Chapter 1 The Dynamics of Business and Economics

What is Business?
Individuals/organizations who try to earn a profit by providing products that satisfy peoples needs (Ferrell et al) An organization that seeks to earn profits by providing goods and services (Griffin et al) The activity of buying and selling, trade (Websters Dictionary)

Basic Business Concepts

Business
An organization that provides goods or services that are then sold to earn profits.

Profits
The difference between a businesss revenues and its expenses. The rewards owners get for risking their money and time.

Consumer Choice and Demand

The freedom of consumers to choose how to satisfy their wants and needs.

The freedom of business owners to decide how to meet those wants and needs.

Opportunity and Enterprise

Success in business requires spotting a promising opportunity and then developing a good plan for capitalizing on it.

The Benefits of Business

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

The People and Activities of Business

People: Owners Employees Customers Management Marketing Finance

Activities:

The People and Activities of Business (contd)

Owners put up money; take risk Employees do the work Customers must be satisfied Finance resources to keep business going Marketing Marketing gather info on customer to make decisions Management coordination of employee efforts set/attain goals be aware of competition

Factors of Production
Factors of production are the basic resources that are needed to produce goods and services: Natural resources: e.g., land, water, forests Human resources: Labour e.g., managers, workers Financial resources: Capital; e.g., money, equipment, machinery

Economic Systems
Economic System
A nations system for allocating its resources among its citizens, both individuals and organizations

Types of Economic Systems

Planned Economy
A centralized government controls all or most factors of production and makes all or most production and allocation decisions for the economy.

Market Economy
Individual producers and consumers control production and allocation by creating combinations of supply and demand.

Market
A mechanism of exchange between buyers and sellers of a good or service.

Planned Economies
Communism
A system Karl Marx envisioned in which individuals would contribute according to their abilities and receive benefits according to their needs.
The government owns and operates all factors of production.

The government assigns people to jobs and owns all businesses and controls business decisions.

Market Economies
Capitalism
The government supports private ownership and encourages entrepreneurship. Individuals choose where to work, what to buy, and how much to pay. Producers choose who to hire, what to produce, and how much to charge.

Mixed Market Economy

Features characteristics of both planned and market economies Privatization: The process of converting government enterprises into privately owned companies. Socialism: The government owns and operates select major industries such as banking and transportation. Smaller businesses are privately owned.

The Economics of Market Systems

Demand The willingness and ability of buyers to purchase a product (a good or a service). Supply The willingness and ability of producers to offer a good or service for sale. The Laws of Demand and Supply Demand: Buyers will purchase (demand) more of a product as its price drops and less of a product as its price increases. Supply: Producers will offer (supply) more of a product for sale as its price rises and less of a product as its price drops.

Demand and Supply

Demand and Supply Schedule
The relationships among different levels of demand and supply at different price levels as obtained from marketing research, historical data, and other studies of the market. Demand curve: How much product will be demanded (bought) at different prices.

Supply curve: How much product will be supplied (offered for sale) at different prices.
Market price (equilibrium price): The price at which the quantity of goods demanded and the quantity of goods supplied are equal.

Demand and Supply Curves

Demand and Supply Curves (contd)

Surpluses and Shortages

Surplus
A situation in which the quantity supplied exceeds the quantity demanded
Causes losses

Shortage
A situation in which the quantity demanded will be greater than the quantity supplied
Causes lost profits

Invites increased competition

Degrees of Competition
Perfect Competition Prices are determined by supply and demand because no single firm is powerful enough to influence the price of its product. All firms in an industry are small. The number of firms in the industry is large. Principles of perfect competition: Buyers view all products as identical. Buyers and sellers know the prices that others are paying and receiving in the marketplace. It is easy for firms to enter or leave the market. Prices are set exclusively by supply and demand and accepted by both sellers and buyers.

Degrees of Competition (contd)

Monopolistic Competition
There are numerous sellers trying to differentiate their products from those of competitors so as to have some control over price.
There are many sellers though fewer than in pure competition.

Sellers can enter or leave the market easily.

The large number of buyers relative to sellers applies potential limits to prices.

 Oligopoly

Degrees of Competition (contd)

An industry with only a few large sellers Entry by new competitors is hard because large capital investment is needed. The actions of one firm can significantly affect the sales of every other firm in the industry. The prices of comparable products are usually similar.

As the trend toward globalization continues, most experts believe that oligopolies will become increasingly prevalent.

Degrees of Competition (contd) Monopoly

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