U. 1
chapter
The S. Business Environment
Business Essentials, 8th Edition
Ebert/Griffin
Instructor Lecture
PowerPoints
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Hall
PowerPoint Presentation prepared by
Carol Vollmer Pope Alverno College
L E A R N II N G O B J E C T II V E S
LEARN NG OBJECT VES
After reading this chapter, you should be able to:
1. Define the nature of U.S. business and identify its main
goals and functions.
2. Describe the external environments of business and
discuss how these environments affect the success or
failure of any organization.
3. Describe the different types of global economic
systems according to the means by which they control
the factors of production.
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L E A R N II N G O B J E C T II V E S
LEARN NG OBJECT VES
((cont.)
cont.)
After reading this chapter, you should be able to:
4. Show how markets, demand, and supply affect resource
distribution in the United States.
5. Identify the elements of private enterprise and explain the
various degrees of competition in the U.S. economic system.
6. Explain the importance of the economic environment to
business and identify the factors used to evaluate the
performance of an economic system.
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The Concept of Business and Profit
Business
An organization that provides (sells) goods or
services to earn profits.
Profits
The difference between a businesss revenues and its
expenses.
Consumer Choice and Demand
Consumers choose how to satisfy their wants and
needs.
Opportunity and Enterprise
Identify needs and capitalize on the opportunity.
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The Concept of Business and Profit (cont.)
The Benefits of Business
Provide goods and services
Employ workers which results in increased quality of
life and standard of living
Innovation and opportunities
Enhanced personal incomes of owners and
stockholders
Support for charities and community leadership
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The External Environments of Business
External Environment
Everything outside an organizations
boundaries that might affect it
Six areas: domestic business, global business,
technological, political-legal, sociocultural, and
economic environments
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The External Environments of Business
(cont.)
Domestic Business Environment
The environment in which a firm conducts its
operations and derives its revenues by:
Seeking to be close to customers
Building relationships with suppliers
Distinguishing itself from competitors
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The External Environments of Business
(cont.)
Global Business Environment
The international forces that affect a business:
International trade agreements
International economic conditions
Political unrest
International market opportunities
Suppliers
Cultures
Competitors
Currency values
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The External Environments of Business
(cont.)
Technological Environment
All the ways by which firms create value for
their constituents:
Human knowledge
Work methods
Physical equipment
Electronics and telecommunications
Various business activity processing systems
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The External Environments of Business
(cont.)
Political-Legal Environment
The relationship between business and the
government; laws regulate what an organization
can and cannot do in many
areas including:
Products
Advertising practices
Safety and health considerations
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The External Environments of Business
(cont.)
Sociocultural Environment
The customs, mores, values, and
demographic characteristics of the society
The standards of business conduct a society
is likely to accept
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The External Environments of Business
(cont.)
Economic Environment
The relevant conditions that exist in the economic
system in which a company operates
In a strong economy where many people have
jobs, a growing company may find it necessary to
pay higher wages and offer more benefits in order
to attract workers.
In a weaker economy where people are looking for
jobs, a firm may be able to pay less and offer fewer
benefits.
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Economic Systems
Economic System
A nations system for allocating its resources among
its citizens, both individuals and organizations
Factors of Production
Labor
Capital
Entrepreneurs
Physical resources
Information resources
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Two 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.
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Types of Economic Systems
Planned Economy
- Communism individuals 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.
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Types of Economic Systems (cont.)
Market Economics
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.
Market
A mechanism of exchange between buyers and
sellers of a good or service.
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Types of Economic Systems (cont.)
Market Economics
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.
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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 in a Market Economy
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.
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Demand and Supply in a Market Economy
Demand and Supply Schedule
The relationships among different levels of demand
and supply at different price levels
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.
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Demand and Supply (cont.)
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Demand and Supply (cont.)
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Demand and Supply (cont.)
Surplus
A situation in which the quantity supplied
exceeds the quantity demanded
Shortage
A situation in which the quantity demanded
will be greater than the quantity supplied
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Private Enterprise in a Market Economy
Private Enterprise System
Allows individuals to pursue their own
interests with minimal government restriction.
Elements of a Private Enterprise System
Private property rights
Freedom of choice
Profits
Competition
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Degrees of Competition
Perfect Competition
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.
Four Principles:
Buyers view all products as identical.
and Buyers sellers know the prices that others are paying
and receiving in the marketplace.
Firms easily enter or leave the market.
Prices are set exclusively by supply and demand.
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Degrees of Competition (cont.)
Monopolistic Competition
Numerous sellers try to differentiate their products
from those of competitors in an attempt to influence
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.
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Degrees of Competition (cont.)
Oligopoly
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.
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Degrees of Competition (cont.)
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).
Natural monopolies: Industries in which one firm can
most efficiently supply all needed goods or services.
Example: Electric company
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Economic Indicators
Economic Indicators
Statistics that show whether an economic system is
strengthening, weakening, or remaining stable
Economic growth indicators
Aggregate output, standard of living, gross domestic product,
and productivity
Economic stability indicators
Inflation and unemployment
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Economic Indicators (cont.)
Business Cycle
The pattern of short-term ups and downs (expansions
and contractions) in an economy.
Aggregate Output
Growth during the business cycle is measured by the
total quantity of goods and services produced by an
economic system during a given period.
Standard of Living
The total quantity and quality of goods and services
that consumers can purchase with the currency used
in their economic system.
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Economic Indicators (cont.)
Gross Domestic Product (GDP)
An aggregate output measure of the total value of all
goods and services produced within a given period by
a national economy through domestic factors of
production.
Gross National Product (GNP)
The total value of all goods and services produced by
a national economy within a given period, regardless
of where the factors of production are located.
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Economic Indicators (cont.)
Real Growth Rate
The growth rate of GDP adjusted for inflation
and changes in the value of the countrys
currency
Growth depends on output increasing at a faster
rate than population.
Real GDP
GDP that has been adjusted to account for
changes in currency values and price
changes.
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Economic Indicators (cont.)
Nominal GDP
GDP measured in current dollars or with all
components valued at current prices.
GDP per Capita
A reflection of the standard of living: GDP per
capita means GDP per person.
It is a better measure of the economic wellbeing of the average person than GDP itself.
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Economic Indicators (cont.)
Purchasing Power Parity
The principle that exchange rates are set so that
the prices of similar products in different countries
are about the same.
Indicates what people can buy with the financial
resources allocated to them by their respective
economic systems
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FIGURE 1.3 Purchasing Power Parity Big
Mac Index
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Economic Indicators (cont.)
Productivity
A measure of economic growth that compares
how much product a system produces with
the resources needed to produce that product.
The standard of living in an economy improves
through increases in productivity.
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Economic Indicators (cont.)
Balance of Trade
The economic value of all the products a country
exports minus the economic value of its imported
products.
Positive balance of trade: When a country
exports (sells to other countries) more than it
imports (buys from other countries).
Negative balance of trade: When a country
imports more than it exports. Commonly called a
trade deficit.
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FIGURE 1.4 Balance of Trade
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Economic Indicators (cont.)
National Debt
The amount of money that the government owes its
creditors.
Financed by borrowing in the form of bonds
(government promises to pay buyers certain
amounts of money by specified future dates).
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Economic Indicators (cont.)
Stability
A condition in which the amount of money available in
an economic system and the quantity of goods and
services produced in it are growing at about the same
rate.
Inflation
Inflation occurs when the amount of money injected
into an economy exceeds the increase in actual
output, resulting in price increases exceeding
purchasing power increases.
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Economic Indicators (cont.)
Consumer Price Index (CPI)
A measure of the prices of typical products
purchased by consumers living in urban areas
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Economic Indicators (cont.)
Unemployment
The level of joblessness among people actively
seeking work in an economic system
Low unemployment results in higher wages.
Higher wages increases unemployment.
Cyclical Unemployment
Businesses continuing to eliminate jobs during a
business cycle downturn cause more reduced
revenues and further job losses.
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Economic Indicators (cont.)
Recession
A period during which aggregate output, as
measured by real GDP, declines
Depression
A prolonged and deep recession
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Managing the U.S. Economy
Fiscal Policy
The ways in which a government collects (taxes) and spends
revenues.
Monetary Policy
The manner in which a government controls its money supply.
Stabilization Policy
Coordinating fiscal and monetary policies to smooth fluctuations
in output and unemployment and to stabilize prices.
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Key Terms
aggregate output
balance of trade
business
business cycle
capital
capitalism
communism
competition
consumer price index
demand
demand and supply
schedule
demand curve
depression
domestic business
environment
economic environment
economic indicators
economic system
entrepreneur
external environment
factors of production
fiscal policies
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Key Terms (cont.)
global business
mixed market economy
environment
monetary policies
gross domestic product
monopolistic competition
(GDP)
monopoly
gross national product
national debt
(GNP)
natural monopoly
inflation
nominal GDP
information resources
oligopoly
labor (human resources)
perfect competition
law of demand
physical resources
law of supply
planned economy
market
market economy
market price (equilibrium as Prentice Hall
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Key Terms (cont.)
political-legal environment
private enterprise
privatization productivity
profits
purchasing power parity
real GDP
recession
shortage
socialism
sociological environment
stability
stabilization policy
standard of living
supply
supply curve
surplus
technological environment
unemployment
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