created when ownership of a product is transferred from the seller to the user
• Possession utility
• Possession involves selling the product or transferring the product’s ownership.
• The exchange of currency for the product shifts possession of the product to consumers so that the consumers own the product
completely. In other words, you could do whatever you wanted to do with the product.
• Possession utility is the usefulness created when ownership of a product is transferred from the seller to the consumer and
occurs after the product has been purchased and in the consumer’s control.
• Marketers make changes that affect the purchasing process or its likelihood—making it easy to buy the product.
Determine economic utilities created by business and marketing

Different consumers and businesses can view the same product’s utility
differently.
• Utility varies. With utility, a consumer’s or a business’s level of satisfaction is
measured at a specific point in time because a level of satisfaction changes over
time.
• Variety of factors affects utility. The amount of satisfaction consumers and
businesses receive from a product is affected by such factors as age, gender,
income, educational level, interests, and preferences.
• Marketers do not create utility by themselves. Producers play an important role,
too. With form utility, producers are the ones who change the physical form of a
good—not marketers. Both marketers and producers are needed to create utility.

• All four types of utility must be present for consumers to be satisfied; none of
them can be overlooked.
Determine economic utilities created by business and marketing

• From utility, marketers learn what consumers want—and how to bring it about.

How does marketing influence utility?

• By providing information
• Marketing is about making connection between products and its users.
• To do this, marketers communicate product information to make consumers and businesses
aware of the product’s benefits and encourage them to buy.
• When consumers and businesses purchase a product, they “connect” with it and can benefit
from its utility.
• By providing information, marketers provide information that influences utility.
• Marketers use a variety of tools to communicate with and educate consumers and
businesses: displays, advertising, mailings, personal selling—whatever tools they feel are best
at connecting with their product users who would get the most utility from their products.
Determine economic utilities created by business and marketing

How does utility relate to the marketing concept?

• Utility is about what the consumer thinks which is at the heart of the marketing concept—a philosophy that encourages marketers to
look at things from the product user’s point of view.

• When marketers use utility to discover how the product user sees a product, they can work to meet the product user’s needs.
• In this way, utility supports implementing the marketing concept.
• It also plays a role in the implementation of the marketing concept when marketers use utility as a measurement tool to research
what product users want.
Explain the principles of supply and demand

• Demand - The quantity of a good or service that buyers are ready to buy at a given price at a particular time.
• Law of Demand - Economic principle which states that the quantity of a good or service that people will buy varies inversely with the
price of the good or service.

• Supply - The quantity of a good or service that sellers are able and willing to offer for sale at a specified price in a given time period
• Law of Supply - Economic principle which states that the quantity of a good or service that will be offered for sale varies in direct
relation to its price

• Law of Supply and Demand - Economic principle which states that the supply of a good or service will increase when demand is great
and decrease when demand is low
Explain the principles of supply and demand

• Buyer’s market - The best time for consumers to buy; characterized by large supply,
small demand, and low prices.
• Seller’s market - The best time for producers to sell; characterized by large demand,
small supply, and high prices
• Elasticity - An indication of how changes in price will affect changes in the amounts
demanded and supplied
• Elastic demand - A form of demand for products in which changes in price correspond
to changes in demand.
• Inelastic demand - A form of demand in which changes in price do not affect demand
List the conditions required for demand to exist
• Desire for a good or service
• Buying power to pay for a good or service
• Willingness to give up some buying power
Describe the functions of prices in markets

• Price - The amount of money paid for a good, service, or resource

• In the U.S., it’s expressed in dollars and cents.
• Indicates the value a customer places on a good, service, or resource
• Customers generally willing to pay more for items they highly value.
• Willingness to pay “the price” is based on:
• Person’s available buying power
• How much value the person places on the good, service or resource
• Relative price of the good, service, or resource
Describe the functions of prices in markets

• Relative prices - One price compared to another; the ratio between two prices
Explain the concept of relative price.
• One price compared to another—the ratio between the two prices
• Example: A cappuccino at a local donut shop is $2, while one at Starbucks is $4. The relative price ratio is 1 to 2. If the prices
decreased to $1 and $2, the relative price ratio would remain unchanged—1 to 2. Even if the cappuccino prices doubled to $4
and $8, the relative price would be the same—1 to 2.
Describe the functions of prices in markets
Describe the functions of prices in markets

Discuss the impact of changes in relative prices.

• If the price of pizzas went up to $18, while movies remained at $6, their
relative price ratio would have changed. Now, you’d have to give up 3 movies
for every pizza.
• The change in relative prices might cause people to buy more movies and
fewer pizzas.
• By comparing relative prices, customers choose the combinations of pizzas
and movies that are most satisfactory to them.
• Businesses compare relative prices to determine which combination of
resources to use to produce their goods or services.
• Owners of resources compare relative prices to determine where than can
most advantageously sell their resources or the services their resources can
supply.
Describe the functions of prices in markets

Explain the relationship of relative prices to the three economic questions in a market economy.

• Relative prices and their effect on people’s decisions answer the three economic questions.
• What to produce? Producers provide that are the most profitable, selling products at the highest prices the market will bear.
• How to produce? Producers produce products at the lowest cost possible.
• How will products be allocated? Whoever is willing and able to pay the price gets the products.
Describe the functions of prices in markets

• Substitution effect - A phenomenon that occurs when changes in relative prices cause
buyers to replace the purchase of one product with another
• Rationing - A function of relative prices that determines who gets the goods and services
produced; determining how scarce resources will be distributed
Discuss the functions of relative prices.
• Information: Relative prices provide information needed to make economic decisions. Used
to decide whether to buy, what to buy, and how much to buy.
• Incentives: Profits encourage producers to change and reallocate their resources. They use
relative prices to determine what to produce.
• Rationing: Prices ration limited resources, goods, and services to those most willing and
able to pay for them. Generally, the higher an item’s price, the less of it someone is willing
to buy. Example: If 20,000 people want to see a soccer match, but the stadium can seat only
5,000 people, the price of admission could be raised to ration out the 15,000 who could not
afford the ticket price. On the other hand, if there were 5,000 people and 20,000 seats, the
price might be lowered to encourage more people to attend.
Describe the functions of prices in markets

Describe how prices are determined in a market economy.

• The interaction of supply and demand largely determines the type and
quantity of goods, services, and resources provided and the prices paid for
them.
• Supply indicates the quantities of an item that are offered for sale at various
possible prices during a specific period of time.
• Demand reflects the quantities that customers are willing and able to buy at
various possible prices during the same time period.
• Demand interacts with supply to determine prices. When the price of an
item decreases, its demand increases. As the price increases, producers are
willing to supply more of the item
Describe the functions of prices in markets

• Equilibrium price - The point at which the quantity of a good that buyers want to buy is equal to
the quantity that sellers are willing to sell at a certain price.
Explain equilibrium price.
• Occurs when the quantity of a good that buyers want to buy is equal to the quantity that sellers are willing
to sell at a certain price
• A state of balance or equality between opposing forces.
• Also referred to as the market-clearing price
• Determined by a trial-and-error process
• Seldom, if ever, actually exists in the marketplace
• The forces that determine it are always changing, thereby causing the equilibrium price to change.

• Excess supply - The situation that exists when supply is greater than demand.
Discuss excess supply.
• Occurs when the quantity demanded is less than the quantity supplied
• Results in producers lowering their prices, consumers buying more at the lowered price, and producers
producing less
• These actions help to eliminate excess supply.
Describe the functions of prices in markets

• Excess demand - The situation that exists when demand is greater than supply.
Explain excess demand.
• Occurs when the quantity demanded is greater than the supply
• Often results in increasing prices since some customers are willing to pay high prices to get what
they want; others buy different products.
• Producers respond by increasing the supply.
• Excess demand is eliminated when the price reaches the point at which customers will buy the same
quantities that producers have available to sell.
• Prices set higher than the equilibrium price result in excess supply; those set lower than the
equilibrium price result in excess demand
• Market price - Actual price that prevails in a market at any particular moment
• Discuss market price.
• This is the actual price that prevails in a market at any particular moment; it’s the price you pay for a
good or service.
• This price is also affected by supply and demand, causing the price you pay to fluctuate.
• Any factor that causes changes in supply and demand will cause changes in prices.
 PART 2
NC CTE 5.02: Understand economic systems to be able to recognize the environments in which businesses function.
Types of economic systems

• Economic System - The organized way in which a country handles its economic
decisions and solves its economic problems.
• Traditional Economic System - An economic system in which people produce only
what they must have in order to exist; all economic decisions are based on habit and
tradition.
• Command Economic System - An economic system in which all or many of the means
of production and distribution are owned and controlled by the government.
• Communism - A command economic system in which the government controls the
economic system and does not allow private ownership of the means of production
and distribution
• Socialism - A modified command economic system in which government owns the
basic means of production and allows private ownership of businesses as well
Types of economic systems

• Describe the characteristics, strengths and weaknesses of

• Traditional Economic Systems - Economic decisions are based on custom and historical precedent
(example/pattern/practice)
• People often perform the same type of work as their parents and grandparents regardless of ability or potential
• Communism - Central ownership (usually the government) of property/resources. All property and resources are
collectively owned by a classless society and not individual citizens
• Workers control the means of production; therefore, all share equally in the benefit of success or the
consequences of failure.
• Lack of consumer choice
• Government determines which goods and services are produced and how they are distributed. Example:
Former Soviet Union
• Socialism - Government ownership of productive resources. A planned economy
• Redistribution of income
• Social welfare characterizes a socialist’s society’s goals
• Peaceful and gradual extension of government ownership (revolution by ballot rather than bullet)
• Market Economic System - Private ownership of property/resources. Profit motive (chance to make money)
• Competition
• Consumer sovereignty (individuals determine through purchases what will be produced)
• Individual choice
• Minimal government involvement
Types of economic systems

• As we have said, all nations must answer the question of scarcity. All nations and
societies must allocate their resources in order to meet their needs. This is where
the essential dilemma between unlimited wants and limited needs comes into
play.
• We have also noted that all nations must make choices. This is a matter
of resource allocation. When we allocate limited resources we make choices. The
cost of these choices is known as opportunity cost. When making these choices
and dealing with scarcity, resource allocation and opportunity cost nations are
answering what we have previously referred to as the three basic economic
questions.
• These are the questions all nations must ask when dealing with scarcity and
efficiently allocating their resources. The three economic questions are:
• What to produce?
• How to produce?
• For whom to produce?
Private enterprise

• Private Enterprise System - An economic system in which individuals and groups, rather
than government, own or control the means of production–the human and natural
resources and capital goods used to produce goods and services. Also known as free market
economy, private profit system, market system, capitalistic system, or free enterprise
system.
• Describe the characteristics, advantages and disadvantages of a private enterprise system
• Advantages
• competition promotes high quality and low prices.
• wide selection of goods and services available to consumers.
• the pursuit of profit leads to efficient use of resources.
• technological change and innovation take place rapidly.
• consumers influence production of goods through consumer sovereignty.
• the economy is flexible and can respond quickly to changing consumer demand.
• Disadvantages
• income and wealth are unevenly distributed. there may be great differences between right and poor.
• economic periods of boom and bust.
• unemployment and underemployment may occur.
• consumers may be manipulated through advertising.
• producers can influence prices through the creation of cartels.
• not all resources are used efficiently.
Factors affecting a business’s profit

• Profit - Monetary reward a business owner receives for taking the risk involved in investing in a business;
income left once all expenses are paid.
• Profit Motive - The desire to make a profit which moves people to invest in business
• Income - The money received by resource owners and by producers for supplying goods and services to
customers
• Expenses - Money spent or cost incurred in an organization's efforts to generate revenue, representing
the cost of doing business.
• Cost Of Goods - The amount of money a business pays for the products it sells or for the raw materials
from which it produces goods to sell; the amount of money a business pays for the products (or for any
part of the products) it sells.
• Operating Expenses - All of the expenses involved in running a business
• Gross Profit - This is the difference between sales income and the direct costs of making those products.
Gross profit is used as a performance indicator to help the business make decisions over its pricing
policies and use of materials.
• Net Profit - Net profit represents gross profit less all expenses associated with the normal running of the
business. Net profit shows how well the business performs under its normal trading circumstances.
Factors affecting a business’s profit

• Profit
• Profit is the difference between the income of the business (Revenues) and all its costs/expenses.
• Calculation: Revenues-Expenses = Profit

• Importance of profit
• It is a reward to the owners of the business. They have taken risks with their money and time. If there was no profit, then
there would be little point in starting up or putting more money into the business, they might as well put the money into
a bank or building society
• Profits are an important source of investment funds. Profit can be used to buy more stock, improve technology or expand
the premises
• A business than does not make a profit will fail, potentially affecting employees, suppliers and the local community
Business risk

• Risk: The possibility of a financial loss.

• Risk Management - The process of managing a business’s exposure to risk in order to achieve business objectives.
• Business Risk - The possibility of loss (failure) or gain (success) inherent in conducting business
• Pure Risks - The possibility of loss to a business without any possibility of gain. Such as:
• Economic Risks - Risks that result from changes in overall business conditions. Examples: Competition, Inflation, Government regulation, Recession
• Natural Risks - Perils resulting from environmental causes. Examples: Floods, Earthquakes, Tornadoes, Hurricanes, Fires
• Human Risks - Perils caused by human errors as well as the unpredictability of customers, employees, or the work environment. Examples: Shoplifting,
Employee theft

• Speculative Risks - Chances of loss that may result in loss, no change, or gain. Examples: buying new machinery,
constructing new buildings.
• Guarantees - A promise made to the consumer that a product’s purchase price will be refunded if the product is not
satisfactory
• Warranties - A promise made by the seller to the customer that the seller will repair or replace a product that does not
perform as expected. A promise to the purchaser that a product will be repaired or replaced if it proves to be defective
Business risk

Methods of dealing with business risk

• Risk Reduction:
• Design work areas to reduce the chance of accident or fire.
• Educate employees on safe use of equipment
• Check and service safety equipment on a regular basis.
• Stress the limits of your company’s products.
• Implement ways to reduce shoplifting.
• Control employee theft.
• Implement ways to reduce robbery.
• Control Risks – a risk that cannot be avoided can be prevented or controlled. When businesses identify a risk they face,
they often take measures to prevent or reduce that risk. Examples: Safety, Security, Employee incompetence, Product
selection, Credit, Changes, Weather extremes
• Retain Risks - Self-insurance against business loss. The business must set aside money each month to help cover the costs
should a loss occur.
• In some instances, businesses may keep, or retain, the risk involved in doing business. A business may do nothing to
reduce or eliminate a risk because the business:
• Involves not doing anything about the risk because the business:
• Is unaware of the risk
• Underestimates the risk
• Feels that the risk is small
• Believes there’s a chance of return
Business risk

Methods of dealing with business risk

• Transfer Risks - Certain risks may be reduced or eliminated by transferring (or shifting) those risks to another person or business. This option
enables businesses to move forward with their decisions without bearing the risks involved. Examples: Contractual agreements,
Guarantees/Warranties, Surety bonds, Rental/Lease agreements
• Property insurance: Covers the loss of physical property (cash, inventory, vehicles, buildings).
• Real property: Buildings, land, and fixtures.
• Personal property: Vehicles, clothing, furniture, jewelry.
• Business interruption insurance: Makes up for lost income if a business is shut down for repairs or rebuilding.
• Casualty insurance: Protects a business from lawsuits.
• Errors-and-omissions insurance: Protects businesses from lawsuits resulting from mistakes in advertising.
• Product liability insurance: Protects manufacturers from claims for injuries that result from using their products.
• Fidelity bonds: Protect companies from employee theft.
• Performance bonds: Protect a business if work is not finished on time or as agreed.
• Workers’ Compensation: A government-regulated program government-regulated program that provides medical benefits and income to
employees who are injured on the job.
• Emergency planning - Businesses must have procedures in place before a crisis occurs. Businesses must create emergency response plans to
handle emergency situations.
• Avoid Risks - Sometimes, the best way to handle a risk is to simply avoid it. This is the first and best way for a business to stay out of trouble.
Example: Avoid flying to eliminate the risk of a plane crash, staying away from things altogether, assurance of nothing happening by eliminating all
possibilities of a risk
• If business owners avoid all risks, they would not:
• Open a new store
• Introduce new products
• Expand overseas
Competition

• Competition - The rivalry among two or more businesses to attract scarce customer dollars
• Direct Competition - Rivalry between or among businesses that offer similar types of goods or
services.
• Indirect Competition - Rivalry between or among businesses that offer dissimilar goods or
services.
• Oligopoly - A market structure in which there are relatively few sellers, and industry leaders
usually determine prices.
• Oligopoly exits where few large firms producing a homogeneous or differentiated product
dominate a market. Examples are automobile and gasoline industries.
• Characteristics
• Few large firms: each must consider its rivals’ reactions in response to its decisions about prices, output, and advertising.
• Standardized or differentiated products.
• Entry is hard: economies of scale, huge capital investment may be the barriers to enter.
• Demand Curve - Facing competition or in tacit collusion, oligopolies believe that rivals will
match any price cuts and not follow their price rise. Firms view their demands as inelastic for
price cuts, and elastic for price rise. Firms face kinked demand curves. This analysis explains
the fact that prices tend to be inflexible in some oligopolistic industries.
Competition

• Monopoly - A type of market structure in which a market is controlled by one supplier, and there are no substitute goods
or services readily available.
• Pure monopoly exists when a single firm is the sole producer of a product for which there are no close substitutes.
Examples are public utilities and professional sports leagues.
• Monopolistic competition refers to a market situation with a relatively large number of sellers offering similar but
not identical products. Examples are fast food restaurants and clothing stores.
• Characteristics
• A lot of firms: each has a small percentage of the total market.
• Differentiated products: variety of the product makes this model different from pure competition model.
Product differentiated in style, brand name, location, advertisement, packaging, pricing strategies, etc.
• Easy entry or exit.
• Demand Curve - The firm’s demand curve is highly elastic, but not perfectly elastic. It is more elastic than the
monopoly’s demand curve because the seller has many rivals producing close substitutes; it is less elastic than pure
competition, because the seller’s product is differentiated from its rivals.
• Characteristics
• A single seller: the firm and industry are synonymous.
• Unique product: no close substitutes for the firm’s product.
• The firm is the price maker: the firm has considerable control over the price because it can control the quantity
supplied.
• Entry or exit is blocked.
Competition

• Regulated Monopolies - Monopoly that the government allows to exist legally.

• Perfect Competition - A market structure in which there are many businesses selling a lot of identical
products for about the same price to many buyers; also known as pure competition.
• Pure or perfect competition is rare in the real world, but the model is important because it helps
analyze industries with characteristics similar to pure competition.
• This model provides a context in which to apply revenue and cost concepts developed in the
previous lecture.
• Examples of this model are stock market and agricultural industries
• Characteristics
• Many sellers: there are enough so that a single seller’s decision has no impact on market price.
• Homogenous or standardized products: each seller’s product is identical to its competitors’.
• Firms are price takers: individual firms must accept the market price and can exert no influence
on price.
• Free entry and exit: no significant barriers prevent firms from entering or leaving the industry.
Competition

• Price Competition - A type of rivalry between or among businesses that focuses

on the use of price to attract scarce customer dollars.
• Non Price Competition - A type of rivalry between or among businesses that
involves factors other than price (e.g., customer services, modern facilities,
trained personnel, and variety of products)
• Price discrimination - is selling a good or service at a number of different prices,
and the price differences is not justified by the cost differences. In order to price
discriminate, a monopoly must be able to
1. be able to segregate the market
2. make sure that buyers cannot resell the original product or services.
• Perfect price discrimination is a price discrimination that extracts the entire consumer surplus
by charging the highest price that consumer are willing to pay for each unit.
• As a result, the demand curve becomes the MR curve for a perfect price discriminator. Firms
capture the entire consumer surplus and maximize economic profit.
Competition

• Government legislation affecting competition

• Competition – Three common Antitrust Laws:
• The Sherman Act outlaws "every contract, combination, or conspiracy in restraint of trade," and
any "monopolization, attempted monopolization, or conspiracy or combination to
monopolize."
• The Clayton Act addresses specific practices such as mergers and interlocking directorates (that
is, the same person making business decisions for competing companies). The Clayton Act
prohibits mergers and acquisitions where the effect "may be substantially to lessen
competition, or to tend to create a monopoly."
• The Federal Trade Commission Act bans "unfair methods of competition" and "unfair or
deceptive acts or practices."
• Freedom of Choice - The key ingredients of economic freedom are personal choice, voluntary
exchange, freedom to compete in markets, and protection of person and property. Institutions and
policies are consistent with economic freedom when they allow voluntary exchange and protect
individuals and their property.
• Private Property - is the exclusive authority to determine how a resource is used, whether that
resource is owned by government or by individuals.
• Profit - Taxation policy affects business costs. For example, a rise in corporation tax (on business
profits) has the same effect as an increase in costs. Businesses can pass some of this tax on to
 PART 3
NC CTE 5.03: Understand the nature of business to show its contributions to society.
Explain the role of business in society

• Social Responsibility - The duty of business to contribute to the well-being of society

• Producers - The people who make or provide goods and services.
• Raw-goods Producers - A type of producer that provides goods in their natural state.
• Manufacturers - A type of producer that changes the shapes or forms of materials so that
they will be useful to customers
• Builders - A type of producer that constructs roads, bridges, buildings, or houses.
• Trade Industries - Businesses that buy and sell goods to others; retailers and wholesalers.
• Retailers - A business that buys consumer goods or services and sells them to the ultimate
consumer
• Wholesalers - Intermediaries who help to move goods between producers and retailers by
buying goods from producers and selling them to retailers.
• Service Businesses - A type of business that performs intangible activities that satisfy the
wants of consumers or industrial users.
Explain the role of business in society

Categories of social responsibility:

• Economic Responsibilities - Companies need to make sure that the company itself if profitable.
• Legal Responsibility - Requirements placed on company by law.
• Ethical Responsibility - Corporation leadership core mission aligns to their actions.
• Philanthropic Responsibilities - Going above and beyond ethical responsibility making an effort to benefit society.
Describe types of business activities

• Business - An organized effort to produce and/or distribute goods and services.

• Accounting - The process of keeping and interpreting financial records. The process of gathering,
recording, organizing, and reporting financial data.
• Customer Relations - All the activities a business engages in to interact with its customers.
• Finance - The process of obtaining funds and using them to achieve the goals of the business.
• Human Resources Management - The process of planning, staffing, leading, and organizing the
employees of the business.
• Information Management - The process of accessing, processing, maintaining, evaluating, and
disseminating knowledge, facts, or data for the purpose of assisting business decision making.
• Management - The process of coordinating resources in order to accomplish an organization's goals
• Marketing - The process of creating, communicating, delivering, and exchanging offerings that have
value for customers, clients, partners, and society at large.
• Operations - The day-to-day activities for continued business functioning.
• Production - The economic process or activity of producing goods and services.
Describe types of business activities

What is a business?
An entity with goals that can be financial or tied to a particular mission
• A business that operates for profit makes money to fulfill financial goals.
• A nonprofit business makes money to fulfill a specific mission or undertaking. The money it makes goes to support that mission.
• Both for-profit and nonprofit businesses are organized efforts to produce and/or distribute goods, services, or ideas.

What does a business need to accomplish?

• Obtain necessary resources
• Produce/provide goods and services
• Market/sell those goods and services
• Store/retrieve information effectively
• Plan for the future

To get everything done, businesses involve themselves in:

• Financial analysis
• Human resources management
• Information management
• Marketing
• Operations management
• Strategic management

These primary business activities are the main things businesses do to stay in business.
Describe types of business activities

• Financial analysis is the process of planning, maintaining, monitoring, controlling, and reporting the use of
financial resources. It includes finance and accounting.
• Businesses need money to make money, and finance activities help them obtain that money.
• They need money for land, equipment, supplies, employees, and overhead expenses.
• They need money for whatever it takes to run the business.
• They get this money from venture capital, debt, and equity.
• Venture capital is the money “angel” investors put into start-up businesses. The purpose is to get those
start-up businesses off the ground. Investors look for long-term growth in return for their risky investment.
• Using debt to finance a project involves issuing bonds or taking out loans that require principal and interest
repayment over time.
• Equity (what the business owns or controls minus debt) is used when businesses sell shares of stock,
company real estate, or other business assets to benefit a particular undertaking.
• Whatever finance method a business chooses, obtaining funds provides an important way to accomplish
business goals.
• Financial analysis is also about keeping accurate and useful financial records—and analyzing and interpreting the
recorded information. These activities form the basis of accounting.
• By accounting for all expenses, and comparing expenses to income, businesses can make judgments and
predictions about their own financial status.
• They can work toward:
• Being able to pay their bills
• Being able to make a healthy profit
Describe types of business activities

• Human resources management is the process of planning, staffing, leading, and organizing
employees.
• Every business needs people to accomplish the tasks intended to meet business objectives.
• Without employees, businesses would have difficulty operating.
• Although specific robotic machines can “replace” employees in certain manufacturing situations.
• Most businesses do not have machines that can perform job tasks as well as humans can.
• Most businesses must hire people to do the job.
• All employees of a business fall under the label of human resources.
• Besides “regular” employees, businesses usually require supervisors, managers, and executives.
• Human resources management covers everything the business needs in this regard.
• Human resources management involves:
• Planning for organizational changes
• Recruiting appropriate employees
• Selecting the “right” people to do the job
• Orienting new employees to their jobs
• Training employees in policies and procedures
• Evaluating employee performance
• Facilitating employee compensation
• Human resources management takes care of the responsibilities associated with having
employees and makes the business a fair and inviting place to work
Describe types of business activities

• Information management is the process of coordinating the resources pertaining to business knowledge, facts,
or data.
• Each business should ensure that valuable information is available when and how it is needed.
• This will avoid the uncomfortable (and unprofitable) situation in which vital business information has been discarded or is
unable to be retrieved.

• Businesses should have a system for:

• Identifying necessary information—includes knowing which facts the business will need to use in the future
• Determining how that information should be presented, viewed, or accessed
• Information can be viewed in formats such as reports, graphs, or spreadsheets.
• Format depends on how it is going to be used.

• Providing appropriate access to the information

• To access information, an employee could just walk to a file cabinet and pull out a client file.
• Or, the employee can do something complex, such as run an advanced query on a company database.
• Situations in which having the right information at the right time can be critical to the success of a business include:
• When an airline needs to know who is flying on a particular airplane
• When a law enforcement officer needs to know if a specific person is a risk to the community
• When a board of directors needs to know the profits from last quarter
• When a sales representative needs to know if a product requested by a customer is available

• All of these things can be handled with technology, but how technology is used to manage information has changed—and will
change—over time.
• Information management is not as much about pinning down the perfect technology for the task as it is about making sure that
a reliable system is in place, so the business can make the best use of its information.
Describe types of business activities

• Marketing is the process of creating, communicating, and delivering value to customers and managing customer relationships in ways
that benefit the organization and its stakeholders.
• At first glance, marketing is simple: A good or service that is ready for sale is marketed to potential customers so they can buy it.
But, long before a product is ready for sale, marketing is involved in the process of preparation.
• Marketing is present when the product idea is conceived.
• Marketing is present during the product’s design and creation.
• Marketing is actually involved in everything related to fulfilling a customer’s product needs.

• Marketing is put into action with activities such as:

• Locating potential customers by determining who will benefit from the product
• Pricing the product appropriately by finding out what customers are willing to pay
• Promoting the product to potential customers by communicating product benefits
• Getting the product into customers’ hands by completing sales transactions

• To accomplish these four things, an office-supply store would:

• Identify local offices and businesspeople who should know about the store and what it has to offer
• Conduct research, surveying the profit opportunity in its area
• Investigate what its competitors are doing—and how customers are responding to their prices
• Price its products slightly higher or lower, depending on its findings
• Make a point of advertising the benefits of popular products it sells
• Let potential customers know why products at this store are better than products at other stores
• Make the purchase process easy and seamless—by providing layaway, credit, or whatever customers might need to
Describe types of business activities
• Operations is the process of planning, controlling, and monitoring the day-to-day activities required for continued business functioning.
• This includes such activities as:
• Production
• Quality concerns
• Safety and security
• Purchasing
• Inventory management
• Project planning
• Expense control
• Property and equipment maintenance
• Every business needs to produce or provide its product, whether that product is a good or a service.

• One aspect of operations is production

• To produce a good, a business obtains supplies for manufacturing, “makes” the good, and then distributes the good to a warehouse
or other holding facility.
• To provide a service, a business obtains the means for providing the service, and then provides the service to its customers.

• Operations also includes establishing the best processes for production and quality control
• Need to vary processes to reduce unnecessary procedures and wasted materials.
• Need to provide easy-to-follow instructions to increase the likelihood that employees will perform as needed
• Need to improve processes regularly to keep them up to date
• This leads businesses to engage in continuous process improvement by:
• Regularly evaluating how well the process works
• Finding its error points
• Correcting the errors as efficiently as possible
Describe types of business activities

• Strategic management is the process of planning, controlling, and organizing an organization or department.
• Businesses need to know where they are in the “big picture.”
• Just having the money, hiring the workers, making/providing the product, and marketing/selling the product are not
enough.
• They need to know:
• Are they headed in the right direction?
• Are they likely to experience long-term success?

• These questions can be answered by analyzing the strategic position of the company—and managing that position
effectively.
• Need to establish the organization’s capabilities
• Need to determine how they can succeed in the long term and what will put them in reach of their goals
• Need to do what they’re capable of doing to reach the goals they’ve set for themselves

• Strategic management involves long-term planning and organizing for future success.
• Long-term planning involves creating the mission and vision of the business, determining its goals, and
selecting strategies to support those goals.
• Long-term planning shows how the business intends to accomplish this.
• Organizing for future success includes determining what will be required to reach the long-term goals of the
business.
• “Organizing” spells out how the business should be set up to meet its objectives.
• If the business plan changes, then strategies and tactics will also likely change.
Explain the nature of business ethics

• Distinguish between ethics and regulations.

• Ethics - The basic principles that govern your behavior
• Regulations - An established set of rules
• Discuss the need for business ethics.
• Know what is right or wrong in the workplace and doing what's right.
• Attention to business ethics is critical during times of fundamental change.
• Attention to ethics in the workplace sensitizes leaders and staff to how they should act.
• Attention to ethics in the workplaces helps ensure that when leaders and managers are struggling in times of crises and
confusion, they retain a strong moral compass.
Describe factors that affect the business environment

There are additional issues to consider when conducting an environmental scan.

• Business ethics
• Defined as the moral or ethical problems that can arise in a business setting; and any special duties or obligations
that apply to people who are engaged in business.
• Business trends
• Defined as the general tendency or direction in a market or industry.
• Relationship between government and business
• In the U.S. economy, the government’s role is to protect consumers, businesses, and society.
• This role has evolved over time.

Identify and explain factors that impact businesses.

• Legal issues: Government requirements and laws, taxes, licensing
• Global environment: Off-shoring
• Social and cultural factors: Diverse workplace, ethnic diversity of customers, language barriers, different ways of doing
business
• Economic conditions: During prosperous times—low unemployment rates, increased investments by individuals,
increased spending
• During adverse conditions: High unemployment rates, decreased spending, decreased saving
• Technological factors: New equipment, new software/hardware
 Describe factors that affect the business environment
• Internal factors affecting the business environment: such as, managerial incentives, organizational culture, and organizational identity.
• Resources: Profitability, sales, product quality brand associations, existing overall brand, relative cost of this new product, employee capability, product portfolio
analysis
• Capabilities to identify internal strategic strengths, weaknesses, problems, constraints and uncertainties

• External factors affecting business environments.

• Customer analysis: Segments, motivations, unmet needs
• Competitive analysis: Identify completely, put in strategic groups, evaluate performance, image, their objectives, strategies, culture, cost structure, strengths,
weakness
• Market analysis: Overall size, projected growth, profitability, entry barriers, cost structure, distribution system, trends, key success factors
• Environmental analysis: Technological, governmental, economic, cultural, demographic, scenarios, information-need

• Discuss reasons that the business environment can be affected by external factors.
• The interactions of business with the non-commercial environment are under increasing scrutiny.
• Environmental factors and organizations, looks at the relationships between business and social and ecological environments, often referred to under the umbrella
term of Corporate Social Responsibility.

• Ethical factors that affect the business environment.

• Management practices that respect the rights of all employees, including the right to free association and collective bargaining.
• Minimizing our impact on the environment.
• Providing a safe and healthy work place.
• Promoting the health and well-being of all employees.

• Cultural factors that affect the business environment.

• Current or emerging trends in lifestyle, fashions, and other components of culture
• demographic trends will affect the market size of the industry such growth rate, income, population shifts

• Socio-political factors that affect the business environment.

• Changes in regulations, impacts be on the industry, tax or other incentives are being developed that might affect strategy development, political or government
stability

• Economic factors that affect the business environment.

• Economic trends that might have an impact on business activity: Interest rates, inflation, unemployment levels, energy availability, disposable income
 Describe factors that affect the business environment
Discuss the global environment in which businesses operate
• The impact of globalization on businesses: Record changes in communications, transportation, and computer technology have given the
process new motivation and made the world more interdependent than ever.
• Factors driving the existence of a global business environment: Money, technology and raw materials move ever more swiftly across national
borders. Along with products and finances, ideas and cultures circulate more freely. As a result, laws, economies, and social movements are
forming at the international level.
• Forces that maintain differences between countries/regions: politics, cultural, laws
• Reasons that businesses go abroad: Globalization creates new markets and wealth
• Ways in which businesses can enter a foreign market.
• Exporting : This is the least risky way to enter foreign markets, as it avoids the substantial costs of establishing manufacturing
operations in the new market. A disadvantage of exporting is that high transportation costs can make exporting uneconomical.
• Turnkey projects: Turnkey projects can be described as exporting process technology to other countries. In a typical project, the
contractor agrees to do the training of operating personnel, above other similar start up activities, so that at the end of the contract
period, the foreign client is handed the "key" to a plant that is ready for full operation.
• Licensing: This is an agreement whereby a licensor grants the rights to intellectual property (patents, inventions, copyrights etc.) to
another company (licensee) for a certain period. The licensor would benefit from royalty fees without having to bear the development
costs and risks associated with operating in a foreign market.
• Franchising: The Franchiser sells intellectual property to the franchisee, but also contractually forces the franchisee to abide by strict
rules as to how it does business. As with licensing, the franchisor typically receives a royalty payment. The franchisee assumes the
costs and risks of opening in a foreign market.
• Joint ventures: A joint venture is formed when two independent companies establishes a firm that is jointly owned, one of which is a
local company. The two companies would typically contribute a team of managers to share operating control. A joint venture enables a
firm to benefit from a local partner's knowledge of the host country's competitive conditions, culture, language, political systems and
business systems and also to share costs.
Explain how organizations adapt to today’s markets

• Forces that are driving market changes

• Globalization - The rapid and unimpeded flow of capital, labor, and ideas across national borders
• Consumer demands - Manner in which individuals act that determines what they buy and sell
• Spending trends – what consumer are willing and able to buy
• Industry structure changes - industry attractiveness, how trends will affect industry competition, which industries a company
should compete in and how companies can position themselves for success.
Explain how organizations adapt to today’s markets

• Discuss management processes that aid adaptation to market conditions

• Proactive management - A style of management that involves anticipating and
planning in advance for change, rather than simply reacting to outside events
when they occur
• Competitive aggression - A negotiating style in which one or both parties view the
negotiation as a game-like challenge or a rivalry; one or both parties consider only
their interests to achieve a desired outcome.
• Innovative management - A style of management that is more participative and
facilitative than traditional, controlling management
• Organizational learning - A concept that refers to a firm’s ability to accept and
respond to change appropriately, becoming as effective and efficient as it can be
• Market orientation - A strong focus on meeting customer needs and wants
• Slack resources - Resources above and beyond what are needed to operate an
organization
Explain the organizational design of businesses

Explain principles of organizational design.

• Organizational design - The process of structuring a business’s people, information, and technology to enable the business to achieve
its goals and be successful

• Purpose of organizational design - It is used to match the form of the organization as closely as possible to the purpose(s) the
organization seeks to achieve.
Explain the organizational design of businesses

Explain key concepts in the design of an organization.

• Span of control - The range of employees who to report to a managerial position
• Authority - The formally-granted influence of a position to make decisions, pursue goals and get resources to
pursue the goals; authority in a managerial role may exist only to the extent that subordinates agree to grant this
authority or follow the orders from that position
• Responsibility - The duty to carry out an assignment or conduct a certain activity
• Delegation - Process of assigning a task to a subordinate along with the commensurate responsibility and
authority to carry out the task
• Chain of command - The lines of authority in an organization, who reports to whom
• Accountability - Responsibility for the outcome of the process
• Line authority - The type of authority where managers have formal authority over their subordinates' activities
(the subordinates are depicted under the manager on a solid line in the organization chart); departments directly
involved in producing services or products are sometimes called line departments
• Staff departments - The type of authority where managers influence line managers through staff's specialized
advice; departments that support or advise line departments are called staff departments and include, e.g.,
human resources, legal, finance, etc.
Explain the organizational design of businesses

Identify types of organizational design.

• Functional structures - the organization is small, geographically centralized, and provides few goods and services.
• Advantages: Reduces duplication of activities, Encourages technical expertise
• Disadvantages: Creates narrow perspectives, Difficult to coordinate
• Divisional structures - the organization is relatively large, geographically dispersed, and/or produces wide range of
goods/services.
• Advantages: Improves decision making, Fixes accountability for performance, Increases coordination of functions
• Disadvantages: Hard to allocate corporate staff support, Loses some economies of scale, Fosters rivalry among
divisions
• Lateral relations - Use offset coordination problems in functional and divisional structures.
• Advantages/Disadvantages: Dotted-line supervision, Liaison roles, Temporary task forces, Permanent teams,
Integrating managers
• Matrix structures - the organization needs constant coordination of its functional activities
• Advantages: Reinforces & broadens technical excellence, Facilitates efficient use of resources, Balances conflicting
objectives of the organization
• Disadvantages: Increases power conflicts, Increases confusion & stress for 2-boss employees, Impedes decision making
 PART 4
NC CTE 5.05: Analyze cost/profit relationships to guide business decision making.
Explain the concept of productivity

• Productivity: Amount and value of goods and services produced (outputs) from set amounts of resources (inputs).
• How productivity is measured
• Number of products produced/Number of steps involved in producing them
• Output per unit of input—is the fundamental determinant of the growth of a country’s material standard of living.
The most commonly cited measures are output per worker and output per hour—measures of labor productivity.
One cannot have sustained growth in output per person—the most general measure of a country’s material
standard of living—without sustained growth in output per worker.
• Dollar value of total sales/ Number of salespeople who make the sales
• Dollar value of total sales/costs of making those sales
Measuring Productivity Activities

• Gross Domestic Product (GDP) - GDP is the highly used measurement to determine a country’s overall economic output. GDP is a
country’s total dollar value of all final goods and services produced in one year.

• Major categories of GDP

• Individual spending
• Business spending
• Government spending
• Exports minus imports
• GDP per capita =_________GDP__________
Total Population
• GDP per Capita is income per person earn
Measuring Productivity Activities

• Labor Activities
• Unemployment rate includes the people of the labor force that are unemployed, are looking for work, willing to
work, and unable to find work.
• Consumer Spending
Measurement of consumer spending:
• Personal income includes the total wages and salaries plus investment income and government payments to
individuals.
• Retail Sales include the sales of goods and services purchased to indicate the spending patterns
• Investment Activities
• Businesses use money deposited in personal saving accounts to buy equipment or products for their businesses.
Savers earn interest on money used by companies and other individuals. The savings rate of a country is an
important factor for economic growth.
• Higher earnings for businesses increases their value, which causes a demand for people wanting to buy the
businesses stock.
• The bond market make available for businesses and government to borrow money. Bondholders earn interest on
money loaned to businesses and government.
• Borrowing Activities
• Governments borrow money to finance projects like schools, public highways, and parks. If the government spend
more money than it collects, then a budget deficit is resulted.
• Companies may borrow money to start up or expand. Using borrowed fund efficiently can result in an increase in
sales and profits.
Explain the concept of productivity

• Describe factors that enhance productivity

• Specialization/Division of labor (one skill or task completed by one worker)
• Increased capital (money) investment
• Mass production (assembly lines)
• Research and development (improving production)
• Working within government regulations
• Training and education (skilled labor)
• Communication
• Participative decision making
• Motivation (incentives, benefits)
• Quality of work life
Explain the concept of productivity

• Describe factors that hinder productivity

• Lack of standardization (no quality control)
• Lack of tools/equipment
• Too many different products
• Poor product/service design
• Lack of communication
• Poor planning (from top management)
• Lack of worker knowledge and education (no skills or experience)
• Personality conflicts
• Poor or unsafe working conditions
• Unclear goals