|Pride/Hughes/Kapoor Business, 109th Edition
Audio Review Transcript
Chapter 1 Exploring the World of Business and Economics
1. Discuss your future in the world of business
We begin by discussing your future in the challenging and changing world of business. Economic problems and increased competition can raise questions about future prosperity, but opportunities exist for people who are willing to work hard, continue to learn, and possess the ability to adapt to change. You can choose one or more ways to become involved in business. You can start your own business, you can work for someone else, and you can buy and sell ownership shares in a business. The American business system is characterized by free enterprise. Free enterprise allows individuals the freedom to choose what to produce, how to produce it, and at what price to sell it. How do you fit in with the free enterprise system, and why should you study business? There are at least four good reasons.
First, studying business can help you choose a career. This course will introduce you to a wide range of business opportunities. Second, studying business will help you be a successful employee. Today’s employers are looking for individuals who can do something, who bring something extra to the table. You need a variety of technical and non-technical skills to make the most of an opportunity. Third, studying business will help you if you want to start your own business. You not only need a combination of skills and talent, but also a willingness to put in long hours in order to be successful. Finally, you can become a better-informed consumer and investor. As a consumer, you make business decisions every time you engage in a transaction. As an investor, understanding business and developing the ability to spot new trends puts you in a position to increase your wealth. (LO1 ends)
2. Define business and identify potential risks and rewards.
Let’s start by defining business and identifying the potential risks and rewards. Business is the organized effort of individuals to produce and sell, for a profit, the goods and services that satisfy society’s needs. Let's discuss each of the three components of the definition. To be organized means that a business must combine four kinds of resources: material resources—such as raw materials, buildings, and machinery; human resources—which are the people who supply the skills in return for wages; financial resources—which is the money required to pay employees, purchase materials, and operate the company; and information resources, which tell managers how effectively the other resources are being used. The other part of organization refers to whether a business is classified as a manufacturing business, a service business, or a marketing intermediary. A marketing intermediary purchases products from manufacturers and resells them to consumers, who are individuals who buy goods and services for their own personal use.
The second part of the business definition is to satisfy society’s needs. People buy goods and services for a reason. It is critical for firms to know who their customers are and to keep in mind their customers’ needs. The third part of the definition stated that business must make a profit. A profit is what remains after all business expenses have been deducted from sales revenue. The profit of a company is the reward owners receive for producing a product that consumers want.
Of course, there are also risks involved with business ownership. One risk is that the owner might not get paid, since employees and suppliers must be paid first. Owners also risk losing whatever they have invested in the business, which may happen if a firm’s expenses are greater than its revenues. This is called a loss. (LO2 ends)
3. Define economics and describe the two types of economic systems: capitalism and command economy.
To satisfy society’s needs and make a profit, a business must operate within the parameters of a nation’s economic system. Economics is the study of how wealth is created and distributed. Economics issues can be analyzed from two different perspectives. Microeconomics looks at the decisions made by businesses and individuals, whereas macroeconomics is the study of the national and global economy. The way in which people deal with the creation and distribution of wealth determines if a nation has a capitalistic or command economy. Economic systems differ in two ways. The first way has to do with ownership of the factors of production, which include natural resources, labor, capital, and entrepreneurship. (An entrepreneur is a person who risks time, effort, and money to start and operate a business.) The second way is in how they answer four basic questions: (1) What 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? And (4) Who owns and controls the major factors of production?
Capitalism is an economic system in which individuals own and operate the majority of businesses that provide goods and services. It’s based on Adam Smith’s theories that people, not government, should be in charge of creating wealth and owning and profiting from resources. He used the term “invisible hand” to describe how an individual’s own personal gain benefits others and the nation’s economy. He believed that economic freedom would produce competitive markets where buyers and sellers could enter and exit at will. This led to a market economy—which is an economic system in which individuals and businesses decide what to produce and buy, and the market determines how much is sold and at what prices. But the government does control some areas, making the American economy a mixed economy, with elements of both capitalism and socialism.
Our mixed economy answers the four economic questions through the continuous interactions among households—which are both resource owners and consumers; businesses—which exchange money, resources, and goods in an ongoing flow; and government—which is responsible for protecting and promoting the public welfare. Today, over two-thirds of our nation’s total production consists of consumer products, which are those goods and services purchased by individuals for personal consumption.
A command economy, on the other hand, is an economic system in which the government decides what goods and services will be produced, and how they will be produced, and what prices will be charged. A centralized government thus provides the answers to the economic questions. Socialism and communism are examples of command economies. In a socialist economy, the government owns and controls key industries, although individuals may choose their own occupations and may own some small businesses. Communism, based on the writings of Karl Marx, describes a classless society whose citizens together own all economic resources, and contribute and receive benefits according to need. Communism did not produce the desired outcome however, and very few communist economies exist today. (LO3 ends)
4. Identify the ways to measure economic performance.
One way to determine the success of an economic system is by measuring its performance. Two common measures are productivity, which is the average level of output per worker per hour, and the gross domestic product, or GDP, which is the dollar value of all goods and services produced by all people within the boundaries of a country during a one-year period. Several other statistical measures are used as well to determine trends that occur in specific parts of the economy. Some of these include balance of trade, the consumer price index—which measures the changes in prices of a fixed basket of goods purchased by a typical consumer in an urban area, the producer price index—which measures prices at the wholesale level, the unemployment rate, and the inflation rate. Inflation is a general rise in the level of prices. The opposite of inflation is deflation, a general decrease in the level of prices. Fluctuations in growth and prices are common. They generally occur in a pattern called the business cycle, which is the recurrence of the four periods of the peak, recession, the trough, and recovery in a nation’s economic activity. In times of prosperity, unemployment is low and total income is relatively high. A recession is two consecutive three-month periods of decline in a country’s GDP. A depression is a severe and longer-lasting recession. Recovery occurs when the economy moves from either a recession or a depression toward prosperity.
The government tries to reduce the effects of recession and depression by using monetary policies and fiscal policies. Monetary policies are the decisions by the Federal Reserve that determine the size of the supply of money and the level of interest rates. Fiscal policy, on the other hand, is the government’s attempt to influence saving and spending by altering the tax structure and the level of government spending. When the government spends more than it receives in a fiscal year, it creates a deficit. The accumulated total of federal deficits is called the national debt. The use of monetary and fiscal policies and their influence on the economy have an effect on competition, as well. (LO4 ends)
Outline the four types of competition.
Competition, or the rivalry among businesses for sales to potential customers, is a hallmark of our market economy. The four types of competition include pure competition, monopolistic competition, oligopoly, and monopoly. Pure, or perfect, competition is 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. All buyers and sellers together determine the price of a product through the forces of supply and demand. The supply is the quantity of a product that producers are willing to sell at each of various prices. Demand is the quantity of a product that buyers are willing to buy at each of various prices. When the price of a demanded quantity of a product is equal to the produced quantity of the product, the price is at equilibrium, or market price. Commodities such as corn and wheat are bought and sold under these conditions. Monopolistic competition describes a far more common market condition in which there are many buyers and many sellers who differentiate their products from those of competitors. Product differentiation is the process of developing and promoting differences between one’s own products and all similar products. Another relatively common type of competition is an oligopoly, which describes a market condition or industry in which there are few sellers. Car manufacturers are an example. Finally, a monopoly is a market or industry with only one seller, such as a utility. Such firms operate legally in what is called a natural monopoly because the investments in capital are so large that the duplication of facilities would be wasteful and not in the public interest. (LO5 ends)
6. Summarize the factors that affect the business environment and the challenges that American business will encounter in the future.
The development of America’s business system began with the first settlers. Since coins were rare and most families survived by producing more than they could consume, they used a system of barter to exchange goods or services directly for other goods and services. Some people were even able to use their skills and excess time to distribute raw materials to various homes where families processed them into finished goods that were offered for sale by a merchant entrepreneur. This was called the domestic system. In the late eighteenth century, the factory system was developed, in which all the materials, machinery, and workers required to manufacture a product are assembled in one place. Certain inventions, primarily in textiles, allowed for specialization, which increased efficiency by separating a manufacturing process into distinct tasks that were assigned to individuals. New inventions and machinery, especially in agriculture and transportation, were developed throughout the nineteenth century. These innovations enabled the country to grow into an industrial giant. The automotive assembly line and the steel industry further transformed the economy in the early twentieth century.
At the same time, changes were also occurring in business ownership and business practices. Instead of having one owner, thousands of people, as corporate shareholders, invested in the ownership and management of a firm. Such modern marketing techniques as advertising, selling, and the advancement of credit to consumers contributed to an overall impression that all was well with the world. Unfortunately, it was not. The stock market crash of 1929 and the Great Depression that lasted throughout the thirties caused huge unemployment, an enormous devaluation of goods and services, and untold suffering. The government came to the aid of the people by developing programs to ease unemployment and by imposing certain regulations on businesses and business practices. Recovery was underway when World War II broke out, which caused a surge in business activity and growth. After the war, business continued to grow in all sectors. At this time, we began to measure the standard of living, a subjective measure of how well-off a person or society is, in terms of want satisfaction through goods and services. The continued growth suffered several major setbacks in the later twentieth century, beginning with the shortage of crude oil in the seventies, which led to very high inflation in the seventies to mid-eighties. Just as things were starting to stabilize, a spate of mergers, acquisitions, and bankruptcies caused increasing unease with the business system. The strength of the economy surged again in the nineties, fueled by sustained economic growth and major investments in technology. The Internet became a major force in the economy, and the source of e-business, the organized effort of individuals to produce and sell, for a profit, the products and services that satisfy society’s needs through the Internet. The new millennium brought a new round of economic problems including high unemployment rates, depressed stock values, and higher than average business failures—especially in the high-tech industry.
What will happen in the future? Of course, no one knows for sure, but American businesses will face challenges from several sectors. We need to answer questions about the amount of government involvement in business, about protection of the environment, about the management of culturally diverse work forces, and about employment, competition, international trade, and technology. (LO6 ends)