Chapter 1

Chapter 1
Exploring the World

of Business and
Economics
© 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
LEARNING OBJECTIVES
1-1 Discuss what you must do to be successful in today’s business

world.
1-2 Define business and identify potential risks and rewards.
1-3 Define economics and describe two types of economic systems:
capitalism and command economy.
1-4 Identify the ways to measure economic performance.
1-5 Examine the different phases in the typical business cycle.
1-6 Outline the four types of competition.
1-7 Summarise the factors that affect the business environment and
the challenges that South African businesses will encounter in
the future.
Why Study Business?
 For help in choosing a career

 To be a successful employee
• Cultural (or workplace) diversity – differences
among people in a workforce owing to race, ethnicity,
and gender
 To improve your management skills
 To start your own business
 To become a better informed consumer
and investor
FIGURE 1-1 Who Makes the Most Money?
Business: A Definition
 Business – the organised effort of individuals to

produce and sell, for a profit, the goods and
services that satisfy society’s needs
The Organised Effort of Individuals
(slide 1 of 3)
 Material resources – the raw materials used in

manufacturing resources as well as buildings and
machinery
 Human resources – the people who furnish their labour
to the business in return for wages
 Financial resources – the money required to pay
employees, purchase materials and generally keep the
business operating
 Informational resources – information that tells the
managers of the business how effectively the other three
resources are being combined and used
FIGURE 1-2 Combining Resources
(slide 2 of 3)
 Today, businesses are usually organised as one of three

specific types.
1. Service businesses – produce services, such as haircuts, legal
advice, or tax preparation
o Example: Pastel Accounting
2. Manufacturing businesses – process various materials into
tangible goods
o Example: Intel
3. Marketing intermediaries – buy products from manufacturers
and then resell them
o Example: Sony Corporation
(slide 3 of 3)
o E-business – the organised effort of individuals

to produce and sell, for a profit, the goods and
services that satisfy society’s needs through the
facilities available on the internet
Satisfying Needs
 The ultimate objective of every business is to

satisfy the needs of its customers.
 When businesses understand their customers’
needs and work to satisfy those needs, they are
usually successful
Business Profit (slide 1 of 2)
 Profit – what remains after all business

expenses have been deducted from sales
revenue
• A negative profit, which results when a business’s
expenses are greater than its sales revenue, is called
a loss.
 Stakeholders – all the different people or
groups of people who are affected by an
organisation’s policies, decisions and activities
FIGURE 1-3 The Relationship Between Sales Revenue and Profit
Business Profit (slide 2 of 2)
 Profit is the reward business owners receive for

producing goods and services that customers
want.
 Profit is also the payment that business owners
receive for assuming the considerable risks of
ownership.
• The risk of not being paid
• The risk of losing whatever they have invested into
the business
Types of Economic Systems (slide 1 of 3)
 Economics – the study of how wealth is created

and distributed
 Today, experts often study economic problems
from two different perspectives:
1. Microeconomics – the study of the decisions made
by individuals and businesses
2. Macroeconomics – the study of the national
economy and the global economy
 Economy – the way in which people deal with
creation and distribution of wealth
 Factors of production – resources used to produce

goods and services
• Land and natural resources – elements used in the production
process to make appliances, cars and other products
o Examples: crude oil, forests, minerals, land, and water
• Labour – the time and effort used to produce goods and services
o Examples: managers and employees
• Capital – the money, facilities, equipment and machines used in
the operation of organisations
o Example: manufacturing equipment at a production facility
• Entrepreneurship – the activity that organises land and natural
resources, labour and capital
o Entrepreneur – a person who risks time, effort and money to
start and operate a business
 Today, two different economic systems exist:

capitalism and command economies.
• The way in which each system answers the following
four basic economic questions determines the type of
a country’s economy:
1. Which goods and services – and how much of each – will
be produced?
2. How will these goods and services be produced?
3. For whom will these goods and services be produced?
4. Who owns and who controls the major factors of
production?
Capitalism (slide 1 of 2)
 Capitalism – an economic system in which

individuals own and operate the majority of
businesses that provide goods and services
 Capitalism stems from the theories of the
Scottish economist Adam Smith.
 Invisible hand – a term created by Adam Smith
to describe how an individual’s personal gain
benefits others and a nation’s economy
FIGURE 1-4 Basic Assumptions of Adam Smith’s Laissez-Faire
Capitalism
Capitalism (slide 2 of 2)
 The term ‘laissez-faire’ describes Smith’s capitalistic

system and implies that there should be no government
interference in the economy.
 Adam Smith’s laissez-faire capitalism is also based on
the concept of a market economy.
• Market economy – an economic system in which businesses
and individuals decide what to produce and buy, and the market
determines quantities sold and prices
o Example: Ford Motor Company must decide what type of cars it
will sell, how the cars will be produced, and for whom the cars will
be produced; you, as the consumer, must decide if you will buy a
Ford product or an car manufactured by another company.
Capitalism in South Africa
 Mixed economy – an economy that exhibits

elements of both capitalism and socialism
• The South African economy is a mixed economy.
• In a mixed economy, the four basic economic
questions (what, how, for whom and who) are
answered through the interaction of:
o Households
- Consumer products – goods and services purchased by
individuals for personal consumption
o Businesses
o Governments
FIGURE 1-5 The Circular Flow in a Mixed Economy
Command Economies
 Command economy – an economic system in

which the government decides which goods and
services will be produced, how they will be
produced, for whom available goods and
services will be produced, and who owns and
controls the major factors of production
 Examples of command economies:
• Socialism
• Communism
Measuring Economic Performance
The Importance of Productivity in the Global Marketplace

 Productivity – the average level of output per worker per hour
South Africa’s Gross Domestic Product

 Gross domestic product (GDP) – the total dollar value of all goods
and services produced by all people within the boundaries of a
country during a specified time period – usually a one-year period
 To make accurate comparisons of the GDP for different years, rand
amounts must be adjusted for inflation and deflation.
• Inflation – a general rise in the level of prices
• Deflation – a general decrease in the level of prices
FIGURE 1-6 Real GDP Growth Rate from 2014 (projected to) 2024
Other Important Economic Indicators
That Measure a Nation’s Economy
 Unemployment rate – the percentage of a

nation’s labor force unemployed at any time
 Consumer price index (CPI) – a monthly index
that measures the changes in prices of a fixed
basket of goods purchased by a typical
consumer in an urban area
 Producer price index (PPI) – an index that
measures prices that producers receive for their
finished goods
TABLE 1-1 Common Measures Used to Evaluate a Nation’s Economic
Health (slide 1 of 2)
TABLE 1-1 Common Measures Used to Evaluate a Nation’s Economic
Health (slide 2 of 2)
The Business Cycle (slide 1 of 2)
 Business cycle – the recurrence of periods of

growth and recession in a nation’s economic
activity
 Generally, the business cycle consists of four
phases:
1. The peak (prosperity)
2. Recession – two or more consecutive three-month
periods of decline in a country’s GDP
o Depression – a severe recession that lasts longer than a
typical recession and has a larger decline in business activity
when compared to a recession
The Business Cycle (slide 2 of 2)
 Generally, the business cycle consists of four phases

(continued):
3. The trough
o To offset the effects of recession and depression, the national
treasury uses both monetary and fiscal policies.
- Monetary policies – the government’s decisions that determine
the size of the supply of money in the nation and the level of
interest rates
- Fiscal policy – government influence on the amount of savings
and expenditures; accomplished by altering the tax structure and
by changing the levels of government spending
4. Recovery (expansion)
Types of Competition
 Competition – rivalry among businesses for

sales to potential customers
 Economists recognise four different degrees of
competition:
1. Perfect
2. Monopolistic
3. Oligopoly
4. Monopoly
TABLE 1-2 Four Different Types of Competition
Perfect Competition (slide 1 of 2)
 Perfect (or pure) competition – the market situation in

which there are many buyers and sellers of a product,
and no single buyer or seller is powerful enough to affect
the price of that product
 Conditions for a perfect competition:
• The market is for a single product.
• There are no restrictions on businesses entering the industry.
• All sellers offer essentially the same product for sale.
• All buyers and sellers know everything there is to know about
the market.
• The overall market is not affected by the actions of any one
buyer or seller.
 Perfect competition is quite rare in today’s world.
Perfect Competition (slide 2 of 2)
The Basics of Supply and Demand

 Supply – the quantity of a product that producers are
willing to sell at each of various prices
 Demand – the quantity of a product that buyers are
willing to purchase at each of various prices
The Equilibrium, or Market, Price

 Market price – the price at which the quantity demanded
is exactly equal to the quantity supplied
FIGURE 1-7 Supply Curve and Demand Curve
Monopolistic Competition
 Monopolistic competition – a market situation

in which there are many buyers along with a
relatively large number of sellers who
differentiate their products from the products of
competitors
• Product differentiation – the process of developing
and promoting differences between one’s products
and all competitive products
 Examples: clothing, shoes, soaps, furniture
Oligopoly
 Oligopoly – a market (or industry) in which

there are few sellers
 Examples: the car, airline and car rental
industries
Monopoly
 Monopoly – a market (or industry) with only one seller, and barriers
to keep other businesses from entering the industry
 Example: public utilities
• Each utility operates in a natural monopoly, an industry that requires a
huge investment in capital and within which any duplication of facilities
would be wasteful.
• A limited (or legal) monopoly is created when a government entity
issues a franchise, license, copyright, patent, or trademark.
 Except for natural monopolies and legal monopolies, laws regulating
competition discourage or prohibit both monopolies and attempts to
form monopolies to ensure that competitive markets exist and
customers have a choice for products they need or want to
purchase.
South African Business Today
 Understanding the history of business and its

development in South Africa can help us understand the
country’s position relative to those of the rest of the
world.
• Standard of living – a loose, subjective measure of how well off
an individual or a society is, mainly in terms of want satisfaction
through goods and services
 South Africa’s history has played a central role in
shaping the nature and performance of the country’s
economy today.
 To understand the current business environment and the
challenges ahead, it helps to understand how business
developed.
Early Business Development
 Before the arrival of Dutch settlers under Jan van

Riebeeck at the Cape of Good Hope in 1652, the
territory that became known as South Africa was the
home of indigenous groups.
 At the time of the arrival of the settlers representing the
Dutch East India Company (DEIC) in 1652, most of the
trade between indigenous groups was subsistence-
based bartering.
 When slaves were imported from Dutch East India, the
economy at the Cape became a slave economy.
 When the colony reached the Great Fish River, the
economy remained agricultural and subsistence-based.
The Discovery of Diamonds and Gold
 In 1867, diamonds were discovered on the banks of the Orange

River.
 In the diamond rush of 1869, thousands streamed to the area and
Kimberley was formed.
 The diamond trade soon fell under the monopoly of De Beers
Consolidated Mines, established by Cecil Rhodes.
 Rapid population and economic growth characterised this period.
 When gold was discovered on the Witwatersrand in 1884, the
transformation of South Africa’s economy from an agricultural one to
an industrialised one accelerated.
 South Africa began to play an active role in the global economy.
 But the diamond and gold mining industries were not racially
balanced.
Business Development in the 1900s
 The 1900s were a time of growing racial inequality in South Africa.

 South Africa became a self-governing dominion of Britain in 1910
when its colonies joined forces to become the Union of South Africa.
 The Union government sought to develop industries other than
mining, so that the economy would rely less on that industry.
Agriculture and manufacturing were targeted. Part of this economic
development involved legislation that sought to reduce Black
workers’ competition with White farmers and other workers.
 Under apartheid, jobs involving skilled labour were reserved for
White South Africans, and Black South Africans provided cheap,
unskilled labour that mining and manufacturing needed to prosper.
 The international community imposed economic sanctions in 1986
and its companies disinvested from the country. Foreign investment
returned when sanctions were lifted in 1993.
A New Century: 2000 and Beyond
 Positives:
• Technology became available at an affordable price.
• The growth of the service economy – an economy in which
more effort is devoted to the production of services than to the
production of goods – changed the way companies do business.
 Negatives:
• Many economic indicators still indicate troubling economic
problems and pessimism.
• Social unrest.
• Political uncertainty on the national and local levels.
The Current Business Environment
 In today’s competitive business world, all of the

following environments affect business:
• The competitive environment
• The global environment
• The technology environment
o Social media – the online interaction that allows people
and businesses to communicate and share ideas, personal
information and information about products or services
• The economic environment
o Sustainability – the ability to maintain or improve
standards of living without damaging or depleting natural
resources for present and future generations
The Challenges Ahead
 Several key issues will challenge South Africa’s

economic system over the next decade.
 The economy went into recession in the first quarter of
2020.
 The country has high income inequality, unemployment
and corruption levels.
 Load shedding reduces investor confidence.
 Skills shortages in technology, engineering, health and
finance.
 South Africa has a high crime rate, a weak rand and
political instability.

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Chapter 1

Exploring the World

1-1 Discuss what you must do to be successful in today’s business

 For help in choosing a career

 Business – the organised effort of individuals to

 Material resources – the raw materials used in

 Today, businesses are usually organised as one of three

o E-business – the organised effort of individuals

 The ultimate objective of every business is to

 Profit – what remains after all business

 Profit is the reward business owners receive for

 Economics – the study of how wealth is created

 Factors of production – resources used to produce

 Today, two different economic systems exist:

 Capitalism – an economic system in which

 The term ‘laissez-faire’ describes Smith’s capitalistic

 Mixed economy – an economy that exhibits

 Command economy – an economic system in

The Importance of Productivity in the Global Marketplace

South Africa’s Gross Domestic Product

 Unemployment rate – the percentage of a

 Business cycle – the recurrence of periods of

 Generally, the business cycle consists of four phases

 Competition – rivalry among businesses for

 Perfect (or pure) competition – the market situation in

The Basics of Supply and Demand

The Equilibrium, or Market, Price

 Monopolistic competition – a market situation

 Oligopoly – a market (or industry) in which

 Understanding the history of business and its

 Before the arrival of Dutch settlers under Jan van

 In 1867, diamonds were discovered on the banks of the Orange

 The 1900s were a time of growing racial inequality in South Africa.

 In today’s competitive business world, all of the

 Several key issues will challenge South Africa’s

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