The Dynamics of

Business and
Economics

Chapter 1

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 Learning Objectives
1-1 Define basic concepts such as business, product, and profit.
1-2 Identify the main participants and activities of business and
explain why studying business is important.
1-3 Define economics and compare the four types of economic
systems.
1-4 Describe the role of supply, demand, and competition in a free-
enterprise system.
1-5 Specify why and how the health of the economy is measured.
1-6 Trace the evolution of the American economy and discuss the
role of the entrepreneur in the economy.
1-7 Evaluate a small-business owner’s situation and propose a
course of action.

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 The Nature of Business 1
Businesses try to earn profits by providing
products that satisfy people’s needs
Products include:
• Tangible goods
• Automobile, smartphone, pair of jeans

• Service
• Dry cleaning, doctor’s visit, movie

• Idea
• Accountants and attorneys provide ideas for solving problems

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 The Nature of Business 2
The Goal of a Business: to earn a profit
Nonprofit organizations
• Do not share the purpose of earning profits
• May provide goods or services
• Engage in fund-raising
• Engage in management, marketing, and finance to
reach goals
Stakeholders

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 The Nature of Business 3
The People and Activities of Business
• Management
• Involves the functions of planning, organizing, leading, and
controlling
• Marketing
• Focus of all marketing activities is satisfying customers

• Finance
• Refers to all activities concerned with obtaining money and
using it effectively

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 Figure 1.1 Overview of the Business World

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 The Nature of Business 4
Why Study Business?
• Help you develop skills and acquire knowledge to
prepare for your future career
• Help you understand activities needed to provide
goods and services
• Help you become a well-informed consumer and
member of society

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 The Economic Foundations of Business 1
What is economics?
Resources
• Natural resources
• Human resources (also called labor)
• Financial resources (also called capital)
• Intangible resources

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 The Economic Foundations of Business 2
Economic Systems
• Communism
• Socialism
• Capitalism (or free enterprise)
• Pure capitalism
• Modified capitalism

• Mixed economies

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 Table 1.1a Comparison of Communism,
Socialism, and Capitalism
Topic Communism Socialism Capitalism
Business Most businesses The government owns Individuals own
ownership are owned and and operates some and operate all
operated by the basic industries; businesses.
government. individuals own small
businesses.
Competition Government Restricted in basic Encouraged by
controls competition industries; encouraged market forces and
and the economy. in small business. government
regulations.

Profits Excess income Profits earned by Individuals and

goes to the small businesses may businesses are
government. The be reinvested in the free to keep
government business; profits from profits after
supports social and government-owned paying taxes.
economic industries go to the
institutions. government.

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 Table 1.1b Comparison of Communism,
Socialism, and Capitalism

Topic Communism Socialism Capitalism

Product Consumers have a Consumers have Consumers have a
availability limited choice of some choice of wide choice of goods
and price goods and services; goods and services; and services; prices
prices are usually prices are are determined by
high. determined by supply and demand.
supply and demand.
Employment Little choice in More choice of Unlimited choice of
options choosing a career; careers; many careers.
most people work for people work in
government-owned government jobs.
industries or farms.

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 The Economic Foundations of Business 3
The Free-Enterprise System
• Many large economies are free-enterprise, such as
U.S., Canada, and Japan
• Many communist and socialist countries apply free-
enterprise principles, such as China and Russia
• Allows a company to succeed or fail on the basis of
market demand

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 The Economic Foundations of Business 4
The Free-Enterprise System continued
• Basic individual and business rights must exist in
order for free enterprise to work
• Right to own property
• Right to earn profits and use them as one wishes
• Right to determine business operations
• Right to choose a career, where to live or locate a business,
what goods/services to purchase, and more

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 The Economic Foundations of Business 5
The Forces of Supply and Demand
• Demand
• Supply
• Equilibrium price

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 Figure 1.2 Equilibrium Price of Handmade Rugs

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 The Economic Foundations of Business 6
The Nature of Competition
• Competition
Four types of competitive environments:
• Pure competition
• Monopolistic competition
• Oligopoly
• Monopoly

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 The Economic Foundations of Business 7
Economic Cycles and Productivity
• Economic expansion
• Inflation

• Economic contraction
• Recession
• Unemployment
• Depression

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 Figure 1.3 Annual Average Unemployment
Rate, Civilian Labor Force, 16 Years and Over

Sources: Bureau of Labor Statistics, “Labor Force Statistics from the Current Population Survey,”
http://data.bls.gov/timeseries/LNS14000000 (accessed March 25, 2018).

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 The Economic Foundations of Business 8
Economic Cycles and Productivity continued
• Measuring the economy
• Gross domestic product (GDP)
• Budget deficit

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 Figure 1.4 Growth in U.S. Gross Domestic Product

Source: U.S. Department of Commerce Bureau of Economic Analysis, “National Economic Accounts,”
www.bea.gov/national/index.htm#gdp (accessed March 25, 2018).

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 Table 1.3 How Do We Evaluate Our Nation’s
Economy?
Unit of Measure Description
Trade balance The difference between our exports and our imports. If the balance is
negative, as it has been since the mid-1980s, it is called a trade
deficit and is generally viewed as unhealthy for our economy.
Consumer Measures changes in prices of goods and services purchased for
Price Index consumption by typical urban households.
Per capita Indicates the income level of “average” Americans. Useful in
income determining how much “average” consumers spend and how much
money Americans are earning.
Unemployment Indicates how many working-age Americans are not working who
rate otherwise want to work.
Inflation Monitors price increases in consumer goods and services over
specified periods of time. Used to determine if costs of goods and
services are exceeding worker compensation over time.
Worker The amount of goods and services produced for each hour worked.
productivity

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 The American Economy 1
United States economy
• Mixed economy
• Foundation based on capitalism
• Standard of living is high

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 The American Economy 2
The Importance of the American Economy
• Open economy
• Economy assessed on several factors
• Growth in GDP and jobs
• Government public policy
• Tax revenue from individuals and businesses

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 Figure 1.5 Individual Income Tax Statistics
by Income Group

Source: Internal Revenue Service, Individual Income Tax Rates and Tax Shares, (accessed March 25, 2018).

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 The American Economy 3
A Brief History of the American Economy
• The early economy
• The Industrial Revolution
• The manufacturing and marketing economies
• The service and new digital economy

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 Figure 1.6 Online Retailing and E-Commerce

Source: Aaron Smith and Monica Anderson, “Online Shopping and E-Commerce,” Pew Research Center, December
19, 2016, http://www .pewinternet.org/2016/12/19/online-shopping-and-e-commerce/ (accessed March 25, 2018).

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 The American Economy 4
The Role of the Entrepreneur
• Risk their wealth, time, and effort to develop for profit
an innovative product or way of doing something
• Let the free-enterprise system help them to succeed
• Change business practices through new technology
and innovative management techniques

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 Mobile Payment Systems

Apple Pay is a mobile payment system that allows users to store their
credit card or debit card information. When checking out at stores,
users can bring up their credit card with two taps and use the
information to pay for their purchases.

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 The American Economy 5
The Role of Government in the American Economy
• Best described as modified capitalism
• Regulate business to preserve competition and
protect consumers through laws and regulations
• Intervene occasionally to regulate economy and spur
growth

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 The American Economy 6
The Role of Ethics and Social Responsibility in
Business
• Promote public confidence in corporate America
• Foster business ethics
• Encourage socially responsible behavior
• Push for diversity in workforce
• Enhance reputation and drive profits

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 Socially Responsible Behavior

Many companies engage in socially responsible behavior to give back to their

communities. Bank of America partners with Habitat for Humanity to build home
for disadvantaged families.

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 Can You Learn Business in a Classroom?
Absolutely!
To be successful in business you need:
• Knowledge
• Skills
• Experience
• Good judgment

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