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Fourth Edition ESSENTIALS BUSINESS Ronald J. Ebert & Ricky W. Griffin Copyright ©2003 Prentice Hall, Inc. PART 1 . . . . . . . . . . . . . . . . . . . . . . . . Understanding the Contemporary Business Environment

Chapter 1:

Chapter 1 Understanding the Business System

“In business you get what you want by giving other people what they want.” ~ Alice Foote MacDougall:

“ In business you get what you want by giving other people what they want. ” ~ Alice Foote MacDougall

Key Topics :

Key Topics Nature and goals of business Global economic systems Private enterprise and competition Evaluating economic performance

Exercise :

Exercise Write four things do you know about business. Write 4 things you would like to know?

What Is Business?:

What Is Business? An organization that provides goods, and services to earn profits Profits: The positive difference between revenues, and expenses

Difference between business, and non-profit organizations?:

Difference between business, and non-profit organizations? goals are quite different, the same skills (management, marketing, finance, etc.) are needed to be successful in both arenas. Discussion : What benefits do businesses offer society? (goods, services, employment, tax revenue, technological advances, etc.)

Factors of Production :

Physical Resources Labor Capital Entrepreneurs Factors of Production Information Resources

Factors of production:

Factors of production Labor : The people who work for businesses. Labor includes both physical and mental contributions. A country with a highly educated workforce is considered rich in this resource. Capital : The funds needed to create and operate a business. Sources include personal investment by owners, loans, sale of stock and bonds, and revenue from the sale of product. Entrepreneurs : People who are willing to accept the risks that are part of creating and operating businesses, in return for the potential profits. Physical resources : Tangible things organizations use in the conduct of their business. Possibilities include natural resources, raw materials, office equipment and facilities, computers, transportation and communication infrastructure, etc. Information resources : Data and other information used by business. This factor has become increasingly important in the last decade.

Exercise: group Discussion:

Exercise: group Discussion Higher Education service. list the factors of production that were used to produce it.

How Are Factors of Production Allocated Economically?:

How Are Factors of Production Allocated Economically ? Planned Economy: An economic system in which the government owns and operates all sources of production. Market Economy: An economic system in which buyers and sellers interact based on freedom of choice.

“Circular Flow in Market Economy”:

“Circular Flow in Market Economy” 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 Copyright ©2003 Prentice Hall, Inc. 1 - 12

Capitalism A Fundamentally Market-Based Economy:

Capitalism A Fundamentally Market-Based Economy Individuals Choose: Where to work What to buy How much to pay Producers Choose: Who to hire What to produce How much to charge Government supports private ownership and encourages entrepreneurship . In market economy's, which are based on the principle of capitalism, individual and businesses control the factor of production and exchange than through input and out put markets.

Mixed Economies Planned and Market:

Mixed Economies Planned and Market The economies of most countries include both planned and market economic elements. Worldwide trend toward more market economic elements.

Socialism A Mixed Economy :

Socialism A Mixed Economy Socialism is a planned economic system in which the government owns and operates selected sources of production. Privatization: Process of converting government enterprises into privately owned companies.


exercise Guess the 4 key elements of free enterprise?

The Palestinian Economy is a Private Enterprise System:

The Palestinian Economy is a Private Enterprise System Private Property Rights Freedom of Choice Profits Competition. Elements for market economy. Individuals are free to pursue their own interests without government restriction. Four Key Elements:


Competition Competition motivates businesses to produce their products better or cheaper. Companies that don’t compete effectively will be forced out of business.

Exercise :

Exercise What is the relationship between standard of living and quality of life? How is quality of life evaluated in different countries?. ( standard of living: level of purchasing power in terms of growth, stability, weakness. The quality of life in terms of welfare, prosperity and growth in gross domestic production). (Assessment in terms of progress, national income, per capita income).

Measuring economy growth:

Measuring economy growth It requires a clear understanding of basic economic indicators and terms, How: Business Cycle : Pattern of short-term expansions and contractions in an economy. When the economy is expanding, we experience growth, and when the economy is contracting, we experience recession. Aggregate output : Total quantity of goods and services produced by an economic system during a given period. Standard of living : Total quantity and quality of goods and services that people can purchase within their economic system. When output increases faster than the population, we experience growth in our standard of living.

So how do we measure the performance of an economic system?:

So how do we measure the performance of an economic system? Gross Domestic Product (GDP) : Value of all goods and services produced by an economic system in a year through domestic factors of production . Gross National Product (GNP ): Value of all goods and services produced by an economic system in a year regardless of where factors of production are located . In other words, when a Japanese automobile produces cars at its factory in Tennessee, the profits from that factory are included in the American GDP, and in the Japanese GNP. Productivity is the amount a system produces compared to the resources needed to produce it.

Recessions & Depressions:

Recessions & Depressions Recession: Aggregate output declines, unemployment increases. A recession is usually measured by two consecutive quarters of decline in real GDP. Depression: Severe and long-lasting recession

Managing the Economy Stability :

Managing the Economy Stability Stabilization Policy: Government policy designed to smooth out fluctuations in the economy Fiscal Policies Monetary Policies

Types of Policies:

Types of Policies Monetary Policy : Designed to control the amount of money flowing around the economy (the money supply). This policy is used to tackle inflation and balance of payments. Methods under this policy: Interest rates: The government may impose restrictions on financial institutions to affect borrowing. The central bank can control bank assets and the amount of lending. Fiscal policy: Aims to control the total spending in the economy. Government spending. Change in direct taxation. Change in indirect taxation.

Direct & Indirect tax:

Direct & Indirect tax A direct tax is one paid directly to the government by the persons. Examples include some income taxes , some corporate taxes , and transfer taxes , and gift tax. Indirect tax or "collected" tax such as sales tax or value added tax or goods and services tax . An indirect tax may increase the price of a good so that consumers are actually paying the tax by paying more for the products.

Looking to the Future :

Looking to the Future Three Major Forces will drive the global economy for the next decade what are they? The information revolution will continue to boost productivity Technological breakthroughs will create new industries Increasing globalization will create larger markets and tougher competition

Review :

Review What are the five factors of production? Is one factor more important than the others? If so, which one? Why? The five factors of production are labor, capital, entrepreneurs, physical resources, and information resources. All five factors are crucial. However, their relative importance depends on the product and the industry. In the software development business, for example, skilled labor and information resources are especially important, but the business couldn’t survive without capital and physical resources (computers), and it wouldn’t have been launched without an entrepreneur.

Review :

Review In recent years, many countries have moved from planned economies to market economies. Why do you think this has occurred? Can you imagine a situation that would cause a revival of planned economies? The failure of communism—both politically and economically—has led to an increase in the number of mixed and market economies. Answers will vary as to what would cause a resurgence of planned economies, but the factors might include a failure of capitalism to effectively distribute society’s resources, or an unbearable level of crime and corruption.

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