Chapter 01: Foundation of Business & Economics

Chapter 01: Foundation of Business & Economics

Layout of Chapter:

1.                  Why we study Business?

Increasing dependence on others, International opportunities, Standard of living, Coping with change, Preventing misconceptions.

2.                  People form the Core of Business:

Owners, Managers, Employees, & Consumers.

3.                  Objectives of Business:

Four main objectives – Profit, Survival, Growth & Social Responsibility.

4.                  Economics - The Foundation of Business:

Resources, Goods & Services, and Allocation.

5.                  Economic Systems:

Planned Economy, Pure Capitalism and Mixed Economy.

6.                  Historical review of American business:

Mercantilism, Adam Smith [The Wealth of Nations], The U.S. Industrial Revolution, The Pre-Depression years, The Great Depression, The New Deal years, World War II, The Modern Era.

7.                  Business challenges for the 1990s/ 2000s:

An Aging Population, The Changing Family, Jobs, Minorities in America, The Global Boom, The Environment.

1.                  Why we study Business?

A)                Increasing dependence on others: Over the years, people have become more and more inter-dependent on others, both individually and nationally.

Business: The Exchange of goods, services, or money for mutual benefit or profit.

Barter: The exchange of goods without using money.

B)                International opportunities: Increasing globalization of business will bring many opportunities. (E.g. Multinational companies.)

C)                Standard of living: We strive to maintain and improve our standard of living.

Standard of living: A measure of how well a person or family is doing in terms of satisfying needs and wants with goods & services.

Free Enterprise: A system in which private businesses are able to start and do business competitively to earn profits, with a minimal degree of government regulations.

D)                Coping with changes: Business is dynamic – always changing. Coping with both predictable and unpredictable events can be easier, more efficient, and less traumatic if we understand/ study business.

E)                Preventing misconceptions: We will be able to separate fact from fiction in business issues. Our knowledge of business will help us identify the misconceptions, misinformation & inaccurate data and prevent us from accepting such data as truth.

Gross National Product (GNP): The market value of all final goods and services produced over a one-year period. It tells us how we are doing in business.

Business Enterprise: An organization involved in exchanging goods, services, or money to earn a profit.

2.                  People form the Core of Business.

The human element is the core of business. Business needs people as owners, managers, employees, and consumers. Business may be operated differently and the objectives of businesses may differ, but the universal element is all business activities is people.

A)    Owners: People who own a business, as well as those who invest money in one and have right on the business property, do so because they expect to earn profit.

B)    Managers: The person responsible for operating the business may be the owner (an owner-manager, also called an entrepreneur) or a professional manager employed by the owner.

C)    Employees: The group of people who supply the skills and abilities to provide a product or service and to earn a profit.

To compete with other businesses, a business enterprise needs a committed and effective team of employees.

D)    Consumers: A person who purchases a good or service for personal use.

A business enterprise attempts to satisfy consumer needs and desires while earning a profit.

3.                  Objectives of Business.

Four main objectives – Profit, Survival, Growth & Social Responsibility.

A business must survive if other objectives are to be accomplished.

Growth is an objective because business does not stand still.

Businesses must accept social responsibility in areas such as the environment and protection from discrimination.

The Profit objective plays a major role in business. Profit carries different meaning to different people because of their values, attitudes, and perceptions - Two views:

A)    Business Profit: The difference between business income (revenue) and business expenses (costs).

Profit = selling price - all costs of making & selling a product, including taxes.

Profits reward a business enterprise for effectively conducting a number of activities:

·             Risk-Taking,

·             Evaluation of Demand, and

·             Efficient Management.

B)    Economic Profit: What remains after expenses and opportunity costs are subtracted from income.

Profit = selling price - all costs of making & selling a product, including taxes; AND Opportunity Cost.

Opportunity Cost: The cost of choosing to use resources for a purpose, which results in sacrificing the next best alternative for the use of those resources.

4.                  Economics - The Foundation of Business.

Economics: The study of how a society chooses to use scarce resources to produce goods and services and to distribute them for consumption.

A)    Resources: A nation’s resources consist of three broad areas - natural, capital & Labour.

Natural Resources: Resources provided in limited amounts by nature, such as oil, coal, water, timber etc.

Capital Resources: Goods produced for the purpose of making other types of goods and services. Some capital resources, called current assets, have a short life and are used up in the production process. These resources (short term in nature) include fuel, raw materials, paper and money. Long lived capital resources, which can be used repeatedly in the production process, are called fixed capital. Examples include factory building, computers, railroad cars etc (long terms in nature).

Labour Resources: The human talent, skills, and competence, available in a nation; the most valuable national resource. E.g. doctors, teachers, engineers, carpenters, electricians etc.

B)    Goods & Services: A nation’s resources are used to produce goods and services that will meet people’s needs and wants.

Needs are goods and services people must have simply to exist. Needs are necessities - food, clothing, shelter and medical care. Wants, on the other hand, are things they would like to have but do not absolutely need for survival. E.g. VCR, DVD, washing machines, cars, luxury vacation etc.

C)    Allocation: The process of choosing how resources will be used to meet a society’s needs and wants; includes the distribution of products to customers.

·             Resource allocation.

·             Product distribution.

5.                  Economic Systems.

An economic system is an accepted process by which natural resources, capital and labour are organized to produce and distribute goods and services. It is the process of organizing production, establishing the rights and freedom of ownership, using productive resources, and governing business transactions in a society. There are three (3) basic types of systems:

1)     Planned Economy: An economy in which the government owns the productive resources, financial enterprises, retail stores, and banks. E.g. East Germany, Romania, Bulgaria & USSR prior to changes in 1989/90.

2)     Pure Capitalism: An economy where Private Enterprises can produce almost everything (found only in textbook examples).

3)     Mixed Economy: An economy in which both Govt. and Pvt. Enterprises produce & distribute the goods and services.

E.g. Bangladesh, India, USA.

Capitalism: Capitalism is characterized by private ownership of capital and by competition among businesses seeking a profit; e.g. the American brand of economic system.

Three (3) important elements of mixed economy and capitalism:

(a)    Freedom of Choice - Consumers have the freedom to consume whatever they need and want.

(b)    Freedom of Enterprise - Businesses and individuals with the capital may enter essentially any legal business venture they wish.

(c)     Competition - There is a rivalry among the businesses for the consumer dollars.

6.                  Historical review of American business.

A)    Mercantilism: A system of state power, with public authority controlling and directing the nation’s economic life. The colonists settled in America during an Era of mercantilism.

B)    Adam Smith [The Wealth of Nations]: Adam Smith criticized mercantilism in his book The Wealth of Nations. Smith opposed the tariffs, granted monopolies, and taxes levied by the state. He argued for free competition among all producers. He believed an individual’s pursuit of their own best interest would lead to a nation to attain its goal. An “invisible hand” will work for this result.

Laissez-Faire: The policy made famous by Adam Smith. A policy that encourages government to leave business and the economy alone. French word Laissez-Faire means to let people do as they chose.

“If government stayed out of the economy and allowed businesses and consumers to pursue their own best interests, competition among producers would keep prices low while generating the goods demanded by consumers.”

Profit motive: Profit Motive is the expected or actual returns that motivate business leaders to do what must be done.

C)    The U.S. Industrial Revolution: The development of modern technology and production processes began in England about 1769. Industrial revolution in USA started in 1790. Extensive mechanization of production systems caused the population to concentrate in cities and changed the nature of work for many people.

D)    The Pre-Depression years: The period from the end of the 19^th century to the Great Depression in 1929 was one of growth in the oil, steel, and financial industries. Other industries, such as tobacco, meat, and copper, also grew. Stock prices were increasing.

People began investing in the stock market, often on credit, until the bottom dropped out of the market, causing the Great Depression.

E)    The Great Depression: (USA 1929 - 1940). Marked by tragic poverty and unemployment. Unemployment rate hit 25% (about 13 million people became unemployed. The GNP (value of goods and services produced in the country) was cut in half. Stock market prices fell about 90%.

Depression: A period of drastic decline in the national economy; characterized by decreasing business transactions, falling prices, and high unemployment.

F)     The New Deal years: Franklin D. Roosevelt became the president of the USA in 1933. He introduced the policies of New Deal which focussed in two areas: unemployment and banking reform. His policies worked and the US started to come out of the Great Depression.

G)    World War II & The Postwar Period: The nation’s economic troubles finally began to ease at the start of World War II. The US government became the principal consumer of the nation’s goods. Industries modified their facilities to produce tanks, weapons, tools, military clothing, airplanes, ships, and other wartime equipment. The government’s total wartime (1941-45) expenditure was $347 billion approx.

The economy continued to expand after the war.

H)    The Modern Era: In the 1950s, the economy continued to expand. Four Recessions occurred during the 50s and 60s, but they were mild.

During 1950-85 period, Americans became familiar with and enjoyed new shopping malls, high-technology consumer goods (such as microwave ovens), new educational opportunities, improved health care, and many other new commodities and services.

Recession: A cycle or period when the level of economic activity declines for at least a six-month period.

Inflation: A rise in the average level of prices for all goods and services in a particular time period. OR, A decline in the purchasing power of the dollar (the dollar buys less).

The 1970s were highlighted by change. In 1974, following the oil prices shock of 1973, a major recession hit the United States. The Organization of Petroleum Exporting Countries (OPEC) had quadrupled oil prices in Fall 1973, right at a time of double-digit inflation in America. Their economic growth stalled. Thus, Americans were faced with stagflation.

Stagflation: A stalled economy (stagnation) faced with rising prices for goods and services (inflation).

Stagnation + Inflation = Stagflation.

In 1981 Ronald Reagan became President of USA and he instituted Supply-Side Economics.

Supply-side Economics: Reducing government’s role in business by decreasing taxes and government regulation. The goal of supply-side economics was to raise the total amount of goods and services produced. Supply-side economists believed that high tax rates reduce a worker’s incentive to work hard/ produce more. 

7.                  Business challenges for the 1990s/ 2000s.

The challenges include An Aging Population, The Changing Family, Jobs - the shift in emphasis from goods to services, Increasing importance of Minorities / women in business world, The Global Boom, The Environment.