Chapter II

Economic Foundations
of Business

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Economic Foundations of Business

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 What is Business?
- Successful businesses satisfy the various needs of
consumers.
- Ford cars fill the need for individual transportation;
Kodak cameras and film satisfy the need to preserve a
memory of important events.
- Some firms fulfill consumer needs though the sale of
services rather than products.
- Prudential markets certain types of insurance policies
that provide a guarantee of monthly payments upon
retirement.
- United Airlines supplies a rapid comfortable means of
moving from one city to another.
- Mc Donald’s offers quick, affordable meals in a family
atmosphere. 3
 BUSINESS AND PROFIT
- In our society, business is the activating element the
engine of growth and productivity.
- Business is defined as all of the commercial and industrial
activities that seek profits by providing goods and services for
sale.
- An important aspect of business is the ability to earn profits.
- Profit is defined as the earnings that remain in a firm after the
costs of operation (including taxes) are subtracted from its
sales revenue.
- Profit rewards a business for providing the desired goods and
services to consumers in an economical and efficient manner.
- Without the profit incentive, our business system could not
operate effectively.

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 What is an Economic System?
- An economic system is the mechanism by which labor
and other economic resources are brought together to
produce and distribute the goods and services people
need and want.
- These include goods such as food, clothing, cares and
factories and services such as transportation, education,
health care, and public safety.
- Since there are limits to what can be produced, basic
choices must be made regarding the types of goods
and services to be produced.
- Different choices result in different types of economic
systems: capitalism, socialism, and communism.
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 Capitalism : In Theory and Practice

- Capitalism is an economic system characterized by the

private ownership of economic resources by individuals
or groups of individuals.
- In capitalism, private property holders are free to use
the resources as they see fit.
- They are the decision makers as they choose the goods
and services to be produced and sold and use the
resources to do so.
- The main motivating force in this economic
system is private profit.

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 Private Property and Enterprise

- In capitalism, individuals and businesses have the right to

purchase, own, and sell property including land, buildings, and
equipment.
- Producers also have the right to sell the goods they produce and
keep the after-tax profits from these sales.
- Most businesses are owned by individuals rather than by
federal, state, or local governments.
- This is true regardless of the size of the business.
- Sears and American Airlines, as well as small hardware store
and local bakeries, are all private enterprises.

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 Freedom of Choice
- An outstanding feature of capitalism, especially in a country
with a democratic form of government, is freedom of choice in
economic actions.
- In our country, producers are free to choose their type of
business.
- They can combine the factors of production-land, labor, capital
(funds and equipment), and management-to generate profits as
they see fit, so long as they conform to our laws.
- As workers, we are free to choose the jobs that we wish in the
industries that we prefer, and with the companies that offer the
best rewards for our efforts.
- As consumers, we are free to buy the goods and services that
we choose.
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 Socialism : In Theory and Practice
- Socialism is an economic system in which the
government owns and controls the non-human economic
resources.
- Socialism shifts the decision-making authority from
business people to the government or a central
authority then makes the major economic decisions
concerning production and distribution of goods and
services.
- These decisions are made for the benefit of society as a
whole.
- In practice, socialist economies vary widely in the
degree of government control and in the attainment of
their goals.
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 Communism : In theory and practice
- Communism, is an economic system In which all economic resources
would be owned collectively by the state and the party.
- Today, with the collapse of communism in the former Soviet
Union and Eastern European countries, the only major countries
regarded as communist are the people’s republic of China,
Cuba, and Vietnam.
- Recently, the People’s Republic of China has been
experimenting with its economic system.
- It is allowing certain privately owned businesses to flourish in
the hope that they will jolt the state-run enterprises into greater
economies and efficiencies.

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 Mixed Economies
- In today’s world, there are probably no purely
capitalistic, socialistic, or communistic economic
systems.
- The economic systems of most nations contain certain
attributes of both capitalism and socialism.
- When an economic system combines in varying degrees
private enterprise, government planning, and government
ownership of certain industries are known as a
mixed economy.

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 Comparing Economic and
Political systems

- Although economic and political systems in each

country are related in important ways, we should be
careful not to confuse the economic systems with the
political systems of different nations.
- An economic system deals with the production and
distribution of goods and services.
- A political system involves the organization of
government, the conduct of its public affairs, and the
pursuit of its national interests.

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 Democracy and Market economy
- Democracy is a political system based on individuals’
freedoms.
- In democratic nation, individuals are free to choose their
personal goals and to decide how their work and
resources will be used.
- The United states and most other major industrial
countries have a market economy in which the
fundamental economic decisions are made primarily by
the interplay of consumers and producers in the
marketplace.
- When producers make the correct economic decisions,
consumers purchase their goods and services,
generating sales and profits.
- Market economies can be democratic, as in the united
states. 13
Characteristics of Capitalism, Socialism
and Communism

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Circular flow process

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Government’s role and responsibility in the Economy
There are five major areas in which governments at the
federal, state, and local levels are involved in the economy:
- Protection of the individual’s rights and freedoms (economic,
political, and religious) through our courts and the administration of
our laws.
- Provision of goods and services (such as high-ways, national
defense, and education) in the interest of all.
- Regulation (the promotion of fair business competition and the
protection of public health and safety).
- Promotion of economic growth and stabilization through
various economic policies and program (including both taxation
and the role as purchaser of businesses’ goods and services).
- Direct support to individuals (programs to reduce hardships for
individuals who cannot meet their minimum needs because of
special circumstances or lack of employment).

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