Chapter 1: Exploring the World of Business and Economics
GBS151, Class 12191
May 28, 2013
Notes Compiled by Nicolas C. Rouse, Instructor, Phoenix College
Chapter Objectives
1. Discuss what you must do to be successful in the world of business.
2. Define business and identify potential risks and rewards.
3. Define economics and describe the two types of economic systems: capitalism and command economy.
4. Identify the ways to measure economic performance.
5. Outline the four types of competition.
6. Summarize the factors that affect the business environment and the challenges that American
businesses will encounter in the future.
1. Your Future in the World of Business
• To experience success, you must adapt to change in order to take advantage of the opportunities that
are out there. To do so, you must bring something to the table that makes you different from the next
person. Ask yourself: What can I do that will make employers want to pay me a salary? What skills do I
have that employers need?
• Why Study Business? Once you have education and knowledge, no one can take it away. Therefore,
there are at least five reasons why you should study business.
o For Help in Choosing a Career. This business course will introduce you to a wide array of
employment opportunities. One thing to remember as you think about what your ideal career
might be is that a person’s choice of a career is ultimately a reflection of what he or she values
and holds most important.
o To Be a Successful Employee. To get a job in your chosen field and to be successful at it, you
will have to develop a plan, or road map, that ensures you have the skills and knowledge the job
requires. This course, your instructor, and all the resources available at your college or
university can help you acquire the skills and knowledge you will need for a successful career.
o To Improve Your Management Skills. To be an effective man-ager, you must be able to
perform four basic management functions: planning, organizing, leading and motivating, and
controlling. To successfully perform these management functions, man-agers must possess
three very important skills: interpersonal skills, technical skills, and conceptual skills.
o To Start Your Own Business. Some people prefer to work for themselves, and they open their
own businesses. To be successful, business owners must possess many of the same skills that
successful employees have. It also helps if your small business can provide a product or
service that customers want. Unfortunately, 70 percent of small businesses fail within the first
seven years. Typical reasons for business failures include undercapitalization, poor business
location, poor customer service, unqualified or untrained employees, fraud, lack of a proper
business plan, and failure to seek outside professional help.
o To Become a Better Informed Consumer and Investor. By studying business, you will
become a more fully informed consumer, which means that you will be able to make more
intelligent buying decisions and spend your money more wisely. This same basic understanding
of business will also make you a better informed investor.
2. Business
• Business is the organized effort of individuals to produce and sell, for a profit, the goods and services
that satisfy society’s needs. To be successful, a business must be organized, it must satisfy needs, and
it must earn a profit.
o The Organized Effort of Individuals. For a business to be organized, it must combine four
kinds of resources: material, human, financial, and informational. (See Figure 1.2.)
• Material resources include the raw materials used in manufacturing processes, as well
as buildings and machinery.
• Human resources are the people who furnish their labor to the business in return for
wages.
• The financial resource is the money required to pay employees, purchase materials,
and generally keep the business operating.
Page 1 of 7
Chapter 1: Exploring the World of Business and Economics
GBS151, Class 12191
May 28, 2013
Notes Compiled by Nicolas C. Rouse, Instructor, Phoenix College
• Information is the resource that tells the managers of the business how effectively the
other resources are being combined and used.
• Businesses are usually classified as one of three types: Manufacturing businesses
process various materials into tangible goods, service businesses produce services,
and marketing intermediaries buy products from manufacturers and then resell them.
o Satisfying Needs. The ultimate objective of every firm is to satisfy the needs of its customers.
When the business understands its customers’ needs and works to satisfy those needs, it is
usually successful.
o Business Profit. Profit is what remains after all business expenses have been deducted from
sales revenue. (See Figure 1.3.) A negative profit, which results when a firm’s expenses are
greater than its sales revenue, is called a loss. The term stakeholders is used to describe all the
different people or groups who are affected by the policies, decisions, and activities made by an
organization. While stockholders and business owners generally believe that profit is the most
important goal for a business, many stakeholders may be just as concerned about a firm’s
social responsibility record. The profit earned by a business becomes the property of its
owners. Profit is the reward business owners receive for producing goods and services that
consumers want and for assuming the risks of ownership. One of these is the risk of not being
paid (employees, suppliers, and lenders must be paid before the owners). Another is the risk of
losing whatever was invested in the business.
3. Types of Economic Systems
• Economics is the study of how wealth is created and distributed.
o By “wealth” we mean anything of value. “How wealth is distributed” simply means “who gets
what.” The way in which people deal with the two issues determines the kind of economic
system, or economy, that a nation has.
o Economics is usually studied from two perspectives:
• Microeconomics—The study of the decisions made by individuals and businesses.
• Macroeconomics—The study of the national economy and the global economy.
o Factors of production are the resources used to provide goods and services. There are four
such factors.
• Land and natural resources—Elements in their natural state that can be used in
production, such as crude oil, forests, minerals, land, water, and even air.
• Labor—Human resources such as managers and employees.
• Capital—Money, facilities, equipment, and machines used in the operation of
organizations.
• Entrepreneurship—The willingness to take risks and the knowledge and ability to use
the other factors of production efficiently. An entrepreneur is a person who risks his or
her time, effort, and money to start and operate a business.
o A nation’s economic system significantly affects all the economic activities of its citizens and
organizations. A country’s economic system provides answers to four basic economic
questions.
• What goods and services—and how much of each—will be produced?
• How will these goods and services be produced?
• For whom will these goods and services be produced?
• Who owns and controls the major factors of production?
• Capitalism. Capitalism is an economic system in which individuals own and operate the majority of
businesses that provide goods and services. Adam Smith in his book, Wealth of Nations, published in
1776, argued that a society’s interests are best served when the individuals within that society are
allowed to pursue their own self-interest.
o Adam Smith created the concept he called the “invisible hand,” which describes how a
business owner’s personal gain benefits others (through the product that is produced or through
the wages that are paid to workers) and a nation’s economy (through increased GDP, taxes,
exports, etc.).
Page 2 of 7
Chapter 1: Exploring the World of Business and Economics
GBS151, Class 12191
May 28, 2013
Notes Compiled by Nicolas C. Rouse, Instructor, Phoenix College
o Adam Smith’s capitalism is based on four fundamental issues (see Figure 1.4).
1. The creation of wealth is properly the concern of private individuals, not of government.
2. Private individuals must own the resources used to create wealth, and the owners of
resources should be free to determine how these resources are used.
3. Smith contended that economic freedom ensures the existence of competitive markets
that allow both sellers and buyers to enter and exit as they choose. The freedom to
enter or leave a market at will has given rise to the term market economy (sometimes
referred to as a free-market economy)—an economic system in which businesses and
individuals make the decisions about what to produce and what to buy; the market
determines how much is sold and at what prices.
4. In Smith’s view, the role of government should be limited to providing defense against
foreign enemies, ensuring internal order, and furnishing public works and education.
With regard to the economy, government should act only as rule maker and umpire.
o Smith believed that each person should be allowed to work toward his or her own economic
gain, without government interference. The French term “laissez faire” describes Smith’s
system; loosely translated it means “let them do” (as they see fit).
• Capitalism in the United States. The U.S. economy is a mixed economy, so called because it
exhibits elements of both capitalism and socialism. In today’s economy, the four basic economic
questions are answered by three groups. (See Figure 1.5.).
o Households. Households are consumers of goods and services, as well as owners of some of
the factors of production.
o Approximately, 70 percent of U.S. production consists of products for personal consumption.
• As “resource owners,” the members of households provide businesses with labor,
capital, and other resources.
• As “consumers,” household members use their income to purchase the goods and
services produced by business. Almost two-thirds of our nation’s total production
consists of consumer products: goods and services purchased by individuals for
personal consumption.
o Businesses. Like households, businesses are engaged in two different exchanges. They
exchange money for natural resources, labor, and capital, and they use these resources to
produce goods and services. Then they exchange their goods and services for sales revenue.
o Governments. Government provides a variety of services that are considered important but
either (a) would not be produced by private business firms or (b) would be produced only for
those who could afford them (e.g., national defense, police/fire protection, education, and
construction of roads and highways).
• Command Economies. A command economy is an economic system in which the government
decides what will be produced, how it will be produced, for whom available goods and services will be
produced, and who owns and controls the major factors of production. Two types of economic systems
serve as examples of command economies.
o Socialism. In a socialist economy, the key industries are owned and controlled by the
government. Depending on the country, private ownership of smaller businesses is permitted to
varying degrees. What to produce and how to produce it are determined in accordance with
national goals.
o Communism. In a communist economy, almost all economic resources are owned by the
government. The basic economic questions are answered through centralized state planning,
which also sets prices and wages. Emphasis is placed on the production of goods the
government needs rather than on the products that consumers might want. Karl Marx was the
father of communism.
4. Measuring Economic Performance
• The Importance of Productivity in the Global Marketplace
o One way to measure a nation’s economic performance is to assess its productivity.
Productivity is the average level of output per worker per hour. An increase in productivity
results in economic growth.
Page 3 of 7
Chapter 1: Exploring the World of Business and Economics
GBS151, Class 12191
May 28, 2013
Notes Compiled by Nicolas C. Rouse, Instructor, Phoenix College
• Important Economic Indicators That Measure a Nation’s Economy
o A nation’s gross domestic product (GDP) is the total dollar value of all goods and services
produced by all people within the boundaries of a country during a one-year period.
• This GDP figure facilitates comparisons between the United States and other countries
because it is the standard used in international guidelines for economic accounting.
• To make accurate comparisons of GDP figures for two different years, we must adjust
the figures for inflation or deflation. Inflation is a general rise in the level of prices.
Deflation is a general decrease in the level of prices. “Real” gross domestic product is
the total dollar value, using inflation-adjusted figures, of all goods and services
produced by a nation. (See Figure 1.6.)
• There are other economic measures that can be used to evaluate a nation’s economy
such as the unemployment rate. (See Table 1.2.)
o The Business Cycle. A nation’s economy fluctuates rather than grows at a steady pace every
year. These fluctuations are generally referred to as the business cycle; that is, the recurrence
of periods of growth and recession in a nation’s economic activity. Generally, the business cycle
consists of four states: the peak (sometimes referred to as prosperity), recession, the trough,
and recovery.
• During the peak period, unemployment is low, total income is relatively high, and
consumers are willing to buy products and services. Businesses often expand and offer
new products and services.
• Economists define a recession as two or more consecutive three-month periods of
decline in a country’s gross domestic product. At the time of publication, many experts
believe the U.S. economy is in a recession caused by a depressed housing market and
related problems in the banking and financial industries. Unemployment rises during a
recession, and total buying power declines. Economists define a depression as a
severe recession that lasts longer than a recession.
• The third phase of the business cycle, the “trough” of a recession or depression, is the
phase in which the nation’s output and unemployment bottom out and reach their
lowest levels. To offset the effects of recession and depression, the federal government
uses both monetary and fiscal policies.
• Monetary policies are the Federal Reserve’s decisions that determine the size
of the supply of money in the nation and the level of interest rates.
• The government can also use fiscal policy to influence the amount of savings
and expenditures by altering the tax structure and changing the levels of
government spending. Although the federal government collects over $3 trillion
in annual revenues, the government often spends more than it receives,
resulting in the federal deficit.
• The total of all federal deficits is called the national debt.
• The last economic state is recovery. Recovery is the movement of the economy from
depression or recession to prosperity; a greater demand for products and services
results.
5. Types of Competition
• Business competition is essentially a rivalry among businesses for sales to potential customers.
Economists recognize four different degrees of competition, ranging from ideal, complete competition to
no competition at all. These are perfect competition, monopolistic competition, oligopoly, and monopoly.
(See Table 1.3.)
o Perfect Competition. Perfect competition is a market situation in which there are many buyers
and sellers of a product, and no single buyer or seller is powerful enough to affect the price of
that product. In perfect competition, buyers and sellers must accept the going price.
• The Basics of Supply and Demand. The supply of a particular product is the quantity
of the product that producers are willing to sell at each of various prices. The demand
for a particular product is the quantity that buyers are willing to purchase at each of
various prices. (See Figure 1.7.)
Page 4 of 7
Chapter 1: Exploring the World of Business and Economics
GBS151, Class 12191
May 28, 2013
Notes Compiled by Nicolas C. Rouse, Instructor, Phoenix College
• The Equilibrium, or Market, Price. Under pure competition, the market price of any
product is the price at which the quantity demanded is exactly equal to the quantity
supplied. Market prices are affected by anything that affects supply and demand.
o Monopolistic Competition. Monopolistic competition is a market situation in which there are
many buyers along with a relatively large number of sellers. The various products available in
this market are similar and intended to satisfy the same need. However, each seller attempts to
make its products different. Product differentiation is the process of developing and promoting
differences between one’s products and all similar products.
o Oligopoly. An oligopoly is a market situation (or industry) in which there are few sellers. These
sellers are quite large and must make sizable investments to enter into their markets. Because
there are few sellers, the market actions of each can have a strong effect on competitors’ sales
and prices.
o Monopoly. A monopoly is a market (or industry) with only one seller. A firm in a monopoly
position must consider the demand for its product and set the price at the most profitable level.
A natural monopoly is an industry that requires a huge investment in capital and within which
any duplication of facilities would be wasteful. Many public utilities are still classified as natural
monopolies, but competition is increasing in many industries.
• In addition to natural monopolies, another type of legal monopoly—sometimes referred
to as “limited monopoly”—is created when the federal government issues a copyright,
patent, or trademark.
• Except for natural and limited monopolies, federal antitrust laws prohibit both
monopolies and attempts to form monopolies.
6. American Business Today
• Refer to Figure 1.8 for an overall view of our nation’s history, the development of our business system,
and some major inventions that influenced the nation and our business system.
• Early Business Development. Almost all families lived on farms, and the entire family worked at the
business of surviving.
o The early colonists used barter—a system of exchange in which goods or services are traded
directly for other goods and/or services without using money.
o The domestic system was a method of manufacturing in which an entrepreneur distributed raw
materials to various homes, where families would process them into finished goods.
o In 1790, Samuel Slater, an Englishman, set up a textile factory in Rhode Island to spin raw
cotton into thread. Slater’s ingenuity resulted in America’s first use of the factory system of
manufacturing, in which all the materials, machinery, and workers required to manufacture a
product are assembled in one place.
o A manufacturing technique called specialization was used to improve productivity.
Specialization is the separation of a manufacturing process into distinct tasks and the
assignment of different tasks to different workers.
o The years from 1820 to 1900 were the golden age of invention and innovation in machinery.
o At the same time, new means of transportation greatly expanded the domestic markets for
American products. Many business historians view the period from 1870 to 1900 as the second
Industrial Revolution.
• The Twentieth Century
o Industrial growth and prosperity continued well into the twentieth century. Henry Ford’s moving
automotive assembly line refined the concept of specialization and helped spur on the mass
production of consumer goods.
o Fundamental changes occurred in business ownership and management. No longer were the
largest businesses owned by one individual; instead, ownership was in the hands of thousands
of corporate shareholders.
o The Roaring Twenties ended with the sudden crash of the stock market in 1929 and the near
collapse of the economy. The Great Depression that followed in the 1930s was a time of misery
and human suffering.
Page 5 of 7
Chapter 1: Exploring the World of Business and Economics
GBS151, Class 12191
May 28, 2013
Notes Compiled by Nicolas C. Rouse, Instructor, Phoenix College
o After Franklin D. Roosevelt became president in 1933, the federal government got deeply
involved in business for the first time by implementing programs to get the economy moving
again.
o The economy was on the road to recovery when World War II broke out in Europe in 1939. The
1940s, 1950s, and 1960s witnessed both increasing production and a rising standard of living.
o Standard of living is a loose, subjective measure of how well off an individual or a society is,
mainly in terms of need satisfaction through goods and services.
o In the mid-1970s, a shortage of crude oil led to a new set of problems for business. As the cost
of petroleum products increased, a corresponding increase took place in the cost of energy and
the cost of goods and services. The result was inflation at a rate well over 10 percent per year
during the early 1980s.
o By the early 1990s, the U.S. economy began to show signs of improvement and economic
growth. Business took advantage of this economic prosperity to invest in information
technology, cut costs, and increase flexibility and efficiency.
o The Internet became a major force in the economy. e-Business, the organized effort of
individuals to produce and sell products and services through the Internet, became an accepted
method of conducting business.
o Unfortunately, by the last part of the twentieth century, business failures and declining stock
values were signs that economic problems were on the way.
• A New Century: 2000 and Beyond
o According to economic experts, the first years of the new millennium might be characterized as
the best of times and the worst of times rolled into one package.
o On the plus side, technology became available at an affordable price. e-Business became an
accepted method of conducting business. The growth of service businesses and increasing
opportunities for global trade has changed the way American firms do business.
o On the negative side, there is still a certain amount of pessimism surrounding the economy.
• The Current Business Environment
o Business is affected by the following environments:
The Competitive Environment. Successful firms compete with competitors by
satisfying customer needs.
The Global Environment. There are winners and losers from globalization. Consumers
win because they have more product choices and lower prices. On the negative side,
many people have and will lose their jobs because of lower offshore wages or due to
technological innovation.
The Technological Environment. Changes in manufacturing equipment,
communication with customers, and distribution of products are examples of how
technology has changed business practices.
The Economic Environment. Managers and business owners do not have unlimited
resources to pay for all the business activities they want to fund. This is especially
important if the nation’s economy drops precipitously or an individual firm’s sales and
profits are declining.
• The Challenges Ahead
o When our business system works well, it provides jobs for those who are willing to work, a
standard of living that few countries can match, and many opportunities for personal
advancement. But our system is far from perfect. It also gave us the Great Depression of the
1930s and the economic problems of the 1970s, the late 1980s, and the economic crisis that
began in the fall of 2007.
o The challenges to the U.S. economic system over the next decade are many. Some of the
issues to be resolved include the following:
How can we create a more stable economy and create new jobs for the unemployed?
How can we regulate banks, savings and loan associations, credit unions, and other
financial institutions to prevent the type of abuses that led to a banking crisis?
How do we reduce the national debt and still maintain a healthy economy and stimulate
business growth?
Page 6 of 7
Chapter 1: Exploring the World of Business and Economics
GBS151, Class 12191
May 28, 2013
Notes Compiled by Nicolas C. Rouse, Instructor, Phoenix College
How can we make American workers more productive and American firms more
competitive in the global marketplace?
How can we preserve the benefits of competition and small business in our American
economic system?
How can we encourage economic growth and at the same time continue to conserve
natural resources and sustain our environment?
How can we meet the needs of two-income families, single parents, older Americans,
and the less fortunate who need health care and social programs to exist?
How can we meet the challenges of managing culturally diverse workforces to address
the needs of a culturally diverse marketplace?
How can we defeat terrorism and resolve conflict with Iran, North Korea, and other
countries throughout the world?
o The answers to these questions are anything but simple. Yet they directly affect our own future,
our children’s future, and the future of our nation. Within the American economic and political
system, the answers are ours to provide.
Page 7 of 7
