PART 1

UNDERSTANDING THE CONTEMPORARY

BUSINESS ENVIRONMENT

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CHAPTER 1
Understanding the Business System

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 Chapter Outline
The Concept of Business and the Concept of
Profit
Economic Systems Around the World
The Economics of a Market System
AShort History of Evolution Business in the
Western World

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The Concept of Business and the Concept
of Profit
Business is an organization
that provides goods or
services to earn profits
Profits represent the
difference between a
business’s revenues and its
expenses

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Economic Systems Around
the World

An economic system is a
nation’s system for allocating
its resources among its
citizens.

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What Are Factors of Production?

Resources used in the

production of goods and
services—labor, capital,
entrepreneurs, physical
resources and information
resources

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Factors of Production
Labor (or Human resources)
are the physical and mental
capabilities of people as they
contribute to economic
production
Capital are the funds needed to
create and operate a business
enterprise

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Factors of Production
Entrepreneur is an individual
who accepts the risks and
opportunities involved in
creating and operating a new
business venture
Physical resources are
tangible things organizations
use in the conduct of their
business

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Factors of Production
 Information resources are
data and other information
used by business

Can you name any others?

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Types of Economic Systems
 Planned economy
 Market economy
 Mixed market economy

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Types of Economic Systems

 Planned economy relies on a

centralized government to control all
or most factors of production and to
make all or most production and
allocation decisions. The Kremlin is
shown above.
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Types of Economic Systems

 Market economy relies on individuals

to control production and allocation
decisions through supply and demand

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Types of Economic Systems

 Mixed market
economy features
characteristics of
both planned and
market economies

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What Is Communism?
Planned economy in
which the government
owns and operates all
factors of production

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What Is a Market?

Mechanism for exchange

between the buyers and sellers of
a particular good or service

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Input and Output Markets
Input market is a market in which firms
buy resources from supplier households
Output market is a market in which firms
supply goods and services in response to
demand on the part of households

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What Is Capitalism?

Market economy that provides

for private ownership of
production and encourages
entrepreneurship by offering
profits as an incentive
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Circular Flow in a Market Economy

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Mixed Market Economies

Privatization is the process

of converting government
enterprises into privately
owned companies
Socialism is a partially
planned system in which
the government owns and
operates selected major
industries

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Demand and Supply in a Market Economy

Demand is the
willingness and ability of
buyers to purchase a
good or service
Supply is the
willingness and ability of
producers to offer a good
or service for sale

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The Laws of Supply and Demand
◦ The law of demand:
Buyers will purchase (demand)
more of a product as its price
drops and less as its price
increases.
◦ The law of supply: Producers
will offer (supply) more of a
product for sale as its price rises
and less as its price drops.

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 What Is a Demand and Supply
Schedule?

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

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Demand and Supply Curves
◦ A demand curve is a graph
showing how many units of
Price a product will be demanded
(bought) at different prices.
◦ A supply curve is a graph
showing how many units of
Quantity
a product will be supplied
(offered for sale) at different
Price prices.

Quantity
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What Is the Market Price
(or Equilibrium Price)?

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

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Surpluses and Shortages
Surplus is a situation Surplus
in which quantity
supplied exceeds
quantity demanded
Shortage is a
situation in which Shortage
quantity demanded
exceeds quantity
supplied

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Private Enterprise and Competition in a
Market Economy
Private enterprise is an economic system
that allows individuals to pursue their own
interests without undue governmental
restriction. Four elements:
◦ Private Property Rights
◦ Freedom of Choice
◦ Profits
◦ Competition

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Private Enterprise and Competition in a
Market Economy
Competition occurs when two or more
businesses vie for the same resources or
customers. Four degrees:
◦ Perfect Competition
◦ Monopolistic Competition
◦ Oligopoly
◦ Monopoly

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Degrees of Competition

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 The Factory System and the Industrial
Revolution

Major mid-18th century

change in production
characterized by a shift
to the factory system,
mass production and
the specialization of
labor

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Laissez-Faire and the
Entrepreneurial Era
Period during the 19th
century in which
improvements in the U.S.
banking system and the
nation’s infrastructure and
the rise of the entrepreneur
on a grand scale were
hallmarks

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The Production Era
Period during the early 20th
century in which U.S. business
focused primarily on improving
productivity and manufacturing
efficiency

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The Marketing Era

Post-World War II
period in which
production continued
to increase, technology
advanced and the
standard of living rose

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What Is the Marketing Concept?
Idea that a business must focus on
identifying and satisfying
consumer wants in order to be
profitable

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The Global Era
Period throughout the 1980s in
which the continuation of
technological advances in
production, computer
technology, information
systems and communications
capabilities was experienced

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The Internet Era
Ways the Internet affects business:
1. The Internet will give a dramatic boost to
trade in all sectors of the economy.
2. The Internet will help to level the playing field
between larger and smaller enterprises
regardless of their products.
3. The Internet holds considerable potential as
an effective and efficient networking
mechanism.

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