1

chapter

The U. S. Business Environment

Business Essentials, 7th Edition

Ebert/Griffin

Instructor Lecture PowerPoints

2009 Pearson Education, Inc.

PowerPoint Presentation prepared by

Carol Vollmer Pope Alverno College

What is Business?
An organized effort of
individuals to produce and
sell, for a profit, products and
services that satisfy societys
needs.

Why study Business?

A. Helps you choose a rewarding
career
B. You can become a better employee
C. You can start your own business
D. You can become a more informed
consumer and investor

Economic Systems
Economic System
A nations system for allocating its resources
among its citizens, both individuals and
organizations
3 Big ones:
Capitalism
Socialism
Communism
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Factors of Production resources a business

uses to produce Goods and Services
Labor: Human resources
Capital: Financial resources
Entrepreneurs: Persons who risk starting a
business
Physical resources: Tangible things used to
conduct business
Information resources: Data and other
information used by businesses

Planned Economies
Communism
A system Karl Marx envisioned in which
individuals would 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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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.
Socialism: The government owns and operates select
major industries such as banking and transportation.
Smaller businesses are privately owned.
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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 as obtained from marketing
research, historical data, and other studies of the market.
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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FIGURE 1.2 Demand and Supply

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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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FIGURE 1.2 Demand and Supply (Cont.)

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Surpluses and Shortages

Surplus
A situation in which the quantity supplied exceeds
the quantity demanded
Causes losses

Shortage
A situation in which the quantity demanded will
be greater than the quantity supplied
Causes lost profits
Invites increased competition
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Degrees of Competition
Perfect Competition
Prices are determined by supply and demand because 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.

Principles of perfect competition:

Buyers view all products as identical.
Buyers and sellers know the prices that others are paying and
receiving in the marketplace.
It is easy for firms to enter or leave the market.
Prices are set exclusively by supply and demand and accepted by
both sellers and buyers.

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Degrees of Competition (Cont.)

Monopolistic Competition
There are numerous sellers trying to differentiate their
products from those of competitors so as to have some
control over 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).
The sole supplier enjoys complete control over the prices of its
products; its only constraint is a decrease in consumer demand
due to increased prices.

Natural monopolies: Industries in which one firm can most

efficiently supply all needed goods or services; typically
allowed and regulated by legislated acts and governmental
agencies.
Example: Electric company
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Economic Indicators
Economic Indicators
Statistics that show whether an economic system is
strengthening, weakening, or remaining stable
Measure key goals of the U.S. economic system: economic
growth and economic stability
Economic growth indicators
Aggregate output, standard of living, gross domestic product, and
productivity

Economic stability indicators

Inflation and unemployment
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Economic Growth, Aggregate Output, and

Standard of Living
Business Cycle
The pattern of short-term ups and downs (or, better,
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.
If GDP is going up, aggregate output is going up; if aggregate
output is going up, the nation is experiencing economic growth.

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 well-being
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 systemsa
better sense of standards of living across the globe.

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FIGURE 1.3 Purchasing Power Parity Big Mac

Index

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Economic Growth
Productivity
A measure of economic growth that compares
how much product a system produces with the
resources needed to produce that product.
If more product is produced with fewer factors of
production, the price of the product decreases.
The standard of living in an economy improves through
increases in productivity.

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Economic Growth (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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Balance of Trade
How does a trade deficit affect economic growth?
The deficit exists because the amount of money spent on
foreign products has not been paid in full. In effect,
therefore, it is borrowed money, and borrowed money
costs more money in the form of interest.
The money that flows out of the country to pay off the
deficit cannot be used to invest in productive enterprises,
either at home or overseas.
http://www.americaneconomicalert.org/ticker_home.asp

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FIGURE 1.4 Balance of Trade

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Economic Growth (cont.)

National Debt
The amount of money that the government owes its
creditors.
Financed by borrowing in the form of bonds: Securities through
which the government promises to pay buyers certain amounts of
money by specified future dates.
Government competition with potential borrowers for available
loan money reduces private borrowing for investments that would
increase productivity.
http://www.brillig.com/debt_clock/
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Economic Growth (cont.)

Inflation
"an increase in the price you pay for
goods."
In other words, a decline in the purchasing
power of your money".
the percentage rate of change in price level
over time.
http://www.inflationdata.com/inflation/Inf
lation_Rate/CurrentInflation.asp
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Economic Indicators
Consumer Price Index (CPI)
A measure of the prices of typical products
purchased by consumers living in urban areas
Compared against base periodan arbitrarily selected
time period against which other time periods are
compared.
http://www.inflationdata.com/inflation/Consumer_Pric
e_Index/CurrentCPI.asp

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Economic Growth (cont.)

Unemployment
The level of joblessness among people actively seeking
work in an economic system
Low unemploymenta shortage of labor available for businesses
to hire; results in higher wages.

Higher wages reduce hiring, which increases unemployment;

results in lower wages.

http://www.google.com/publicdata?ds=usunemploy
ment&met=unemployment_rate&tdim=true&dl=en
&hl=en&q=unemployment+rate#met=unemploymen
t_rate&tdim=true
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Economic Growth (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 and spends revenues.
Tax rates can play an important role in fiscal policy.

Monetary Policy
The manner in which a government controls its money supply.
Working mainly through the Federal Reserve System, the government
can influence banks willingness to lend money and prompt interest
rates to go up or down.

Stabilization Policy
Coordinating fiscal and monetary policies to smooth fluctuations in
output and unemployment and to stabilize prices.

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Key Terms of Chapter 1

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
global business environment
gross domestic product (GDP)
gross national product (GNP)
inflation
information resources
labor (human resources)
law of demand

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Key Terms (cont.)

law of supply
market
market economy
market price (equilibrium price)
mixed market economy
monetary policies
monopolistic competition
monopoly
national debt
natural monopoly
nominal GDP
oligopoly
perfect competition
physical resources

planned economy
political-legal environment
private enterprise
privatization
productivity
profits
purchasing power parity
real GDP
recession
shortage
socialism
sociological environment
stability
stabilization policy

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Key Terms (cont.)

standard of living
supply
supply curve
surplus
technological
environment
unemployment

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