Chapter 1: The Foundations of Business

1. Introduction
Goods, which are tangable, and services are products. Some businesses offer one or the
other, while others, like restaurants, offer a combination of the two.

Revenue is the amount of money that is made selling a product or service.

The general formula is: Number of items sold * Price per item

Expenses is the cost of running a business. This includes:

● Labour (personnel, employees)
● Advertisement
● Taxes
● Insurence
● Facilities

Profit is calculated as: Revenue - Expenses

Businesses meet wants rather than needs.

A mutually beneficial exchange occurs between a buyer and a seller, typically when the
buyer gives money for the seller’s product.
An example of a mutually beneficial exchange is a used car.

2. Getting Down to Business

Vocabulary:
Business - any activity that provides goods or services in an effort to make a profit
Profit - the money a company makes after all expenses have been paid
Non-Profit Organization - an organization that has a purpose other than returning profits
to owners
Management - the process of planning for, organizing, directing, and controlling a
company’s resources so that it can achieve its goals.
Operations Manager - a person who designs and oversees the process that converts
resources into goods or services
Marketing - the activity and processes for creating, communicating, delivering, and
exchanging offerings that have value for customers, clients, partners, and society at large
Accountant - a financial advisor responsible for measuring, summarizing, and
communicating financial and managerial information
Finance - activities involved in planning for, obtaining, and managing a company’s funds

2.1 Business Participants and Activities

Participants:
● Owners
● Employees
● Customers

Owners invest money in a business;

Employees work for a company to help reach its goals
Customers generate profit for a business

The goal of a business is to satisfy the needs of its customers to generate profit, which can
then be invested back into the business.

2.2 Functional Areas of Business

Functional Areas of Business:
● Management
● Operations
● Marketing
● Accounting
● Finance

Management involves planning for, organizing, staffing, directing, and controlling a

company’s resources so that it can achieve its goals.

The operations manager designs and oversees the transformation of resources into goods
or services, as well as insuring their products are high quality.

Marketing consists of everything that a company does to identify customers’ needs.

● The benefits and features of products
● Price and quality
● The best method of delivering products
● The best means of promoting them
● Managing relationships with customers.

Accountants measure, summarize, and communicate financial and managerial

information and advise other managers on financial matters.
● Financial accountants prepare financial statements to help users, both inside and
outside the organization, assess the financial strength of the company.
● Managerial accountants prepare information, such as reports on the cost of
materials used in the production process, for internal use only.

Finance involves planning for, obtaining, and managing a company’s funds.

2.3 External Forces that Influence Business Activities

Figure 1.2 - Orange represents the external factors that influence a business

3. What is Economics
Vocabulary:
Economics - the study of how scarce resources are used to produce goods and services that
are distributed among people
Resources - inputs used to produce outputs
Factors of Production - resources consisting of land, labour, capital (money, buildings,
equipment), and entrepreneurial skills combined to produce goods and services
Economic System - a means by which a society makes decisions about allocating resources
to produce and distribute products
Communism - the economic system featuring the highest level of government control and
social services
Socialism - the economic system falling between communism and capitalism in terms of
government control and social services
Free Market - an economic system in which most businesses are owned and operated by
individuals
Capitalism - the economic system featuring the lowest level of government control and
social services
Mixed Market Economy - an economic system that relies on both markets and government
to allocate resources
Privatization - the process of converting government-owned businesses to private
ownership.

3.1 Resources: Inputs and Outputs

Resources:
● Land and other natural resources
● Labor (physical and mental)
● Capital, including buildings and equipment
● Entrepreneurship

Resources are combined to create goods and services.

Land and natural resources provide raw materials.
Labour transforms raw materials into goods and services.
Capital (equipment, buildings, vehicles, cash, and so forth) is needed during production.
Entrepreneurship provides the skill and creativity needed to produce a good or service to
be sold to the marketplace.

Factors of Production:
● The land the factory sits on
● The electricity used to run the plant
● The raw materials used to make the product
● The labourers who make the product
● The factory and equipment used in the manufacturing process
● The money needed to operate the factory
● The entrepreneurship skill used to coordinate the other resources to initiate the
production process and the distribution of the goods or services to the marketplace

3.2 Input and Output Markets

Figure 1.3 - represents the circular flow of how the factors of production are provided by
households
● Households provide factors of production (or resources)
● Households consume goods and services
● Businesses buy resources
● Businesses produce and sell both goods and services

3.3 The Questions Economists Ask

Economic answer 3 types of questions:
1. What goods and services should be produced to meet consumers’ needs? In what
quantity? When should they be produced?
2. How should goods and services be produced? Who should produce them, and what
resources, including technology, should be combined to produce them?
3. Who should receive the goods and services produced? How should they be allocated
among consumers?

3.4 Economic Systems

There are 3 types of systems a country can use:
● Planned Systems
● Free Market System
● Mixed Market System

Planned systems have the government exerts control over the allocation and distribution
of all or some goods and services.
There are two types of planned systems: Communist and Socialist.
A communist economy is one in which the government owns all or most enterprises.
Central planning by the government dictates which goods or services are produced, how
they are produced, and who will receive them.
Examples include South Korea and Cuba
A socialist economy is one where industries that provide essential services, such as
utilities, banking, and health care may be government-owned, while other businesses are
owned privately.
Central planning allocates the goods and services produced by government-run industries
and tries to ensure that the resulting wealth is distributed equally, while privately-owned
companies are operated for the purpose of making a profit for their owners.
Examples include Sweden and France.

The free market system, also known as capitalism, is the economic system in which most
businesses are owned and operated by individuals.
Competition dictates how goods and services will be allocated and business is conducted
with only limited government involvement.
Examples include the United States and Japan.
Figure 1.4 - As you move from left to right, the amount of government control over business
diminishes, as well as the level of social services, such as health care, child-care services,
social security, and unemployment benefits.

A mixed market economy relies on both markets and the government to allocate
resources.
Most economic systems are considered mixed as they adopt capitalistic characteristics and
convert businesses previously owned by the government to private ownership through a
process called privatization.

4. Perfect Competition and Supply and Demand

Vocabulary:
Perfect Competition - a market in which many consumers buy standardized products from
numerous small businesses
Demand - the quantity of a product that buyers are willing to purchase at various prices
Demand Curve - the graph showing the quantity of a product that will be bought at certain
prices
Supply - the quantity of a product that sellers are willing to sell at various prices
Supply Curve - the graph showing the quantity of a product that will be offered for sale at
certain prices
Equilibrium Price - the price at which buyers are willing to buy exactly the amount that
sellers are willing to sell

4.1 Perfect Competition

Perfect Competition:
● No seller is big enough or influential enough to affect the price
● Sellers and buyers accept the going price.

4.2 The Basics of Supply and Demand

Demand is the quantity of a product that buyers are willing to purchase at various prices.
Typically, the lower the price, the more people are willing to buy a product.
Figure 1.6 - The Demand Curve

Supply is the quantity of a product that sellers are willing to sell at various prices.
Typically, the higher the price, the more willing companies are willing to sell a product.

Figure 1.7 - The Supply Curve

Figure 1.8 - The Equilibrium Point

The equilibrium price is where the supply and demand curve intersect. This point is the
optimal value that will satisfy both the company and the customers.

Anything above the equilibrium is a surplus, while anything below the equilibrium is a
shortage.

5. Monopolistic Competition, Oligopoly, and Monopoly

Vocabulary:
Monopolistic Competition - a market in which many sellers supply differentiated products
Oligopoly - a market in which a few sellers supply a large portion of all the products sold in
the marketplace
Monopoly - a market in which there is only one seller supplying products at regulated
prices
Natural Monopoly - a monopoly in which one seller is permitted to supply products without
competition
Legal Monopoly - a monopoly in which one seller supplies a product or technology to which
it holds a patent.

5.1 Monopolistic Competition

Monopolistic competition occurs when there are many sellers selling somewhat different
products.
Products can be different in a number of ways, such as quality, style, convenience, location,
and brand name.
Under monopolistic competition, companies have only limited control over price.
Examples: Coke vs Pepsi, Gasoline at the closest store
5.2 Oligopoly
In an oligopolistic market, few sellers supply a large portion of all the products sold in the
marketplace.
As the cost of starting a business in an oligopolistic industry is usually high, the number of
firms entering it is low.
As the products are fairly similar, when one company lowers prices, others are often forced
to follow suit to remain competitive.
Examples: Airlines, Car manufacturing companies

5.3 Monopoly
In a monopoly, there’s only one seller in the market.
Most monopolies fall into one of two categories: natural and legal.

Natural monopolies require huge investments, and it would be inefficient to duplicate the
products that they provide.
In exchange for the right to conduct business without competition, their prices are
government-controlled and are required to serve all customers.
Examples of natural monopolies include public utilities, such as electricity and gas
suppliers.

A legal monopoly occurs when a company receives a patent to exclusively sell an invented
product or process.
Patents are issued for a limited time, generally, twenty years, where other companies can’t
use the invented product or process without permission from the patent holder.
Without competition, companies enjoyed a monopolistic position in regard to pricing.
Examples of legal monopolies include Polaroid

6. Measuring the Health of the Economy

Vocabulary:
Gross Domestic Product (GDP) - the measure of the market value of all goods and services
produced by a nation’s economy in a given year
Business Cycle - the pattern of expansion and contraction in an economy
Recession - an economic slowdown measured by a decline in gross domestic productivity
Depression - a severe, long-lasting recession
Full Employment - a condition in which about 95 percent of those who want to work are
employed
Unemployment Rate - the percentage of the total labour force that’s currently unemployed
and actively seeking work
Price Stability - the conditions under which the prices for products remain fairly constant
Inflation - a rise in the overall price level
Deflation - a decrease in the overall price level
Consumer Price Index (CPI) - the index that measures inflation by measuring the prices of
goods purchased by a typical consumer
Economic Indicator - a statistic that provides information about trends in the economy
Lagging Economic Indicator - the statistical data that measure economic trends after the
overall economy has changed
Leading Economic Indicator - the statistical data that predicts the status of the economy
three to twelve months in the future
Consumer Confidence Index - the measure of optimism that consumers express about the
economy as they go about their everyday lives

6.1 Economic Goals

The world’s economy share 3 common goals:
● Growth
● High employment
● Price stability

Economic Growth is measured by the GDP and can be shown using the business cycle.

GDP is the market value of all goods and services produced by the economy in a given year.
GDP includes only those goods and services produced domestically; goods produced
outside the country are excluded.
GDP also includes only those goods and services that are produced for the final user;
intermediate products are excluded.
Change in GDP shows the state of the economy; if GDP goes up, the economy is growing. If it
goes down, the economy is contracting.

A typical business cycle runs from three to five years and can be divided into four general
phases: prosperity, recession, depression, and recovery.
● During prosperity, the economy expands, unemployment is low, incomes rise, and
consumers buy more products.
● Eventually, things slow down and the economy falls into a recession. GDP decreases,
unemployment rises, and because people have less money to spend, business
revenues decline.
● Generally, a recession is followed by a recovery in which the economy starts growing
again.
● If, however, a recession lasts a long time (perhaps a decade or so), while
unemployment remains very high and production is severely curtailed, the economy
could sink into a depression.
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The peak is when the economy is producing at its maximum capacity, and the demand
exceeds the supply. The economy begins to overheat and fall into a recession.

The trough is the lowest point in GDP, where there is a decline in growth curbs,
government intervention is usually needed at this point.

Full employment is when about 95 percent of those wanting to work are employed.
The unemployment rate is the percentage of the labour force that’s unemployed and
actively seeking work.
The unemployment rate goes up during recessionary periods and goes down when
the economy is expanding.

Price stability occurs when the average of the prices for goods and services doesn’t change
or changes very little.
When the overall price level goes up, we have inflation and when the price level goes down,
we have deflation.
The consumer price index (CPI) measures the rate of inflation by determining price
changes of a hypothetical basket of goods, such as food, housing, clothing, medical care,
appliances, automobiles, and so forth, bought by a typical household.
6.2 Economic Forecasting
Economic indicators are statistics that provide valuable information about the economy.

Lagging economic indicators are statistics that report the status of the economy a few
months in the past.
Examples include: the average length of unemployment

Leading economic indicators are indicators that predict the status of the economy three to
twelve months in the future.
If it rises, the economy is likely to expand in the coming year and if it falls, the economy is
likely to contract.

The consumer confidence index is a good indicator of consumers’ future buying intent,
based on the results of a survey that gathers consumers’ opinions on the health of the
economy and their plans for future purchases.

7. Government’s Role in Managing the Economy

Vocabulary:
Monetary Policy - the efforts exerted by the Bank of Canada to regulate the nation’s money
supply
Fiscal Policy - the governmental use of taxation and spending to influence economic
conditions
National Debt - Total amount of money owed by the federal government

7.1 Monetary Policy

Monetary policy is exercised by the Bank of Canada, to decrease or increase the money
supply and raise or lower short-term interest rates, making it harder or easier to borrow
money.
When inflation is a problem, it will use a contractionary policy to decrease the money
supply and raise interest rates.
To counter a recession, it uses expansionary policy to increase the money supply and
reduce interest rates.

7.2 Fiscal Policy

The fiscal policy is the government’s powers over spending and taxation.
During a recession, the appropriate policy is to increase spending, reduce taxes, or both,
thus putting more money in the hands of businesses and consumers, encouraging
businesses to expand and consumers to buy more goods and services.
During inflation, the government will decrease spending or increase taxes, or both, thus
reducing spending by businesses and consumers, prices come down and inflation eases.
7.3 The National Debt
If the government takes in more money than it spends on goods and services, the result is a
budget surplus.
If the government spends more than it takes in, we have a budget deficit.

7.4 Macroeconomics and Microeconomics

Macroeconomics:
● The study of the economy as a whole
● Examines the economy-wide effect of inflation
● Investigates overall trends in imports and exports

Microeconomics:
● The study of the economic choices made by individual consumers or businesses
● Considers the price you’re willing to pay to go to college.
● Explains the price that teenagers are willing to pay for a concert ticket