Chapter 1

1
Business in a
Changing World
Chapter 1
The Dynamics of Business and
Economics
McGraw-Hill/Irwin Copyright © 2009 by the McGraw-Hill Companies, Inc. All rights reserved.
The Nature of Business
What is a business?
Individuals or organizations trying to
earn a profit by providing products that
satisfy people's needs.
1-4
The Nature of Business
What is a product?
A good or service with tangible and
intangible characteristics that provide
satisfaction and benefits
1-5
Products
Tangible Goods & Services
Tangible Goods Services

Automobile Dry cleaning
Computer Photo processing
Loaf of bread Checkup at doctor’s
Television Movie star performance
1-6
The Primary Goal of Business
Earn a Profit
The difference between what it costs to
make and sell a product and what a
customer pays for it.
1-7
The Primary Goal of Business
PROFIT --
The reward for the risks that
businesses take in providing products.
1-8
Non-Profit Organizations
Not all organizations are businesses.
Nonprofit organizations provide goods

and services but do not have the
fundamental purpose of earning
profits.
1-9
Maintaining Profitability
Quality products Efficient operations

Management skills
•Planning
•Organizing
•Controlling Profitabilit
•Leading y
Marketing Expertise Business ethics

Social responsibility
•Products
•Price
•Promotion
•Distribution
1-10
Stakeholders
Customers, employees, investors, government regulators,
community and society. Those that have a stake in the success
and outcomes of a business are considered stakeholders.
1-11
Stakeholders & the Environment
Environmentally Friendly Practices
•Hewlett-Packard
•Cummins, Inc.
•Diversity Pipeline Alliance
•Home Depot
•U-Haul
1-12
The People & Activities of Business
1-13
Management – Focus on employees

•Coordinating employee’s actions
•Organizing people for efficiency
•Motivating employees toward business goals
.
1-14
Management – Production and Manufacturing

•Plan activities
•Organize staff
•Control tasks
.
1-15
Marketing – Focus on satisfying customers

•Determine what products customers want
•Plan and develop products
•Determine distribution
•Determine place
•Determine promotion
1-16
Marketing & Promotion

•Advertising
•Personal selling
•Sales promotion
•Publicity-Sponcer ships
1-17
Finance – Primary responsibility of owners

•Obtaining money
•Using money effectively
•Accountants, stockbrokers, bankers
1-18
Why Study Business
•Develop Skills for career success

•Understand business activities
•Importance of profitability
•Individual businesses
•Local and regional economic impact
•Global economic impact
1-19
Why Study Business
Business impact
•Purchase raw materials
•Hire employees
•Attract capital
•Create products
•Fuel the global economy
•Contribute to society
1-20
The Economic Foundations of Business
Distribution of resources for the production of

goods and services within a social system.
Resources --
•Natural resources (land, forests, minerals, water)
•Human resources (labor)
•Financial resources (capital)
1-21
Factors of Production --
Natural, human, and financial resources used to produce

goods and services --
1-22
Economic Systems
How a society distributes its resources to produce

goods and services
Central issue of economics –
•How to fulfill an unlimited demand for goods and services

with a limited supply of resources
1-23
Economic Systems
How a society distributes its resources to produce
goods and services
Three Important questions –

1. What types and quantities of goods/services will
satisfy consumer needs?
2. How will goods/services be produced? By whom?
With what resources?
3. How are goods/services distributed to consumers?
1-24
THOMAS MALTHUS and LO 2-1
the DISMAL SCIENCE
• Malthus believed that if the rich had most of the

wealth and the poor had most of the population,
resources would run out.
• This belief led the writer Thomas Carlyle to call

economics “The Dismal Science.”
• Neo-Malthusians believe there are too many

people in the world and believe the answer is
radical birth control.
2-25
LO 2-1
POPULATION as a RESOURCE
• Contrary to Malthus, some

economists believe a large
population can be a
resource.
- An educated population is
highly valuable.
- Business owners provide
jobs and economic growth for
their employees and
communities as well as for
themselves.
2-26
ADAM SMITH the LO 2-1
FATHER of ECONOMICS
Smith believed that:

• Freedom was vital to any
economy’s survival.
• Freedom to own land or
property and the right to
keep the profits of a
business is essential.
• People will work hard if
they believe they will be
rewarded.
2-27
LO 2-1
The INVISIBLE HAND THEORY
• As people improve their own situation in life, they

help the economy prosper through the production
of goods, services and ideas.
• Invisible Hand -- When self-directed gain leads to

social and economic benefits for the whole
community.
2-28
UNDERSTANDING the LO 2-1
INVISIBLE HAND THEORY
• A farmer earns money by selling

his crops.
• To earn more, the farmer hires
farmhands to produce more
crops.
• When the farmer produces more,
there is plenty of food for the
community.
• The farmer helped his
employees and his community
while helping himself.
2-29
Comparison of Communism, Socialism, and Capitalism
1-30
Economic Systems
Communism
A society in which the people without regard to

class, own all the nation’s resources.
•China
•North Korea
•Cuba
1-31
Economic Systems
Socialism
System in which the government owns and operates

basic industries but individuals own most businesses.
•Sweden
•India
•Israel
1-32
Economic Systems
Capitalism
Free Enterprise – individuals own and operate majority of

businesses providing goods and services
•United States
•Japan
•Australia
•Canada
1-33
Economic Systems
Pure Capitalism
Modified Capitalism
Free Market -- All economic decisions made without

government intervention (pure capitalism)
Government intervenes and regulates business to some

extent (modified capitalism)
1-34
Economic Systems
Mixed Economies
No country practices pure capitalism or pure

socialism/communism. Economic systems
contain various elements of government
intervention
1-35
Supply & Demand
Distribution of resources and products

determined by supply and demand
Demand -- number of goods/services consumers

buy at given price at a specific time
Supply -- number of products businesses will sell

at different prices at a specific time
1-36
SUPPLY CURVES
• Supply -- The quantities of products businesses are

willing to sell at different prices.
• As quantity increases , price will also increases.
Example:
Demand for fish dishes
increases at the restaurant, this
will send signal to producer to
buy more fish, hence producer
will send signal to fisherman to
catch more fish, fisherman will
see that more fish means more
profit hence, will supply more
fish.
So who is increasing price = ? 2-37

DEMAND CURVES
• Demand -- The quantities of products consumers are

willing to buy at different prices.
• As quantity increases , price will decrease.
Example:
Increased supply of world cup T-shirts
lead to less buying after it was ended,
so sellers will tend to put discounts on
those items which were not selling.
Such as: 1 for $20
2 for $15
3 for $10
So who is decreasing the price = ?
2-38
EQUILIBRIUM
• Market Price (Equilibrium Point) -- Determined

by supply and demand, this is the negotiated price.
So, we can say that.
Demand < Supply, Price ↓
Demand > Supply, Price ↑
Demand = Supply, Equilibrium point
2-39
Nature of Competition
Rivalry among businesses for consumers’

dollars.
Pure competition – many small businesses in same

product market.
Monopolistic competition – small number of
businesses little difference in products
Oligopoly– very few businesses selling a product.
Monopoly- one seller in the market.
1-40
Economic Cycles and Productivity
Economic Expansion – economy is growing and

consumers are spending money
Economic Contraction – spending declines,

layoffs, economy slows down
1-41
Economic Cycles
•Inflation– condition characterized by continuing
rise in prices
•Recession– decline in production, employment,
and income
•Unemployment– % population wants to work
but unable to find jobs
•Depression– unemployment very high;
consumer spending low; business output sharply
reduced
1-42
Evaluating Our Nation’s Economy
1-43
Entrepreneurship
Risk, innovation, creativity,

reward
Bill Gates cofounder of Microsoft Corporation

Michael Dell founder of Dell Computer Corporation
Frederick Smith founder of Federal Express Fedex
Ben & Jerry’s cofounder of Ben & Jerry’s Ice Cream
Sam Walton founder of Wal-Mart Stores, Inc
Steven Jobs, cofounder of Apple Computer, Inc
1-44
Ethics & Social Responsibility
Business reputation depends on profit AND

ethical conduct and responsibility
GOOD ETHICS = GOOD BUSINESS
• What society wants

• Interest of stakeholders
• Goal is to build trust and avoid misconduct
• Enron- corporate misconduct
1-45

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1

Tangible Goods Services

Nonprofit organizations provide goods

Quality products Efficient operations

Marketing Expertise Business ethics

Management – Focus on employees

Management – Production and Manufacturing

Marketing – Focus on satisfying customers

Marketing & Promotion

Finance – Primary responsibility of owners

•Develop Skills for career success

Distribution of resources for the production of

Natural, human, and financial resources used to produce

How a society distributes its resources to produce

Central issue of economics –

•How to fulfill an unlimited demand for goods and services

Three Important questions –

the DISMAL SCIENCE

• Malthus believed that if the rich had most of the

• This belief led the writer Thomas Carlyle to call

• Neo-Malthusians believe there are too many

• Contrary to Malthus, some

Smith believed that:

• As people improve their own situation in life, they

• Invisible Hand -- When self-directed gain leads to

INVISIBLE HAND THEORY

• A farmer earns money by selling

A society in which the people without regard to

System in which the government owns and operates

Free Enterprise – individuals own and operate majority of

Free Market -- All economic decisions made without

Government intervenes and regulates business to some

No country practices pure capitalism or pure

Distribution of resources and products

Demand -- number of goods/services consumers

Supply -- number of products businesses will sell

• Supply -- The quantities of products businesses are

So who is increasing price = ? 2-37

• Demand -- The quantities of products consumers are

So who is decreasing the price = ?

• Market Price (Equilibrium Point) -- Determined

So, we can say that.

Demand < Supply, Price ↓

Demand > Supply, Price ↑

Demand = Supply, Equilibrium point

Rivalry among businesses for consumers’

Pure competition – many small businesses in same

Economic Expansion – economy is growing and

Economic Contraction – spending declines,

Risk, innovation, creativity,

Bill Gates cofounder of Microsoft Corporation

Business reputation depends on profit AND

• What society wants

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