Chapter One Understanding Business

What is Business A business is an organization that produces or sells goods or services to satisfy the needs, wants and demands of consumers for the purpose of making a profit Businesses can differ based on: Type of ownership Goods it produces or services it offers Different functions it performs for the community Types of jobs it provides

A business is an organization that produces or sells goods or services to satisfy the needs, wants and demands of consumers for the purpose of making a profit

Businesses can differ based on:

Type of ownership

Goods it produces or services it offers

Different functions it performs for the community

Types of jobs it provides

Goods and Services Essential goods and services: A need is an item that is necessary for survival. Luxury goods and services: A want is an item that is not necessary for survival but adds pleasure and comfort to life. Tangible: A good is an item that can be seen or touched. Intangible: A service is assistance provided; a product that cannot be touched.

Essential goods and services: A need is an item that is necessary for survival.

Luxury goods and services: A want is an item that is not necessary for survival but adds pleasure and comfort to life.

Tangible: A good is an item that can be seen or touched.

Intangible: A service is assistance provided; a product that cannot be touched.

Producers and Consumers A producer is an individual or business that makes a product. A consumer is a person or business who buys goods and services.

A producer is an individual or business that makes a product.

A consumer is a person or business who buys goods and services.

Economic Resources Goods must be created from basic components called factors of production. Natural resources are raw materials that come from the earth, water and air. Human resources (labour) are the people who work to create the goods and services. Capital resources including buildings, equipment, tools, trucks and factories.

Goods must be created from basic components called factors of production.

Natural resources are raw materials that come from the earth, water and air.

Human resources (labour) are the people who work to create the goods and services.

Capital resources including buildings, equipment, tools, trucks and factories.

Demand Demand is the quantity of a good or service that consumers are willing and able to buy at a particular price. Law of Demand: as the price of an item decreases, the demand for it increases; as the price of an item increases, the demand for it decreases

Demand is the quantity of a good or service that consumers are willing and able to buy at a particular price.

Law of Demand: as the price of an item decreases, the demand for it increases; as the price of an item increases, the demand for it decreases

Conditions That Create Demand Consumer must be aware or interested in the good and service There is a supply of the good or service available for the consumer Prices are reasonable and competitive The good or service must be conveniently located for the consumer to purchase

Consumer must be aware or interested in the good and service

There is a supply of the good or service available for the consumer

Prices are reasonable and competitive

The good or service must be conveniently located for the consumer to purchase

Factors That Affect Demand Changes in consumer income Changes in consumer taste Changes in expectations of future conditions Changes in other prices Changes in population

Changes in consumer income

Changes in consumer taste

Changes in expectations of future conditions

Changes in other prices

Changes in population

Supply Supply is the quantity of a good or service that businesses are willing and able to provide within a range of prices that people would be willing to pay. Law of Supply: as the price of an item increases, the supply of it increases; as the price of an item decreases, the supply of it decreases

Supply is the quantity of a good or service that businesses are willing and able to provide within a range of prices that people would be willing to pay.

Law of Supply: as the price of an item increases, the supply of it increases; as the price of an item decreases, the supply of it decreases

Factors That Affect Supply Change in the number of producers Change in the price of related goods Change in technology Change in expectations Changes in the environment

Change in the number of producers

Change in the price of related goods

Change in technology

Change in expectations

Changes in the environment

Price Affected by both supply and demand If demand is high and supply is low, the price will be high. If demand is low and supply is high, the price will be low

Affected by both supply and demand

If demand is high and supply is low, the price will be high.

If demand is low and supply is high, the price will be low

Competition Free enterprise: economic system in which economic resources are privately owned and decisions about what to produce are made freely by individual owners Level and amount of competition influences price Competition benefits consumers through: Lower prices Higher quality goods and services Product development

Free enterprise: economic system in which economic resources are privately owned and decisions about what to produce are made freely by individual owners

Level and amount of competition influences price

Competition benefits consumers through:

Lower prices

Higher quality goods and services

Product development

Business Survival To survive a business must produce items the public wants and needs In order to prevent obsolesce (product no longer in use) a business must: Take risks Innovate Adapt

To survive a business must produce items the public wants and needs

In order to prevent obsolesce (product no longer in use) a business must:

Take risks

Innovate

Adapt

Interdependence People rely on goods and services from thousands of different businesses to satisfy our needs and wants Businesses rely on other businesses to provide them the resources they need to satisfy wants and needs

People rely on goods and services from thousands of different businesses to satisfy our needs and wants

Businesses rely on other businesses to provide them the resources they need to satisfy wants and needs

Profit Profit is the income that is left after all expenses are paid. Revenue is all the income from the sale of goods and services Expenses are all costs associated with running the business and producing the good or services Profit = Revenue – Expenses

Profit is the income that is left after all expenses are paid.

Revenue is all the income from the sale of goods and services

Expenses are all costs associated with running the business and producing the good or services

Profit = Revenue – Expenses

Profit Example A-1 Lawn Service, April Mowed 83 lawns at $20 per lawn Rototilled 36 garden plots for $25 each Spent $248 on gasoline and oil $702 for equipment rental Paid customer $40 for broken flower planter Calculate the profit

A-1 Lawn Service, April

Mowed 83 lawns at $20 per lawn

Rototilled 36 garden plots for $25 each

Spent $248 on gasoline and oil

$702 for equipment rental

Paid customer $40 for broken flower planter

Calculate the profit

Answer Revenue 83 x 20 + 36 x 25 = $2560 Expenses 248 + 702 + 40 = $990 Profit 2560 – 990 = $1570

Revenue

83 x 20 + 36 x 25 = $2560

Expenses

248 + 702 + 40 = $990

Profit

2560 – 990 = $1570

Types of Costs Fixed costs: An expense that does not change depending on the quantity produced Variable costs: An expense that changes based on the quantity produced Profit = Revenue – Variable Costs – Fixed Costs

Fixed costs: An expense that does not change depending on the quantity produced

Variable costs: An expense that changes based on the quantity produced

Profit = Revenue – Variable Costs – Fixed Costs

Example You decide to sell candy at school since the vending machines do not offer chocolate bars. You buy chocolate bars for $0.50 from a wholesaler. You sell the bars for $1.00 You photocopy 100 flyers for a total cost of $10. How much money do you make if you sell 40 chocolate bars?

You decide to sell candy at school since the vending machines do not offer chocolate bars.

You buy chocolate bars for $0.50 from a wholesaler.

You sell the bars for $1.00

You photocopy 100 flyers for a total cost of $10.

How much money do you make if you sell 40 chocolate bars?

Example Solution Revenue: 40 x 1 = $40 Variable Cost: 40 x 0.50 = $20 Fixed Cost: $10 Profit = 40 – 20 – 10 = $10. How many chocolate bars do you need to sell to cover your costs (break-even point)? For each chocolate bar you sell, you make (1 – 0.5=.5) $0.50 To cover your fixed costs, you need to sell (10/0.50 = 20) 20 chocolate bars

Revenue: 40 x 1 = $40

Variable Cost: 40 x 0.50 = $20

Fixed Cost: $10

Profit = 40 – 20 – 10 = $10.

How many chocolate bars do you need to sell to cover your costs (break-even point)?

For each chocolate bar you sell, you make (1 – 0.5=.5) $0.50

To cover your fixed costs, you need to sell (10/0.50 = 20) 20 chocolate bars

Types of Businesses A manufacturing business produces the product from raw materials Eg. GM A retail business takes a finished product and sells it to the consumer Eg. The GAP A service business provides a particular service for the consumer Eg. Cadet Cleaners A franchise business is given the right to operate using its parent company’s name and logo Eg. McDonald’s

A manufacturing business produces the product from raw materials Eg. GM

A retail business takes a finished product and sells it to the consumer Eg. The GAP

A service business provides a particular service for the consumer Eg. Cadet Cleaners

A franchise business is given the right to operate using its parent company’s name and logo Eg. McDonald’s

Small Businesses Small businesses, employing 0 to 19 people, were 92% of the businesses in Canada in 2003

Small businesses, employing 0 to 19 people, were 92% of the businesses in Canada in 2003

Starting a Business http://careerccc.org/products/cp_99_e/section4/quiz.html

http://careerccc.org/products/cp_99_e/section4/quiz.html

Starting a Business Why start your own business? Be your own boss Financial independence Opportunity to use your skills, knowledge, creativity

Why start your own business?

Be your own boss

Financial independence

Opportunity to use your skills, knowledge, creativity

Before starting your own business, you must consider: What are your skills best suited for? Where can you find information regarding the type of business you plan to open? What are the startup costs? Should I use debt or equity financing? Where can I find financing (capital /money)? What level of risk can I expect? What are the steps involved in running this business? What resources would I need? Should my business be home-based? What type of business would you like to operate?

What are your skills best suited for?

Where can you find information regarding the type of business you plan to open?

What are the startup costs?

Should I use debt or equity financing?

Where can I find financing (capital /money)?

What level of risk can I expect?

What are the steps involved in running this business?

What resources would I need?

Should my business be home-based?

What type of business would you like to operate?

Types of Business Ownership Sole Proprietorship A business owned and operated by one person Owner is responsible for all the operations of the business and assumes all the risks Partnership Partnership A business owned and operated by two or more people A partnership agreements is required before the business opens

Sole Proprietorship

A business owned and operated by one person

Owner is responsible for all the operations of the business and assumes all the risks Partnership

Partnership

A business owned and operated by two or more people

A partnership agreements is required before the business opens

Types of Business Ownership Corporation A legal entity that exists independently from its owners The owners of a corporation are called shareholders (they own stock in the business) Corporations can either be: Private  only 50 shareholders (normally within a family) Public  anyone can buy shares in the company. These shares are traded on stock exchanges Crown  owned by the government (Canada Post, LCBO) Non-profit  Corporations like the United Way who’s goal is to not make a profit, but to fight for a cause

Corporation

A legal entity that exists independently from its owners

The owners of a corporation are called shareholders (they own stock in the business)

Corporations can either be:

Private  only 50 shareholders (normally within a family)

Public  anyone can buy shares in the company. These shares are traded on stock exchanges

Crown  owned by the government (Canada Post, LCBO)

Non-profit  Corporations like the United Way who’s goal is to not make a profit, but to fight for a cause

Types of Business Ownership Co-operatives Businesses owned and operated by a group of people with a strong common interest Franchise A business given the right to operate using its parent company’s name and logo

Co-operatives

Businesses owned and operated by a group of people with a strong common interest

Franchise

A business given the right to operate using its parent company’s name and logo

Franchise A business given the right to operate using its parent company’s name and logo Advantages: You have a recognizable name Franchisor supplies training and other expertise Franchisor provides advertising, equipment, and packaging Disadvantages: Expensive A lot of rules to follow

A business given the right to operate using its parent company’s name and logo

Advantages:

You have a recognizable name

Franchisor supplies training and other expertise

Franchisor provides advertising, equipment, and packaging

Disadvantages:

Expensive

A lot of rules to follow

Sole Proprietorship Advantages: You keep all the profits (you get all the money you make) Easier to make decisions Financial information can be kept secret Easy to start up and close down Disadvantages: Unlimited Liability Cost and time commitment can be high Funding can be difficult to obtain

Advantages:

You keep all the profits (you get all the money you make)

Easier to make decisions

Financial information can be kept secret

Easy to start up and close down

Disadvantages:

Unlimited Liability

Cost and time commitment can be high

Funding can be difficult to obtain

Partnership Advantages: Responsibilities are shared More resources Less risk and lower time commitment Disadvantages: Partners have unlimited liability Conflict Shared profits Difficult to end partnership

Advantages:

Responsibilities are shared

More resources

Less risk and lower time commitment

Disadvantages:

Partners have unlimited liability

Conflict

Shared profits

Difficult to end partnership

Corporation A legal entity that exists independently from its owners The owners of a corporation are called shareholders (they own stock in the business) To INCORPORATE your business, you (along with a lawyer and accountant) must submit ARTICLE OF INCORPORATION to the government specifying what type of corporation you will be (how many shares will be issued etc.) Shareholders elect a BOARD OF DIRECTORS who guide the corporation

A legal entity that exists independently from its owners

The owners of a corporation are called shareholders (they own stock in the business)

To INCORPORATE your business, you (along with a lawyer and accountant) must submit ARTICLE OF INCORPORATION to the government specifying what type of corporation you will be (how many shares will be issued etc.)

Shareholders elect a BOARD OF DIRECTORS who guide the corporation

Corporation Continued Advantages Limited liability for its owners Easy to raise money Lower tax rates Can continue even if owners pass away Disadvantages Difficult to set up Complicated management structures Employees may not be as committed Value changes daily on the stock market

Advantages

Limited liability for its owners

Easy to raise money

Lower tax rates

Can continue even if owners pass away

Disadvantages

Difficult to set up

Complicated management structures

Employees may not be as committed

Value changes daily on the stock market

Co-operatives Businesses owned and operated by a group of people with a strong common interest Advantages: The responsibilities and costs are shared among the members of the co-op Members pay less for Goods and Services and will share in any profit Disadvantages: Decision making may be difficult Do not exist to make large profits

Businesses owned and operated by a group of people with a strong common interest

Advantages:

The responsibilities and costs are shared among the members of the co-op

Members pay less for Goods and Services and will share in any profit

Disadvantages:

Decision making may be difficult

Do not exist to make large profits