FOUNDATIONS OF BUSINESS

Fifth Edition

Chapter 1
Exploring the
World of Business
and Economics

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 Learning Objectives (1 of 2)

1-1 Discuss what you must do to be successful in

the world of business.
1-2 Define business and identify potential risks and
rewards.
1-3 Define economics and describe two types of
economic systems: capitalism and command
economy.
1-4 Identify the ways to measure economic
performance.

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in whole or in part, except for use as permitted in a license distributed with a certain product or service
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 Learning Objectives (2 of 2)

1-5 Examine the different phases in the typical

business cycle.
1-6 Outline the four types of competition.
1-7 Summarize the factors that affect the business
environment and the challenges that American
businesses will encounter in the future.

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 Introduction

In free enterprise, individuals are free to:

• Decide what to produce
• How to produce it
• At what price to sell it

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 Your Future in the Changing World of
Business
• What does it take to succeed in business?
– Have a dream—know what you want
– Adapt to changes in the environment—work hard to
turn your dreams into reality
– Write down your goals

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 Why Study Business?

• For help in choosing a career

• To be a successful employee
• To improve your management skills
• To start your own business
• To become a better informed consumer
and investor

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in whole or in part, except for use as permitted in a license distributed with a certain product or service
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 Tips for Studying Business

• Prepare before you go to class

• Read the chapter
• Underline or highlight important concepts
• Take notes
• Apply the concepts
• Practice critical thinking
• Prepare for the examinations

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in whole or in part, except for use as permitted in a license distributed with a certain product or service
or otherwise on a password-protected website for classroom use.
 What Is Business?

• The organized effort of individuals to produce and

sell, for a profit, the goods and services that satisfy
society’s needs
A business must combine all four resources effectively
to be successful.

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 Four kinds of resources

BUSINESS
• Human resources
• Material resources
• Informational resources
• Financial resources

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 The Relationship Between Sales
Revenue and Profit
• Profit is what remains after all business expenses
have been deducted from sales revenue
• A loss (negative profit) results when a firm’s
expenses are greater than its revenues
• Sales revenue
• Expenses
• Profit

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in whole or in part, except for use as permitted in a license distributed with a certain product or service
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 General types of businesses

• The three general types of businesses are

• Service businesses
• Manufacturers
• Marketing intermediaries

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 The role of business

Positive:
•Provide valuable products and services
•Create jobs
•Pay taxes
•Contribute to national growth, stability and safety
Negative:
•Contaminate the environment
•Causes health and safety risks
•Causing financial instability

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 Economics

• Economics is the study of how wealth (anything of

value) is created and distributed
– Microeconomics is the study of the decisions made
by individuals and businesses
– Macroeconomics is the study of the national and
global economies

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in whole or in part, except for use as permitted in a license distributed with a certain product or service
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 Factors of Production

• Factors of production
– Land and natural resources
– Labor
– Capital
– Entrepreneurship
• Entrepreneur
– A person who risks time, effort, and money to start
and operate a business

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 A Nation’s Economy

• Economy—the system through which a society

creates and distributes wealth
• Differences in economic systems determined by
how they answer the four basic economic questions
– What goods and services will be produced?
– How will they be produced?
– For whom will they be produced?
– Who owns and controls the major factors
of production?

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 Measuring Economic Performance
• Productivity: The average level of output per
worker per hour
• Gross Domestic Product (GDP): The total value of
all goods and services produced by all people within
the boundaries of a country during a one-year
period
• Inflation is a general rise in the level of prices
• Deflation is a general decrease in the level of
prices
• Unemployment rate: The percentage of a nation’s
labor force unemployed at any time
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 Economic Indicators
• Consumer Price Index (CPI)
– A monthly index that measures the changes in prices
of a fixed basket of goods purchased by a typical
consumer in an urban area
• Producer Price Index (PPI)
– An index that measures prices that producers receive
for their finished goods
– Differs from CPI due to:
 Government subsidies
 Sales and excise taxes
 Distribution costs
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 Measures of Economic Health
Economic Measure Description

The total value of a nation’s exports minus the total value of its imports
1. Balance of trade
over a specific period of time.

2. Consumer confidence A measure of how optimistic or pessimistic consumers are about the
index nation’s economy. This measure is usually reported on a monthly basis.

The total amount of profits made by corporations over selected time

3. Corporate profits
periods.
An economic statistic that tracks the increase in prices of goods and
4. Inflation rate services over a period of time. This measure is usually reported monthly
and calculated on an annual basis.

The total income earned by various segments of the population, including

5. National income employees, self-employed individuals, corporations, and other types of
income.

6. New housing starts The total number of new homes started during a specific time period.

The lowest interest rate that banks charge their most credit-worthy
7. Prime interest rate
customers.

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Four Phases of The Business Cycle (1 of 2)

• Peak
• Recession
• Trough
• Recovery

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Four Phases of The Business
Cycle (2 of 2)

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 The Business Cycle: Growth and
Recession (1 of 2)
• The recurrence of periods of growth and recession
in a nation’s economic activity
– Recession
 Two or more consecutive three-month periods of
decline in a country’s gross domestic product
– Depression
 A severe recession that lasts longer than a typical
recession and has a larger decline in business activity
when compared to a recession

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 The Business Cycle: Growth and
Recession (2 of 2)
– Monetary policies
 Federal Reserve decisions that determine the size
of the supply of money in the nation and the level
of interest rates

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 The Business Cycle: Fiscal Policy

• Fiscal policy
– Government influence on the amount of
savings and expenditures; accomplished by altering
the tax structure and by changing the levels of
government spending
• Federal deficit
– A shortfall created when the federal government
spends more in a fiscal year than it receives
• National debt
– The total of all federal deficits
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 Product Life Cycle

• Introduction
• Growth
• Maturity
• Decline

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 Product Life Cycle

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 International Business

• An absolute advantage is the ability to produce a

specific product more efficiently than any other
nation.
• A comparative advantage in managing. A
comparative advantage is the ability to produce a
specific product more efficiently than any other
product.

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 Being Ethical and
Socially Responsible
• Ethical issues
The study of right and wrong and of the morality of the
choices individuals make (Pride et al., 2013).

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in whole or in part, except for use as permitted in a license distributed with a certain product or service
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 Being Ethical and
Socially Responsible
• Fairness and honesty
• Organizational Relationships
• Conflict of interest
• Communications

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 Being Ethical and
Socially Responsible

• Copyright © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated,
in whole or in part, except for use as permitted in a license distributed with a certain product or service
or otherwise on a password-protected website for classroom use.
• Copyright © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated,
in whole or in part, except for use as permitted in a license distributed with a certain product or service
or otherwise on a password-protected website for classroom use.
• Copyright © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated,
in whole or in part, except for use as permitted in a license distributed with a certain product or service
or otherwise on a password-protected website for classroom use.
• Copyright © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated,
in whole or in part, except for use as permitted in a license distributed with a certain product or service
or otherwise on a password-protected website for classroom use.