CHAPTER 1

Yashuhide Fumoto/Getty Images

Understanding
Economic
Systems and
Business
The Future of Business
The Essentials 4th Edition
Gitman & McDaniel
Chapter 1
Copyright 2009 by South-Western, a division of Cengage Learning. All rights reserved

Prepared by
Deborah Baker

1 How do businesses and not-for-profit organizations

help create our standard of living?
2 What are the sectors of the business environment, and
how do changes in them influence business decisions?
3 What are the primary features of the worlds economic
systems, and how are the three sectors of the U.S.
economy linked?

CHAPTER 1

Learning Goals

4 How do economic growth, full employment, price

stability, and inflation indicate a nations economic
health?

5 How does the government use monetary policy and

fiscal policy to achieve its macroeconomic goals?
6 What are the basic microeconomic concepts of demand
and supply, and how do they establish prices?
7 What are the four types of market structure?

CHAPTER 1

Learning Goals (continued)

8 Which trends are reshaping the business, micro-, and

macroeconomic environments and competitive arena?

The Nature of Business

A business is an organization
that strives for a profit by
providing goods and services
desired by its customers.

AP Images / Paul Sakuma

Businesses provide

Goods
Goodsand
andservices
services
that
thatare
arethe
thebasis
basisof
ofour
our
standard
standardof
ofliving
living
Jobs,
Jobs,goods
goodsand
and
services
servicesthat
thathelp
help
determine
determineour
ourquality
qualityof
oflife
life

The Nature of Business

standard of living
A countrys output of goods and services that
people can buy with the money they have.

The Nature of Business

quality of life
The general level of human happiness based on
such things as life expectancy, educational
standards, health, sanitation, and leisure time.

The Nature of Business

Revenue
Revenue

The money a company

earns from providing services
or selling goods to customers.

less

Costs
Costs

Expenses that a company

incurs from creating and
selling goods and services.

equals

Profit
Profit

The money left over after

all expenses are paid.
7

Not-for-Profit Organizations

Not-for-profit
Not-for-profit
organizations
organizations
account
accountfor
formore
more
than
than28%
28%of
of
economic
economicactivity
activity
In
Inthe
theU.S.
U.S.

AAnot-for-profit
not-for-profitorganization
organization
is
isan
anorganization
organization
that
thatexists
existsto
toachieve
achievesome
some
other
othergoal
goalthan
thanthe
the
usual
usualbusiness
businessgoal
goalof
ofprofit.
profit.

Government
Government
is
isthe
thelargest
largest
not-for-profit
not-for-profitgroup.
group.
8

Not-for-Profit Organizations
Develop
Develop strategy
strategy
Create
Createbudgets
budgets
Measure
Measureperformance
performance
Encourage
Encourageinnovation
innovation
Improve
Improveproductivity
productivity
Demonstrate
Demonstrateaccountability
accountability

Factors of Production
1. Natural resources
2. Labor
3. Capital
4. Entrepreneurship
5. Knowledge

10

CONCEPT check

Explain the concepts of revenue, costs,

and profit.
What are the five factors of production?
What is the role of the entrepreneur in society?

11

Understanding the Business Environment

What are the sectors of the business

environment, and how do changes in them
influence business decisions?

12

External Environment
Economic
Political and legal
Demographic
Social
Competitive
Global
Technological

13

Economic Influences
Fluctuations in economic activity create
business cycles.
Government can impact the level of
economic activity through taxes and interest
rate levels.
Forces of supply and demand determine how
prices and quantities of goods and services
behave in a free market.

14

Political and Legal Influences

Amount of government activity
Types of laws passed
General political stability of government

15

Demographic Factors

demography
The study of peoples vital statistics, such as their
age, race and ethnicity, and location.

16

Demographic Factors
Age
Age
Gender
Gender
Race
Race
Ethnicity
Ethnicity
Location
Location

17

Demographic Factors

Generation
GenerationYY

Born
Born between
between 1979-1997
1979-1997

Generation
GenerationXX

Born
Born between
between 1964-1977
1964-1977

Baby
BabyBoomers
Boomers

Born
Born between
between 1946-1964
1946-1964

18

Social Factors
Attitudes
Attitudes
Values
Values
Lifestyles
Lifestyles

19

Technology

technology
The application of science and engineering skills
and knowledge to solve production and
organizational problems.

20

CONCEPT check

Define the components of the internal and

external business environments.
What factors within the economic environment
affect businesses?
Why do demographic shifts and technological
developments create both challenges and new
opportunities for business?

21

How Business and Economics Work

What are the primary features of the worlds

economic system, and how are the three
sectors of the economy linked?

22

How Business and Economics Work

economics
Economics is the study of how a society uses
scarce resources to produce and distribute goods
and services.

23

Economic Concerns

What is produced?
How much is produced?
How is it produced?
For whom is it produced?

24

Global Economic Systems

Free
FreeMarket
Market //Capitalism
Capitalism
Planned
PlannedEconomies
Economies

Communism
Communism
Socialism
Socialism

Mixed
MixedEconomies
Economies

25

Global Economic Systems

Differentiation among Economic Systems

Allocating limited resources

Choosing goods and services to produce
Determining how and by whom to produce goods
Distributing goods and services

26

Global Economic Systems

capitalism
An economic system based on competition in the
marketplace and private ownership of the factors
of production; also known as the private
enterprise system.

27

Global Economic Systems

communism
An economic system characterized by government
ownership of virtually all resources, government
control of all markets, and economic decisionmaking by central-government planning.

28

Global Economic Systems

socialism
An economic system in which the basic industries
are owned either by the government itself or by
the private sector under strong government
control.

29

Global Economic Systems

mixed economies
Economies that combine several systems; for
example, an economy where the government
owns certain industries but others are owned by
the private sector.

30

Macroeconomics and Microeconomics

macroeconomics
The subarea of economics that focuses on the
economy as a whole by looking at aggregate data for
large groups of people, companies or products.
microeconomics
The subarea of economics that focuses on individual
parts of the economy, such as households or firms.

31

CONCEPT check

What is economics, and how can you benefit from

Understanding basic economic concepts?
Compare and contrast the worlds major economic
systems. Why is capitalism growing, communism
declining, and socialism still popular?
What is the difference between macroeconomics
and microeconomics?

32

Understanding the Business Environment

How do economic growth, full employment,

and price stability indicate a nations
economic health?

33

Economic Growth
economic growth
An increase in a nations output of goods and services.
The more a nation produces, the higher its standard
of living.

34

Economic Growth
gross domestic product
The total market value of final goods and services
produced within a nations borders each year.

35

Business Cycles
recession
A decline in GDP that lasts for at least two
consecutive quarters.

36

Keeping People on the Job

full employment
The condition when all people who want to work
and can work have jobs.

37

Measuring Unemployment
unemployment rate
The percentage of the total labor force that is not
working but is actively looking for work.

38

Types of Unemployment
Frictional
Frictional

Short-term
Short-termunemployment
unemploymentthat
thatis
isnot
not
related
relatedto
tothe
thebusiness
businesscycle
cycle

Structural
Structural

Unemployment
Unemploymentthat
thatis
iscaused
causedby
byaa
mismatch
mismatchbetween
betweenjobs
jobsand
andworkers
workersskills
skills

Cyclical
Cyclical

Seasonal
Seasonal

Unemployment
Unemploymentthat
thatoccurs
occurswhen
whenaa
downturn
downturnin
inthe
thebusiness
businesscycle
cycle
reduces
reducesdemand
demandfor
forlabor
labor
Unemployment
Unemploymentthat
thatoccurs
occursduring
during
specific
specificseasons
seasonsin
incertain
certainindustries
industries
39

Keeping Prices Steady

inflation
The situation in which the average of all prices of
goods and services is rising.

40

Types of Inflation

Demand-Pull
Demand-Pull
Inflation
Inflation

Cost-Push
Cost-Push
Inflation
Inflation

Demand
Demandfor
forgoods
goodsand
andservices
services
is
isgreater
greaterthan
thanthe
thesupply
supply

Increases
Increasesin
inproduction
productioncosts
costs
push
pushup
upprices
prices

41

CONCEPT check

What is a business cycle? How do businesses

adapt to periods of contraction and expansion?
Why is full employment usually defined as a target
percentage below 100 percent?
What is the difference between demand-pull and
cost-push inflation?

42

Achieving Macroeconomic Goals

How does the government use

monetary policy and fiscal policy
to achieve its macroeconomic goals?

43

Monetary Policy
Federal Reserve System (the Fed)
The central banking system of the United States.

44

Fiscal Policy
crowding out
The situation that occurs when government
spending replaces spending by the private sector.

45

Fiscal Policy

The
Thecondition
conditionthat
thatoccurs
occurswhen
whenthe
the
Federal
Budget
Federal Budget federal government spends more for
federal government spends more for
Deficit
Deficit
programs
programsthan
thanititcollects
collectsin
intaxes.
taxes.

National
National
Debt
Debt

The
Theaccumulated
accumulatedtotal
totalof
ofall
allof
ofthe
the
federal
federalgovernments
governmentsannual
annualbudget
budget
deficits.
deficits.

46

A High National Debt

Pros:

Cons:

Contributes to:
Economic growth
High employment
Price stability

Not everyone
holds the debt
Crowding out
private investment

47

CONCEPT check

What are the two kinds of monetary policy?

What fiscal policy tools can the government use to
achieve its macroeconomic goals?
What problems can a large national debt present?

48

Microeconomics

What are the basic microeconomic concepts

of demand and supply, and how do they
establish prices?

49

The Nature of Demand

demand
The quantity of a good or service that people are
willing to buy at various prices.

50

The Nature of Supply

supply
The quantity of a good or service that businesses
will make available at various prices.

51

Factors Causing Demand and Supply Curve Shifts

Shift Demand

Shift Supply

Buyers incomes

Technology

Buyers preferences/tastes

Resource prices

Prices of substitute products

Changes in prices of other

products that can be produced
with the same resources

Expectations about future prices

Number of buyers

Number of suppliers
Taxes

Exhibit 1.9

52

CONCEPT check
What is the relationship between prices and demand
for a product?
How is market equilibrium achieved? Describe the
circumstances under which the price for gasoline
would have returned to equilibrium in the U.S. after
Hurricane Katrina.
Draw a graph that shows an equilibrium point for
supply and demand.

53

Competing in a Free Market

What are the four types of

market structure?

54

Four Types of Market Structures

Perfect
Competition
Pure
Monopoly
Monopolistic
Competition
Oligopoly

55

Perfect Competition
A large number of small firms are in the
market
The firms sell similar products
Buyers and sellers have good
information about prices, sources of
supply, etc.
It is easy to open a new business or
close an existing one

56

Pure Monopoly
A single firm accounts for all industry
sales
The firm is the industry
Barriers to entry prevent new firms
from competing with the existing firm

57

Monopolistic Competition
Many firms are in the market
The firms offer products that are close
substitutes but still differ
It is relatively easy to enter the market

58

Oligopoly
A few firms produce most or all of
the output
Large capital requirements or other
factors limit the number of firms

59

CONCEPT check

What is meant by market structure?

Compare and contrast perfect competition and
pure monopoly. Why is it rare to find perfect
competition?
How does an oligopoly differ from monopolistic
competition?

60

Trends in the Business Environment and Competition

Which trends are reshaping the micro- and

macroeconomic environments and the
competitive arena?

61

Not Over the Hill Yet

Baby boomers make up 42 percent of the workforce.
By 2010, 25 percent of all employments will be of
retirement age. Many will work beyond the traditional
retirement age of 65.
Todays workforce spans four generations.

62

Not Over the Hill Yet

Challenges from the aging population include:
Health care
Financial services
Government
Society

63

Meeting Competitive Challenges

relationship management
The practice of building, maintaining, and
enhancing interactions with customers to develop
long-term satisfaction through mutually beneficial
partnerships.
Includes:
Supply Chain Management
Relationship Marketing

64

CONCEPT check

What steps can companies take to benefit from the

aging of its workers and to effectively manage a
multigenerational workforce?
Why is the increasing demand for energy worldwide
a cause for concern?
Describe several strategies that companies use to
remain competitive in the global economy.

65