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chapter The U. S. Business Environment

Business Essentials, 7th Edition

Ebert/Griffin

PowerPoint Presentation prepared by

Carol Vollmer Pope Alverno College
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After reading this chapter, you should be able to:
1. Define the nature of business and identify its main
goals and functions.
2. Describe the external environments of business
and discuss how these environments affect the
success or failure of any organization.
3. Describe the different types of global economic
systems.

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 LL EE AA RR NN II NN GG OO BB JJ EE CC TT II VV EE SS (cont’d)
(cont’d)
After reading this chapter, you should be able to:
5. Identify the elements of private enterprise
6. Explain the importance of the economic
environment to business and identify the factors
used to evaluate the performance of an economic
system.

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 Exercise

A. Write four things do you know about

business. Write 4 things you would like
to know?
B. Try to know your neighbor and brake
the ice.
 The Concept of Business and Profit

• Business
– An organization that provides goods or
services that are then sold to earn
profits.
• Profits
– The positive difference between a
business’s revenues and its expenses.
The rewards owners get for risking
their money and time.
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 The Concept of Business and Profit

• Consumer Choice and Demand

– The freedom of consumers to choose how
to satisfy their wants and needs.
– The freedom of business owners to decide
how to meet those wants and needs.
• Opportunity and Enterprise
– Success in business requires spotting a
promising opportunity and then developing
a good plan for capitalizing on it.
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 The Benefits of Business
1. Provision of goods and services
2. Employment of workers
3. Innovation and opportunities
4. Increased quality of life and standard of living
5. Enhanced personal incomes of owners and
stockholders
6. Tax payments support government
7. Support for charities and community leadership

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 The External Environments of Business
• External Environment
– Everything outside an organization’s boundaries
that might affect it and business cannot control
1. The domestic business environment
2. The global business environment
3. The technological environment
4. The political-legal environment
5. The socio-cultural environment
6. The economic environment
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 Domestic Business Environment
– The environment in which a firm conducts
its operations and derives its revenues by:
1. Seeking to be close to its customers
2. Establishing strong relationships with its
suppliers
3. Distinguishing itself from its competitors
4. Example, lock at the IUG.

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 Global Business Environment
– The international forces that affect
business:
1.International trade agreements
2.International economic conditions
3.Political unrest
4.International market opportunities
5.Suppliers outsourcing.
6.Cultural differences
7.Competitors, Currency values
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 Technological Environment
– All the ways by which firms create value for
their constituents:
1. Human knowledge
2. Work methods
3. Physical equipment
4. Electronics and telecommunications
5. Various business activity processing
systems
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 Political-Legal Environment
– The regulatory relationship between business and the
government (legal system) and its agencies that define
what organizations can and can’t do:
1. Product identification laws (ingredients to be listed).
2. Local zoning requirements e.g., obtain a license to
operate
3. Advertising practices
4. Safety and health considerations, warnings on
cigarette packages.
5. Acceptable standards of business conduct, pollution
– Pro- or anti-business sentiment/attitude in government
and political stability are also important considerations,
especially for international firms.
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 Socio-cultural Environment
– The customs (e.g., celebrations),
mores/traditions (e.g., beliefs), values (e.g.,
importance of religion), and demographic
characteristics of the society in which an
organization functions (e.g., education level).
– Socio-cultural processes determine the
goods, services, and standards of business
conduct a society is likely to accept, e.g.,
children labor, selling certain food.
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 Economic Environment
– The relevant conditions that exist in
the economic system in which a
company operates
– Examples: recession and growth.

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 Economic Environment
– Examples:
• If an economy is doing well enough that
most people have jobs, a growing company
may find it necessary to pay higher wages
and offer more benefits in order to attract
workers from other companies.
• If many people in an economy are looking
for jobs, a firm may be able to pay less and
offer fewer benefits.
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Factors of Production

Labor Capital

Information
Resources

Physical
Entrepreneurs Resources
 Factors of production
A. 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.
B. 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.
 Factors of production
A. Entrepreneurs: People who are willing to accept
the risks that are part of creating and operating
businesses, in return for the potential profits.
B. 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.
C. Information resources: Data and other
information used by business. This factor has
become increasingly important in the last decade.
 Exercise: group Discussion

1. In your faculty of business, list the

factors of production that were used to
provide higher education service.
2. What are the factors of production used
to produce clothes?
3. Factors of production in a supermarket.
 Economic Systems
• Economic System
– A nation’s system/methods for allocating its
resources among its citizens, both individuals and
organizations
• Factors of Production
– Labor: Human resources
– Capital: Financial resources
– Entrepreneurs: Persons who risk starting a
business
– Physical resources: Tangible things used to
conduct business
– Information resources: Data and other information
used by businesses
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 Types of Economic Systems
• Planned Economy
– A centralized government controls all
or most factors of production and
makes all or most production and
allocation decisions for the economy.
With communism—as currently
operating in North Korea—all sources
of production are owned and operated
by the government.

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 Types of Economic Systems
• Market Economy
– Individual producers and consumers
control production and allocation by
creating combinations of supply and
demand.
• Market
– A mechanism of exchange between
buyers and sellers of a good or service.

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 Planned Economies
• Communism
– A system Karl Marx envisioned in which
individuals would contribute according to
their abilities and receive benefits according
to their needs.
• The government owns and operates all factors of
production.
• The government assigns people to jobs and
owns all businesses and controls business
decisions.
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 Market Economics
• Capitalism
–The government supports private
ownership and encourages
entrepreneurship.
–Individuals choose where to work,
what to buy, and how much to pay.
–Producers choose who to hire, what
to produce, and how much to charge.

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 Mixed Market Economy
A. Mixed Market Economies: mixed of planned
and market economies; many countries are
moving from planned systems to mixed
market systems through privatization, which
involves the transformation of government-
controlled businesses into privately owned
enterprises.
B. In the partially planned system called
socialism, the government owns and
operates selected major industries.
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 The Economics of Market Systems
• Demand
– The willingness and ability of buyers to
purchase a product (a good or a
service).
• Supply
– The willingness and ability of producers
to offer a good or service for sale.
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 The Economics of Market Systems
• The Laws of Demand and Supply in a Market
Economy
– Demand: Buyers will purchase (demand)
more of a product as its price drops and
less of a product as its price increases.
– Supply: Producers will offer (supply) more
of a product for sale as its price rises and
less of a product as its price drops.

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 Private Enterprise in a Market Economy
• Private Enterprise System
– Allows individuals to pursue their own
interests with minimal government
restriction.
• Elements of a Private Enterprise System
– Private property rights
– Freedom of choice
– Profits
– Competition
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 Economic Indicators
• Economic Indicators
–Statistics that show whether an
economic system is strengthening,
weakening, or remaining stable
–Measure key goals of the economic
system: economic growth and
economic stability
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 Economic Indicators
–Economic growth indicators
• Aggregate output, standard of
living, gross domestic product,
and productivity
–Economic stability indicators
• Inflation and unemployment

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Economic Growth, Aggregate Output,
and Standard of Living
The elements:
• Business Cycle
–The pattern of short-term ups
and downs (or, better,
expansions and
contractions/reductions) in an
economy.
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Economic Growth, Aggregate Output,
and Standard of Living
The elements:
• Aggregate Output
–Growth during the business cycle is
measured by the total quantity of
goods and services produced by an
economic system during a given
period. It measures the growth
during the business cycle
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Economic Growth, Aggregate Output,
and Standard of Living
• Standard of Living
–The total quantity and quality
of goods and services that
consumers can purchase with
the currency used in their
economic system.

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 Gross Domestic Product (GDP)
–An aggregate output measure of
the total value of all goods and
services produced within a given
period by a national economy
through domestic factors of
production. In US $14 trillion
• If GDP is going up, aggregate output
is going up; if aggregate output is
going up, the nation is experiencing
economic growth. 34
 Gross National Product (GNP)
– The total value of all goods and
services produced by a national
economy within a given period,
regardless of where the factors of
production are located.
– E.g., When a Japanese automobile
produces cars at its factory in USA, the
profits from that factory are included
in the American GDP, and in the
Japanese GNP.
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 Economic Growth
• Productivity
– A measure of economic growth that compares
how much product a system produces with the
resources needed to produce that product.
• If more product is produced with fewer
factors of production, the price of the
product decreases.
• The standard of living in an economy
improves through increases in productivity.

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 Balance of Trade
– The economic value of all the products a
country exports minus the economic
value of its imported products.
• Positive balance of trade: When a country
exports (sells to other countries) more than it
imports (buys from other countries).
• Negative balance of trade: When a country
imports more than it exports. Commonly
called a trade deficit.
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FIGURE 1.4 Balance of Trade

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A.National debts in USA in 2007
amounted 9.4$ trillion.
B.Trade deficit: in 2007
exceeded $700 billion.

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 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

• Stabilization Policy
–Coordinating fiscal and
monetary policies to smooth
fluctuations in output and
unemployment and to stabilize
prices.

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 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:
1. Interest rates:
2. The government may impose restrictions on
financial institutions to affect borrowing.
3. The central bank can control bank assets and
the amount of lending. Level of reserves
 Types of Policies
Fiscal policy:
Aims to control the total spending in
the economy.
1. Government spending.
2. Change in direct taxation.
3. Change in indirect taxation.
 Assignment
Interview a Business Owner
Interview a business owner or senior
manager and ask them how
government fiscal policy affect their
business in terms of sales, competition
and profit.

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