Chapter 1 Understanding the U.S. Business System Leonardo Matarrese @MyPlick

Outline The Concept of Business and the Concept of Profit Economic Systems Around the World The U.S. Economic System Evaluating Economic Systems Leonardo Matarrese @MyPlick

The Concept of Business and the Concept of Profit

Economic Systems Around the World

The U.S. Economic System

Evaluating Economic Systems

The Concept of Business and the Concept of Profit Business An organization that provides goods or services to earn profits Profits The difference between a business’s revenues and its expenses Leonardo Matarrese @MyPlick

Business

An organization that provides goods or services to earn profits

Profits

The difference between a business’s revenues and its expenses

Economic Systems Around the World Economic System A nation’s system for allocating its resources among its citizens Leonardo Matarrese @MyPlick

Economic System

A nation’s system for allocating its resources among its citizens

Factors of Production Resources used in the production of goods and services Four traditional factors of production: Natural Resources Labor Capital Entrepreneurs Newer perspectives include: Physical Resources Information Resources Leonardo Matarrese @MyPlick

Resources used in the production of goods and services

Four traditional factors of production:

Natural Resources

Labor

Capital

Entrepreneurs

Newer perspectives include:

Physical Resources

Information Resources

Factors of Production Natural Resources Materials supplied by nature (such as land, water, mineral deposits, and trees) Labor (or Human Resources) Physical and mental capabilities of people as they contribute to economic production Capital Funds needed to create and operate a business enterprise Leonardo Matarrese @MyPlick

Natural Resources

Materials supplied by nature (such as land, water, mineral deposits, and trees)

Labor (or Human Resources)

Physical and mental capabilities of people as they contribute to economic production

Capital

Funds needed to create and operate a business enterprise

Factors of Production Entrepreneur Person who starts a new business or makes the decisions that expand a small business Physical Resources Tangible things organizations use in the conduct of their business Information Resources Data and other information used by a business Leonardo Matarrese @MyPlick

Entrepreneur

Person who starts a new business or makes the decisions that expand a small business

Physical Resources

Tangible things organizations use in the conduct of their business

Information Resources

Data and other information used by a business

Types of Economic Systems Planned Economy Centralized government controls all or most factors of production and makes all or most production and allocation decisions Market Economy Individuals control production and allocation decisions through supply and demand Leonardo Matarrese @MyPlick

Planned Economy

Centralized government controls all or most factors of production and makes all or most production and allocation decisions

Market Economy

Individuals control production and allocation decisions through supply and demand

Planned Economies Communism Planned economic system in which the government owns and operates all major sources of production Socialism Planned economic system in which the government owns and operates selected major sources of production Leonardo Matarrese @MyPlick

Communism

Planned economic system in which the government owns and operates all major sources of production

Socialism

Planned economic system in which the government owns and operates selected major sources of production

Market Economies Market Mechanism for exchange between buyers and sellers of a particular good or service Input Market Firms buy resources from supplier households Output Market Firms supply goods and services in response to demand on the part of households Capitalism Market economy that provides for private ownership of production and encourages entrepreneurship by offering profits as an incentive Leonardo Matarrese @MyPlick

Market

Mechanism for exchange between buyers and sellers of a particular good or service

Input Market

Firms buy resources from supplier households

Output Market

Firms supply goods and services in response to demand on the part of households

Capitalism

Market economy that provides for private ownership of production and encourages entrepreneurship by offering profits as an incentive

“ Pure Market Economy” 1- Leonardo Matarrese @MyPlick OUTPUT MARKETS Goods Services INPUT MARKETS Labor Capital Entrepreneurs Physical Resources Information Resources HOUSEHOLDS Demand products in output markets Supply resources in input markets FIRMS Supply products in output markets Demand resources in input markets DEMAND DEMAND SUPPLY SUPPLY

Demand products in output markets

Supply resources in input markets

Supply products in output markets

Demand resources in input markets

Mixed Market Economies Privatization Process of converting government enterprises into privately owned companies Socialism Planned economic system in which the government owns and operates only selected major sources of product io n Economic system featuring characteristics of both planned and market economies Leonariodo Matarrese @MyPlick

Privatization

Process of converting government enterprises into privately owned companies

Socialism

Planned economic system in which the government owns and operates only selected major sources of product io n

The U.S. Economic System Understanding the complex nature of the U.S. economic system is essential to understanding the environment in which U.S. businesses operate. Leonardo Matarrese @MyPlick

Understanding the complex nature of the U.S. economic system is essential to understanding the environment in which U.S. businesses operate.

Markets, Demand, & Supply Demand The willingness and ability of buyers to purchase a good or service Supply The willingness and ability of producers to offer a good or service for sale Leonardo Matarrese @MyPlick

Demand

The willingness and ability of buyers to purchase a good or service

Supply

The willingness and ability of producers to offer a good or service for sale

The Laws of Demand & Supply Law of Demand Principle that buyers will purchase (demand) more of a product as its price drops and less as its price increases Law of Supply Principle that producers will offer (supply) more of a product for sale as its price rises and less as its price drops Leonardo Matarrese @MyPlick

Law of Demand

Principle that buyers will purchase (demand) more of a product as its price drops and less as its price increases

Law of Supply

Principle that producers will offer (supply) more of a product for sale as its price rises and less as its price drops

The Laws of Demand & Supply Demand and Supply Schedule Assessment of the relationships between different levels of demand and supply at different price levels Demand Curve Graph showing how many units of a product will be demanded (bought) at different prices Supply Curve Graph showing how many units of a product will be supplied (offered for sale) at different prices Leonardo Matarrese @MyPlick

Demand and Supply Schedule

Assessment of the relationships between different levels of demand and supply at different price levels

Demand Curve

Graph showing how many units of a product will be demanded (bought) at different prices

Supply Curve

Graph showing how many units of a product will be supplied (offered for sale) at different prices

The Laws of Demand & Supply Market Price (or Equilibrium Price) Profit-maximizing price at which the quantity of goods demanded and the quantity of goods supplied are equal Surplus Situation in which quantity supplied exceeds quantity demanded Shortage Situation in which quantity demanded exceeds quantity supplied Leonardo Matarrese @MyPlick

Market Price (or Equilibrium Price)

Profit-maximizing price at which the quantity of goods demanded and the quantity of goods supplied are equal

Surplus

Situation in which quantity supplied exceeds quantity demanded

Shortage

Situation in which quantity demanded exceeds quantity supplied

Demand & Supply 1- 1- Leonardo Matarrese @MyPlick Demand and Supply Schedules Quantity of Quantity of Price Pizzas Demanded Pizzas Supplied $2 2000 100 $4 1900 400 $6 1600 600 $8 1200 800 $10 1000 1000 $12 800 1200 $14 600 1300 $16 400 1600 $18 200 1800 $20 100 2000

Demand & Supply Quantity of Pizzas Demanded Price of Pizzas Demand Curve   1- 1- Leonardo Matarrese @MyPlick 200 - 400 - 600 - 800 - 1000 - 1200 - 1400 - 1600 - 1800 - 2000 - $20 - 18 - 16 - 14 - 12 - 10 - 8 - 6 - 4 - 2 -

Demand & Supply Quantity of Pizzas Supplied Supply Curve   1- 1- Leonardo Matarrese @MyPlick 200 - 400 - 600 - 800 - 1000 - 1200 - 1400 - 1600 - 1800 - 2000 - $20 - 18 - 16 - 14 - 12 - 10 - 8 - 6 - 4 - 2 - Price of Pizzas

Demand & Supply Quantity of Pizzas per Week Demand Curve Supply Curve Equilibrium Price  1- 1- Leonardo Matarrese @MyPlick 200 - 400 - 600 - 800 - 1000 - 1200 - 1400 - 1600 - 1800 - 2000 - $20 - 18 - 16 - 14 - 12 - 10 - 8 - 6 - 4 - 2 - Price of Pizzas

Private Enterprise Economic system that allows individuals to pursue their own interests without undue governmental restriction Four elements of private enterprise: Private Property Rights Freedom of Choice Profits Competition Leonardo Matarrese @MyPlick

Four elements of private enterprise:

Private Property Rights

Freedom of Choice

Profits

Competition

Private Enterprise Private Property Rights The right to buy, own, use, and sell almost any form of property Freedom of Choice The right to sell your labor to the employer you choose, purchase products you want to buy, choose what to produce or who to hire, etc. Profits Anticipated profits play a large part in individuals’ choices of what goods or services to produce Competition Vying among businesses for the same resources or customers Leonardo Matarrese @MyPlick

Private Property Rights

The right to buy, own, use, and sell almost any form of property

Freedom of Choice

The right to sell your labor to the employer you choose, purchase products you want to buy, choose what to produce or who to hire, etc.

Profits

Anticipated profits play a large part in individuals’ choices of what goods or services to produce

Competition

Vying among businesses for the same resources or customers

Degrees of Competition Pure Competition Market or industry characterized by numerous small firms producing an identical product Monopolistic Competition Market or industry characterized by numerous buyers and relatively numerous sellers trying to differentiate their products from those of competitors Oligopoly Market or industry characterized by a handful of (generally large) sellers with the power to influence the prices of their products Leonardo Matarrese @MyPlick

Pure Competition

Market or industry characterized by numerous small firms producing an identical product

Monopolistic Competition

Market or industry characterized by numerous buyers and relatively numerous sellers trying to differentiate their products from those of competitors

Oligopoly

Market or industry characterized by a handful of (generally large) sellers with the power to influence the prices of their products

Degrees of Competition Monopoly Market or industry in which there is only one producer, which can therefore set the prices of its products Natural Monopoly Industry in which one company can most efficiently supply all needed goods or services Leonardo Matarrese @MyPlick

Monopoly

Market or industry in which there is only one producer, which can therefore set the prices of its products

Natural Monopoly

Industry in which one company can most efficiently supply all needed goods or services

Evaluating Economic Systems Nearly every economic system has three broad goals: Stability Full Employment Growth Leonardo Matarrese @MyPlick

Nearly every economic system has three broad goals:

Stability

Full Employment

Growth

Economic Goals Stability Condition in which the balance between the money available in an economy and the goods produced in it are growing at about the same rate Inflation Phenomenon of widespread price increases throughout an economic system Recession Period characterized by decreases in employment, income, and production Depression Particularly severe and long-lasting recession Leonardo Matarrese @MyPlick

Stability

Condition in which the balance between the money available in an economy and the goods produced in it are growing at about the same rate

Inflation

Phenomenon of widespread price increases throughout an economic system

Recession

Period characterized by decreases in employment, income, and production

Depression

Particularly severe and long-lasting recession

Economic Goals Full Employment Everyone who wants to work has an opportunity to do so Unemployment Level of joblessness among people actively seeking work Knowledge Workers Skilled employees in high-tech industries Growth Increase in the amount of goods and services produced by a nation’s resources Leonardo Matarrese @MyPlick

Full Employment

Everyone who wants to work has an opportunity to do so

Unemployment

Level of joblessness among people actively seeking work

Knowledge Workers

Skilled employees in high-tech industries

Growth

Increase in the amount of goods and services produced by a nation’s resources

Assessing Economic Performance Gross National Product (GNP) The value of all goods and services produced by an economic system in a year regardless of where the factors of production are located Real Gross National Product (real GNP) Gross national product adjusted for inflation and changes in the value of a country’s currency Gross Domestic Product (GDP) The value of all goods and services produced in a year by a nation’s economy through domestic factors of production Leonardo Matarrese @MyPlick

Gross National Product (GNP)

The value of all goods and services produced by an economic system in a year regardless of where the factors of production are located

Real Gross National Product (real GNP)

Gross national product adjusted for inflation and changes in the value of a country’s currency

Gross Domestic Product (GDP)

The value of all goods and services produced in a year by a nation’s economy through domestic factors of production

Assessing Economic Performance Productivity Measure of economic growth that compares how much a system produces with the resources needed to produce it Balance of Trade The difference between a country’s exports to and imports from other counties Budget Deficit Situation in which a government body spends more money than it takes in National Debt Total amount that a nation owes its creditors Leonardo Matarrese @MyPlick

Productivity

Measure of economic growth that compares how much a system produces with the resources needed to produce it

Balance of Trade

The difference between a country’s exports to and imports from other counties

Budget Deficit

Situation in which a government body spends more money than it takes in

National Debt

Total amount that a nation owes its creditors

Managing the U.S. Economy Fiscal Policies Government economic policies that determine how the government collects and spends its revenues Monetary Policies Government economic policies that determine the size of a nation’s money supply Leonardo Matarrese @MyPlick

Fiscal Policies

Government economic policies that determine how the government collects and spends its revenues

Monetary Policies

Government economic policies that determine the size of a nation’s money supply

The Global Economy in the 21st Century The United States was riding the crest of a long-term economic boom. Growth has been strong, and unemployment and inflation remain low. Now are we in a recession? What forces will drive the economy for the next decade? Leonardo Matarrese @MyPlick

The United States was riding the crest of a long-term economic boom. Growth has been strong, and unemployment and inflation remain low. Now are we in a recession?

Three Major Forces The information revolution will continue to enhance productivity across all sectors of the economy, but most notably in such information-dependent industries as finance, media, and wholesale and retail trade. New technological breakthroughs in such areas as biotechnology will create entirely new industries. Increasing globalization will create much larger markets while also fostering tougher competition among global businesses; as a result, companies will need to focus even more on innovation and cost cutting. Leonardo Matarrese @MyPlick

The information revolution will continue to enhance productivity across all sectors of the economy, but most notably in such information-dependent industries as finance, media, and wholesale and retail trade.

New technological breakthroughs in such areas as biotechnology will create entirely new industries.

Increasing globalization will create much larger markets while also fostering tougher competition among global businesses; as a result, companies will need to focus even more on innovation and cost cutting.

Projected Trends & Patterns The economy will maintain strong and consistent growth rates, perhaps exceeding 3 percent per year. New technological breakthroughs in such areas as biotechnology will create entirely new industries. Inflationary surges and large budget deficits will become less likely. Countries that encourage free trade, innovation, and open financial systems will prosper. The most successful businesses will be those that are able most effectively to master new technologies and keep abreast of their competitors. Leonardo Matarrese @MyPlick

The economy will maintain strong and consistent growth rates, perhaps exceeding 3 percent per year. New technological breakthroughs in such areas as biotechnology will create entirely new industries.

Inflationary surges and large budget deficits will become less likely.

Countries that encourage free trade, innovation, and open financial systems will prosper.

The most successful businesses will be those that are able most effectively to master new technologies and keep abreast of their competitors.