UNIVERSITY OF THE CENTRAL PUNJAB

Faculty of Commerce M. Com (Fall 2011)

The Dynamics of Business and Economics
Instructor: Muzaffar Asad

Not-for-Profit Organizations C. Businesses generally fall into one of two categories: 1. Who gets what? B. What is a Business? A. Service-producing businesses II. Entrepreneurs 5. Barriers to entry are low for Service Businesses III. How much to produce? 3. What to produce? 2. Differentiate between goods-producing and service businesses and list five factors that are contributing to the increase in the number of service businesses 3. Discuss the four major economic roles of the government 6. Capitalism b. mixed capitalism 2. Natural resources 2. Greater need for professional advice 5. Capital 4. What is an Economic System? A. Consumers have more disposable income 2. Profit vs. Free-market system a. B. Define what business is and identify four key social and economic roles that businesses serve. Planned System a. Factors of Production: 1. Differentiate between a free-market system and a planned system 4. 2. Goods-producing businesses 2. Increasing number of complex goods and new technology 4. Knowledge C. Identify five challenges that businesses are facing in the global economy Brief Lecture Outline I. Growth of the Service Sector A. Explain how a free-market system monitors its economic performance 7. Communism b. Explain how supply and demand interact to affect price 5. Three basic questions: 1. Types of economic systems: 1. Changing demographic patterns and lifestyle trends 3. Privatization.Learning Objectives 1. Socialism D. Human resources 3. Page 2 of 12 . Five key factors for this continued growth: 1. Business serves many functions in society and the economy.

How Do Free Market Economies Work? A. B. Provide us with crucial goods and services such as food and housing. Economic contraction c.IV. Contribute to economic stability a. Oligopoly 4. Leading indicators 3. Supply and demand interact to determine prices and how much to produce: 1. Create and foster prosperity Page 3 of 12 . Regulated v/s Deregulated Industries 3. Competition in free-market economies 1. Measuring Price Changes 1. Government’s role in free-market economies 1. Inflation 2. Testing the effectiveness of an economics system 1. Unemployment statistics 2. Durable goods orders C. 2. to name a few. Economic expansion b. How do Economists know if the system is working? A. Business serves many functions in society and the economy to: 1. Supply 3. Housing starts 3. Gross national product (GNP) E. Lagging indicators. 2. Deflation 3. Enacts laws and creates regulation to foster competition. Protects stakeholders rights 4. Competitive advantage C. Watching Economic Indicators 1. Measuring a Nation’s Output: 1. Fiscal and Monetary Policy V. Monopolistic competition 5. Demand 2. Business Cycles d. Consumer Price Index D. Challenges of a Global Economy Lecture Notes (and Expanded Outline) I. What is a Business? A. Economic indicators 2. Equilibrium price B. Monopoly 3. Pure Competition 2. Gross domestic product (GDP) 2.

. Businesses generally fall into one of two categories: 1. a. Goods-producing businesses may pursue activities such as manufacturing. etc. C. Because the US has more elderly. etc. and agriculture in order to produce goods. doesn't matter what it takes. Economists project that the growth in the service sector will continue to increase. about half of the 1. …. Service-producing businesses provide intangible products such as finance. … Efficiency is doing something with the least possible expenditure of resources (such as time. Example: consulting firms II. Labor intensive rely mainly on worker skill and knowledge. twocareer households. travel. to continue to serve their customers. Most goods-producing businesses are generally Capital-intensive businesses. B. energy.3. Currently. service has been the primary area of growth for the US economy. and relaxation. Reinvest profits in the economy. they still must run effectively and efficiently. etc. and raw material. however.) Effectiveness is doing it well. Five key factors for this continued growth: 1. Most service businesses are labor-intensive businesses. mining. 4. construction. transportation. A. single.000 largest US companies are service-based.intensive: require lots of capital. Profit vs. 2. which in turn raises our standard of living and improves our quality of life. 2. Growth of the Service Sector Since the mid-1980s. insurance. Changing demographic patterns and lifestyle trends a. Not-for-Profit Organizations 1. a. and single parents than Page 4 of 12 . Example: airline industry. Baby Boomers (people born between 1946 and 1964) are in their peak earning years with “disposable” income earmarked for investment. transportation. Generate taxes for public education. Profit organizations earn the difference between production and marketing costs and product price. breaking even in the process. Consumers have more disposable income a. Not-for-Profit organizations provide goods and services. Capital. automobile manufacturers 2.

Knowledge: the collective intelligence of an organization C. Capitalism: Capitalism is a free-market system based on freedom and competition Theories of capitalism are based on the ideas that:  capitalism requires no outside regulation (laissez faire) Page 5 of 12 . minerals. and forests). Consultants are often used to cut costs. An economic system allocates a nation’s resources to satisfy the needs of its citizens. and support services increases. growing need for services such as childcare. a. Types of economic systems: The degree to which governments control a country’s resources has spawned a continuum: 1. Capitol: resources such as money. equipment. and at what price. 4. and buildings necessary for production of goods and services. 5. refine processes. Businesses rely on five factors of production to optimize profits: 1. and home maintenance. food service. Increasing number of complex goods and new technology a. water. Greater need for professional advice a.ever before. 3. As we continue to use technological goods such as computers in our homes. who gets what B. how and when to produce. creating a market for such services. repair. what to produce 2. b. An economic system seeks to answer three basic questions: 1. Natural resources: assets useful in their natural state (land. Human resources: anyone involved in the production of goods and services 3. 2. Increased Internet creates more international support services. 3. Barriers to entry are low for Service Businesses III. how much to produce 3. What is an Economic System? A. Factors of Production: the basics used to produce goods and services are called factors of production. for whom. Entrepreneurs: innovative risk-takers who create and operate new businesses 4. the need for specialized maintenance. Free-market system: private individuals determine what to produce. E-commerce is the activity of buying and selling over the Internet.

2. D. 1. The trend toward privatization. Page 6 of 12 . Socialism lies somewhere between capitalism and communism in the degree of economic freedom that it permits. Mixed capitalism (limited intervention):     2. Socialism involves:     a high degree of government planning. a. Demand: the amount of a good or service that consumers will buy at a given time at various prices (buyers’ behavior). People get what they want and producers profit by keeping up with demand. Equilibrium price: point at which quantity supplied equals quantity demanded. some government ownership of land and capital resources high taxes for extensive coverage of social services. b. North Korea)    Almost all resources are under government control Private ownership is restricted to personal and household items Resource allocation is handles through rigid centralized planning by a handful of government officials who answer the four basic economic questions. 3. Planned System: government controls all or part of a society’s resources and limit the freedom of choice in order to accomplish government goals. Example: China prepares to turn more than 60% of its state-owned industries by 2005. little private ownership and profit (restricted to industries less vital to common welfare) Privatization: a trend towards free-market enterprise systems. markets produce goods in proportion to society’s wants US Canada Germany Japan b. How Do Free Market Economies Work? A. Supply: the quantities of a good and service that producers will provide at a particular time at various prices (sellers’ behavior). Communism is the most restrictive planned economy (Cuba. IV. Supply and demand interact to determine prices and how much to produce: 1.

No single seller is powerful enough to set prices.. 4. Governments relax or remove existing laws that impede healthy competition. and society at large. for example. service c. 4. offer products distinguishable from one another in some way. Oligopoly: A few providers dominate the market place (e. customers. 5. Monopoly: a single seller controls the supply of goods or services and the price. Four types of competition are: 1. supervisors. Federal antitrust laws. 3. Regulates and deregulates certain industries a. Enacts laws and creates regulation to foster competition. none of whom dominates the market. innovation C. prohibit harmful monopolies.g. Contribute to economic stability a. Protects stakeholders rights a. 2. Deregulation of certain industries may allow new industry competitors to enter the market. Monopolistic competition: a large number of sellers. Economic expansion occurs when the economy is growing and people are spending more Page 7 of 12 . Example: airlines. Stakeholders are groups that are affected by a business’s operations including colleagues. Firms seek to establish competitive advantage. suppliers. trucking. employees. create more choices for consumers and kept he price in check. Pure Competition: multiple buyers choose from highly similar products or services and multiple sellers freely enter and exit the market (low barriers to entry). power companies). 3. Competition is a situation in which two or more suppliers of a product are rivals in the pursuit of the same customers. banking. Government’s role in free-market economies: Sometimes governments intervene to: 1. close government control is substituted for free competition and competition is either limited or eliminated. a. Competition in free-market economies.B. b. quality d. investors. Example: recent Microsoft court battle 2. In a regulated industry. Competitive advantage: using an area of competition to appeal to particular customers: a. price b.

Unemployment statistics: signal future changes in consumer spending. Fiscal policy: government plans to collect and spend tax revenues and expenditures to stimulate or slow down the economy. Watching Economic Indicators 1. 2. d. governments can:  levy new taxes  raise or lower current tax rates  raise or lower interest rates  regulate the amount of money circulating in the economy V. 2. Testing the effectiveness of an economics system: Economists monitor statistics on employment. fewer people can afford to build new homes. Housing starts: show where several industries are heading. B. 1. and the economy suffers. Example: unemployment shows future cutbacks in spending. Business cycles: ups and downs in the economy  Recession is a downward trend that consists of two consecutive quarters of decline in Real Gross Domestic Product. How Do Economists Know if the System is Working? A. Lagging indicators: statistics that show a swing in the economy after the movement has begun. people have less money to spend. Business cut back on production.money. Fiscal and Monetary Policy:    Page 8 of 12 . If mortgage rates are high. Consumer purchases stimulate businesses o produce more goods and services. Example: Housing is very sensitive to interest rates. and price changes to measure the efficiency of our economic systems. and the economy as a whole slows down. 3. interest rates. To manage business cycles. Economic contraction occurs when such spending declines. Monetary policy: adjusts the nation’s money supply by increasing or decreasing interest rates pr the money supply to help control inflation. Economic indicators: statistics pointing toward major trends in our economic system. b. Example: When unemployment rises. Leading indicators: statistics pointing toward future trends. which in turn stimulates employment. c. employees are laid off.

and use of goods and services during a specific period of time (usually a year). housing. Deflation is the sustained fall in the general price level for goods and services. we can discover whether our economy is holding steady. distribution. Inflation is a stead rise in the prices of goods ands services throughout the economy. 3. By comparing output with other nations or previous years. D. Producing quality products and services that satisfy customer’s changing needs b. and utilities over time. Gross domestic product (GDP): measures a country’s production. Behaving in an ethically and socially responsible manner e. Globalization: the increasing tendency of the world to act as one market instead of a series of national ones---open new markets for a company’s goods and services. Durable goods orders: orders for goods that typically last for more than three years. growing. C. Measuring a Nation’s Output: 1. Starting and managing a small business in today’s competitive environment c. 2. Keeping pace with technology and electronic commerce Page 9 of 12 . Example: A rise in durable goods orders if a positive indicator that business spending is turning around. 2. E. food. Gross national product (GNP): excludes profits from foreign-owned businesses. or faltering. 2. Thinking globally and committing to a culturally diverse workforce d. Globalization creates tough competition and challenges for new businesses: a. Consumer Price Index measures the rare of inflation by comparing the change in prices of a representative basket of goods and services such as clothing. Measuring Price Changes 1. Challenges of a Global Economy 1.3.

they provide people with jobs and a means to prosper. The number of service businesses is increasing because (1) consumers have more disposable income to spend on taking care of themselves.Summary of Learning Objectives 1. governments limit the individual’s freedom of choice in order to accomplish government goals. and (5) in general barriers to entry are lower for service companies than they are for goods-producing businesses. they pay taxes that are used by the government to provide services for its citizens. control the allocation of resources. Explain how supply and demand interact to affect price. The important thing to remember is that in a free-market system. the pursuit of private gain is regarded as a worthwhile goal. Differentiate between goods-producing and service businesses. by whom. However. 2. In a free-market system. the interaction of supply and demand determines what is produced and in what amounts. whereas the quantity supplied may (or may not) decline. (2) many services target consumers’ needs brought about by changing demographic patterns and lifestyle trends. adjusting price or supply to meet or spur demand does not guarantee profitability. with the power to block those that might restrain competition. 4. When the interests of buyers and sellers are in balance. an equilibrium price is established. individuals have a high degree of freedom to decide what is produced. nonprofit organizations exist to provide society with a social or educational service. Businesses serve four key functions: They provide society with necessities. 3. as the airline example illustrates. (3) consumers need assistance with using and integrating new technology into their business operations and lifestyle. It protects stakeholders from potentially harmful actions of businesses. It regulates certain industries where competition would be wasteful or excessive. The driving force behind most businesses is the chance to earn a profit. and by approving mergers and acquisitions. the quantity demanded goes down but the supplier’s incentive to produce more goes up. Define what a business is and identify four key social and economic roles that businesses serve. supply and demand affect price in the following manner: When the price goes up. and they reinvest their profits in the economy. and list five factors that are contributing to the increase in the number of services businesses. (4) companies are turning to consultants and other professionals for advice to remain competitive. Differentiate between a free-market system and a planned system. by enforcing antitrust legislation. A business is a profit-seeking activity that provides goods and services to satisfy consumers’ needs. The government fosters competition by enacting laws and regulations. And it contributes to Page 10 of 12 . The pursuit of private gain is nonexistent under a planned system. In a planned system. the quantity demanded increases. however. and for whom. In the simplest sense. When the price goes down. and restrict private ownership to personal and household items. thereby increasing a nation’s wealth. Discuss the four major economic roles of the government. whereas service businesses produce intangible goods and tend to be labor intensive. 5. Goods-producing businesses produce tangible goods and tend to be capital intensive. Moreover.

7. and (5) keeping pace with technology and electronic commerce. Economists evaluate economic performance by monitoring a variety of economic indicators such as unemployment statistics. (2) starting and managing a small business in today’s competitive environment. (3) thinking globally and committing to a culturally diverse workforce. The five challenges identified in the lecture are (1) producing quality products and services that satisfy customers’ changing needs. They compute the consumer price index (CPI) to keep an eye on price changes—especially inflation. Explain how a free-market system monitors its economic performance. 6.economic stability by regulating the money supply and by spending for the public good. housing starts. Page 11 of 12 . economists measure the productivity of a nation by computing the country’s gross domestic product (GDP)—the sum of all goods and services produced by both domestic and foreign companies as long as they are located within a nation’s boundaries. (4) behaving in an ethically and socially responsible manner. and inflation. In addition. Identify five challenges that businesses are facing in the global economy. durable-goods orders.

Assignment . quality. service or a combination of these attributes. as directed to you in the class. How does that business try to gain a competitive advantage in the marketplace? Write a brief summary. describing whether the company competes on speed.Practice Your Knowledge Select a local service business you are familiar with. Page 12 of 12 . Be prepared to present your analysis to your classmates. price. innovation.

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