An introduction to business-v1.2

We begin with a definition ofeconomics and a discussion of the resources used to produce goods and services.. The resources obtained from households are then used by businesses to produc

An Introduction to

Business

v 1.0

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About the Author 1

Acknowledgments 2

Dedication 5

Preface 6

Chapter 1: The Foundations of Business 11

Introduction 14

Getting Down to Business 16

What Is Economics? 22

Perfect Competition and Supply and Demand 29

Monopolistic Competition, Oligopoly, and Monopoly 35

Measuring the Health of the Economy 38

Government’s Role in Managing the Economy 47

Cases and Problems 51

Chapter 2: Business Ethics and Social Responsibility 56

Misgoverning Corporations: An Overview 59

The Individual Approach to Ethics 64

Identifying Ethical Issues 71

The Organizational Approach to Ethics 79

Corporate Social Responsibility 84

Environmentalism 96

Stages of Corporate Responsibility 101

Cases and Problems 106

Chapter 3: Business in a Global Environment 113

The Globalization of Business 115

Opportunities in International Business 126

The Global Business Environment 136

Trade Controls 148

Reducing International Trade Barriers 153

Preparing for a Career in International Business 159

Cases and Problems 162

Sole Proprietorship 173

Partnership 176

Corporation 181

Other Types of Business Ownership 187

Mergers and Acquisitions 195

Cases and Problems 199

Chapter 5: The Challenges of Starting a Business 205

What Is an Entrepreneur? 207

The Place of Small Business in the Business Landscape 216

What Industries Are Small Businesses In? 222

Advantages and Disadvantages of Business Ownership 227

Starting a Business 232

The Business Plan 241

How to Succeed in Managing a Business 249

Cases and Problems 256

Chapter 6: Managing for Business Success 262

What Do Managers Do? 264

Planning 266

Organizing 276

Directing 290

Controlling 294

Managerial Skills 297

Cases and Problems 304

Chapter 7: Recruiting, Motivating, and Keeping Quality Employees 313

Human Resource Management 316

Developing Employees 325

Motivating Employees 331

What Makes a Great Place to Work? 339

Performance Appraisal 351

Labor Unions 360

Cases and Problems 368

Why Teamwork Works 385

The Team and Its Members 391

The Business of Communication 402

Communication Channels 408

Forms of Communication 421

Cases and Problems 431

Chapter 9: Marketing: Providing Value to Customers 438

What Is Marketing? 439

The Marketing Mix 448

Pricing a Product 457

Placing a Product 462

Promoting a Product 474

The Product Life Cycle 482

The Marketing Environment 486

Careers in Marketing 498

Cases and Problems 501

Chapter 10: Product Design and Development 506

What Is a Product? 507

Where Do Product Ideas Come From? 513

Identifying Business Opportunities 517

Understand Your Industry 521

Forecasting Demand 525

Breakeven Analysis 530

Product Development 534

Protecting Your Idea 540

Cases and Problems 543

Chapter 11: Operations Management in Manufacturing and Service Industries 549 Operations Management in Manufacturing 550

Facility Layouts 558

Managing the Production Process in a Manufacturing Company 562

Graphical Tools: PERT and Gantt Charts 567

The Technology of Goods Production 571

Operations Management for Service Providers 574

Understanding Financial Statements 600

Accrual Accounting 612

Financial Statement Analysis 623

Challenges Facing the Accounting Profession 638

Cases and Problems 644

Chapter 13: Managing Financial Resources 653

The Functions of Money 654

Financial Institutions 659

The Federal Reserve System 669

The Role of the Financial Manager 676

Understanding Securities Markets 688

Financing the Going Concern 697

Careers in Finance 702

Cases and Problems 705

Chapter 14: Personal Finances 714

Financial Planning 725

Time Is Money 740

The Financial Planning Process 746

A House Is Not a Piggy Bank: A Few Lessons from the Subprime Crisis 760

Cases and Problems 771

Chapter 15: Managing Information and Technology 773

Data versus Information 774

Managing Data 782

Types of Information Systems 787

Computer Networks 795

Data Communications Networks 798

Security Issues in Electronic Communication 806

Careers in Information Management 815

Cases and Problems 817

Chapter 16: The Legal and Regulatory Environment of Business 821

Law and the Legal System 824

Criminal versus Civil Law 830

Negligence Torts 838

Product Liability 846

Some Principles of Public Law 862

Cases and Problems 883

Karen Collins

Dr Karen Collins is associate professor of accounting at

Lehigh University in Bethlehem, Pennsylvania She has

a Ph.D in accounting from Virginia Tech Dr Collins

coordinates the college's freshman-level Introduction to

Business course Exploring Business has evolved based on

Dr Collin’s innovative and successful approach to

Lehigh’s Introduction to Business course She was

recently honored with an Innovation in Teaching Award

for the course from the Middle Atlantic Association of

Colleges and Business Administration (AACSB)

Dr Collins’s research interests include upward mobility

of women in accounting, quality of life issues, stress, and ethnic diversity in the

accounting profession She has published articles in journals such as Accounting, Organizations and Society, Accounting Horizons, Journal of Accountancy, Journal of

Vocational Behavior, and Journal of Occupational Health Psychology.

Dr Collins has won numerous teaching awards while at Lehigh, including theDeming Lewis Faculty Award (for the faculty member who had the strongest

influence on the ten-year graduating class), in 2003; the Faculty Recognition Award(from the Dean of Students Office), also in 2003; and the Andersen ConsultingFaculty Fellowship for Excellence in Teaching, 1998–99 and 1999–2000

The author would like to thank the following colleagues who have reviewed the textand provided comprehensive feedback and suggestions for improving the material:

Tim Allwine Lower Columbia College

Douglas Antola Crowe Bradley University

Vondra Armstrong Pulaski Technical College

April Bailey Shippensburg University of Pennsylvania

Michael Baran South Puget Sound Community College

Ruby Barker Tarleton State University

Murray Brunton Central Ohio Technical College

Laura Bulas Central Community College

Leon Chickering South Puget Sound Community College

Glenn Doolittle Santa Ana College

Amy Epplin Rend Lake College

Andrea Foster John Tyler Community College

Joseph Fox Asheville-Buncombe Technical Community College

Leatrice Freer Pitt Community College

George Generas University of Hartford

David Gilliss San Jose State University

Alfredo Gomez Broward College

Madeline Grant Santa Ana College

Gail Jacobs LA College International

Francis Krcmarik Mott Community College

Elaine Madden Anne Arundel Community College

Timothy March Kaskaskia College

Marian Matthews Central NM Community College

Gina McConoughey Illinois Central College

Tom McFarland Mt San Antonio College

Bill McPherson Indiana University of Pennsylvania Diane Minger Cedar Valley College

Jennifer Morton Ivy Tech Community College of Indiana John Olivo Bloomsburg University of Pennsylvania Lauren Paisley Genesee Community College

Anthony Racka Oakland Community College Nancy Ray-Mitchell McLennan Community College Martin St John Westmoreland County Community College John Striebich Monroe Community College

Frank Titlow St Petersburg College Bob Urell Irvine Valley College Dean Williamson Brewton-Parker College #2004

In addition, a select group of instructors assisted the development of this material

by actually using it in their classrooms Their input, along with their students’feedback, has provided us critical confirmation that the material is effective andimpactful in the classroom:

Nikolaos Adamou Borough of Manhattan CC April Bailey Shippensburg University of Pennsylvania Michael Davis Yavaipai College

Andrea Foster John Taylor Community College Frank Markham Mesa State

Donn Miller-Kermani Florida Institute of Technology Diane Minger Cedar Valley College

Tony Racka Oakland Community College

P Gerard Shaw Dean College Dean Williamson Brewton-Parker College David Woolgar Santa Ana College

David Murphy, Madisonville Community College, P Gerard Shaw, Dean College, andDiane Minger, Cedar Valley College, collaborated on the Test Item Files and StudentQuizzes.

Chuck Bowles, Pikes Peak Community College, developed the PowerPointPresentation Slides

Kim Richmond, St Joseph’s University, developed the Video Learning Segments

I am sincerely grateful to a great team of individuals atUnnamed Publisherwhomade working on this project an enjoyable experience Special thanks to JeffShelstad and Eric Frank for their confidence in me and in the project and to SharonKoch for her enthusiasm Thanks to Joanne Butler and Sharon Hughes for theirdedication to quality and their positive attitudes Thanks also to several very specialfriends who made substantial contributions to the textbook project: Ron Librach,Joseph Manzo, Judy Minot, and Eleanore Stinner

Thanks to the members of the Introduction to Business faculty team at LehighUniversity who are a constant source of ideas and advice Their excitement aboutthe course and dedication to our students create a positive and supportive teachingenvironment I enjoy the hours we spend in the “bullpen” sharing teaching tips,brainstorming ways to improve the course, and just having fun

Finally, I thank my husband, Bill, my sons, Don and Mark, and their wives, Courtneyand Tara, for their support and encouragement during this project They’re the best

of my world

This book is dedicated to Jayden and Jack

My desire in writing this text was to provide faculty with a fully developed teachingpackage that allows them to enhance student learning and introduce students to

business in an exciting way Exploring Business is designed to be a powerful but to-use teaching tool I’ve devised a broad range of features that allow instructors to

simple-introduce students to business in an exciting way, but also worked to fashion

material that’s straightforward, current, relevant, and easy to teach from The text

is purposely brief and covers business essentials without burdening students orfaculty with unnecessary detail

I’ve tried to build a textbook package that’s as supportive as possible to both

students and faculty The textbook package supports learning through interactiveand multimedia content designed to help students not only master topics but assesstheir learning The sixteen chapters are written using a modular format with self-contained sections which can be reorganized, deleted, added to and even edited atthe sentence level Each module ends with a detailed summary to assist students asthey learn from the text

Using our build-a-book platform, you can easily customize your book to suit yourneeds and those of your students An extensive author-prepared instructors’

manual and excellent set of PowerPoint slides provide teaching support to

instructors A test item file developed using assessment techniques supports faculty

in evaluating student performance

As in other Introduction to Business books, this text uses a wide variety of

company-specific examples However, I improve on the traditional approach by

adding an optional case study of a dynamic organization that can easily be

integrated into the text The company chosen for this purpose is Nike In the future,other case-study companies will be added

I have designed this textbook package to be flexible and meet the needs of three

groups of instructors—those who want to

• teach the course using the textbook alone

• teach the course using the comprehensive Nike case (or a company oftheir choice)

• teach the course by incorporating both a company case study and abusiness plan project

Enhanced Learning

As an epigraph for this book, I’ve chosen a nugget from the treasure trove ofBenjamin Franklin’s considerable educational experience:

“Tell me and I forget Teach me and I remember Involve me and I learn.”

I believe that this quote encapsulates an important goal of this textbook package: to encourage students to be active learners Thus I’ve designed the textbook to facilitate

the attainment of this goal I strive to enhance student learning through provoking questions, problems, and cases that ask students to do more than merelyregurgitate information from the text Most of these exercises require students togather information, assess a situation, think about it critically, and reach aconclusion Many are based on current business situations involving well-knowncompanies of interest to students Each chapter presents a number of Questions andProblems as well as five cases on areas of skill and knowledge endorsed by AACSB:Learning on the Web, Career Opportunities, The Ethics Angle, Team-Building Skills,and The Global View The questions are challenging and stimulating, and most areappropriate for in-class discussions More than 70 percent of our items helpstudents build skills in areas designated as critical by AACSB, including analyticalskills, ethical awareness and reasoning abilities, multicultural understanding andglobalization, use of information technology, and communications and team-oriented skills Each AACSB-inspired exercise is identified by an AACSB tag and anote indicating the relevant skill area

thought-Author-Prepared Instructor’s Manual

For the past twelve years, I have been developing, coordinating and teaching anIntroduction to Business course in which first-year students are introduced tobusiness through the study of Nike and the preparation of a business plan Duringthis twelve-year period, more than 3,500 students have taken the course Over theyears, sections of the course have been taught by a mix of permanent faculty,graduate students, adjuncts, and even the dean Each semester, I oversee the courseand guide approximately ten instructors as they teach their sections—a task that’sbeen made possible through the development and continuous improvement ofextensive teaching materials

Because I feel strongly that well-structured and easily understood teaching

geared toward Nike, and material dedicated to the business plan project The to-use notes include teaching tips and ample in-class activities The Instructor’sManual also contains author-prepared solutions to all questions, problems andcases.

easy-Test Item File and PowerPoint Slides

The Test Item File contains approximately 150 questions per chapter Each question

is fully referenced to corresponding learning objectives, AACSB objectives, pagereferences, and difficulty level There are about 35 to 40 PowerPoint slides perchapter To provide teaching support to instructors, each of the slides is linked tothe teaching notes contained in the Instructor’s Manual

Nike: An Integrated Case Study

A Nike case study is available for those instructors who decide to introduce theirstudents to business using an exciting case—one which is in fact updated yearly.Through an in-depth study of a real company, students can learn not only about thefunctional areas of business, but how these functional areas fit together Studying adynamic organization on a real-time basis allows students to discover the

challenges that it faces and exposes them to critical issues affecting the business,such as globalization, ethics and social responsibility, product innovation, diversity,supply chain management, and e-business

Students learn about Nike by reading a case study based on extensive research andexecutive interviews The case is broken down into 26 individual case notes, whichare linked to the appropriate sections of the text Each provides a real-worldexample to help students master a particular business topic For example, afterreading about the ways companies promote their products, students are directed to

a Nike case note that traces the evolution of the company’s promotional strategies,including its well-known sports-marketing efforts After reading chapter materials

on the pros and cons of doing business in a global environment, students can read aNike case note that examines both the benefits that Nike derives from its

international operations and the responsibilities that it has to the countries inwhich it operates

We help students expand their understanding of Nike by providing four winning videos featuring key company executives discussing specifically chosentopics: the company’s history, its corporate-responsibility challenges andinitiatives, its commitment to product innovation, and its carefully orchestratedentrance into the soccer-shoe market We structured interview questions to elicitinformation that will be valuable to students in mastering particular topics, and

award-we’ve selected and organized footage to capture students’ attention Instructors canshow the 15-minute videos in class or ask students to watch them online Discussionquestions, written by the author, aid classroom discussions on the topics covered inthe videos Each chapter also contains a multi-part question on one of the Nike casenotes covered in the chapter These questions require students to think about thecase and present their opinions on the issues covered In addition to these

questions, the test item file contains multiple-choice questions keyed to the Nikecases

Current (and sometimes controversial) topics can be woven into the class throughNike-related memo-writing (or debating) assignments accompanying each chapter.These assignments, which are updated frequently, provide students with an

opportunity to strengthen their writing skills and form opinions on current issuesaffecting Nike One assignment, for example, asks students to deliver an opinion onNike’s failure (until recently) to connect with female consumers Another asksstudents to discuss Nike’s use of celebrity athletes in light of recent scandalsinvolving several of its athletes Once the memos themselves have been composed,they underpin excellent in-class discussions or debates In fact, as an alternative tohaving students write memos, instructors might ask students to research the topicand come to class prepared to debate the pertinent issues

I’ve found that, by studying Nike, students willingly participate in classroomdiscussions Why? Because Nike is on just about everybody’s radar screen Studentsenjoy discussing the opportunities and challenges faced by Nike and speculating onwhat the company intends to do about them, now and in the future

Business Plan Project

I’m convinced that having students develop a business plan as a component of anIntroduction to Business course has considerable academic value A business planproject introduces students to the excitement and challenges of starting a businessand helps them discover how the functional areas of business interact Thus this

textbook package includes an optional business plan project that’s fully integrated

into the book The business plan project is modeled after one used and refined by

me and my teaching team over the past twelve years During this time period, morethan 800 student teams have prepared and presented business plans using thisapproach

If their instructor elects to assign the business plan project, students begin the

they’re shown how to integrate each of these individual sections into a final version

of the plan Because the project is carefully coordinated with the presentation ofcourse materials, students are able to apply what they’re learning, as they’relearning it, to the practical process of preparing a business plan

Because I understand that preparing the financial section of the business plan can

be difficult for students, we furnish students with an Excel template that simplifiesthe process of preparing financial reports for their proposed businesses They don’teven need to be competent in Excel to use it; it’s designed to be simple to use, and

we provide detailed instructions

Introduction to Business Community

Those teaching Introduction to Business come from varied backgrounds but sharecommon goals of exciting students about business and sparking their interest infuture business courses I wrote this text to provide members of this communitywith a fully developed teaching package that enhances the learning environmentand helps them introduce students to business in an exciting way My hope is that

by sharing my materials, experiences and approach to teaching with others, theywill enjoy the course as much as I do

Karen Collins

The Foundations of Business

Why Is Apple Successful?

In 1976 Steve Jobs and Steve Wozniak created their first computer, the Apple I.Thisvignette is based on an honors thesis written by Danielle M Testa, “Apple, Inc.: AnAnalysis of the Firm’s Tumultuous History, in Conjunction with the AboundingFuture” (Lehigh University), November 18, 2007 They invested a mere $1,300 andset up business in Jobs’s garage Three decades later, their business—Apple Inc.—hasbecome one of the world’s most influential and successful companies Did you everwonder why Apple flourished while so many other young companies failed? Howdid it grow from a garage start-up to a company generating $24 billion in sales?How was it able to transform itself from a nearly bankrupt firm to a multinationalcorporation with locations all around the world? You might conclude that it was thecompany’s products, such as the Apple I and II, the Macintosh, or more recently itswildly popular iPod and iPhone Or you might decide that it was its people: itsdedicated employees and loyal customers Perhaps you will decide it was

luck—Apple simply was in the right place at the right time Or maybe you willattribute the company’s success to management’s willingness to take calculatedrisks Perhaps you will attribute Apple’s initial accomplishments and reemergence

to its cofounder, Steve Jobs After all, Jobs was instrumental in the original design ofthe Apple I and, after being ousted from his position with the company, returned tosave the firm from destruction and lead it onto its current path

Before we decide what made Apple what it is today and what will propel it into asuccessful future, let’s see if you have all the facts about the possible choices: itsproducts, its customers, luck, willingness to take risks, or Steve Jobs We’re

confident that you’re aware of Apple’s products and understand that “Apple

customers are a loyal bunch Though they’re only a small percentage of all

computer users, they make up for it with their passion and outspokenness.”EllenLee, “Faithful, sometimes fanatical Apple customers continue to push the

boundaries of loyalty,” San Francisco Chronicle, March 26, 2006 We believe you can

understand the role that luck or risk taking could play in Apple’s success But youmight like to learn more about Steve Jobs, the company’s cofounder and CEO, before

Figure 1.1

A new iPhone 3G is displayed at the Apple store at the Grove where it went on sale in Los Angeles, California New iPhone

Growing up, Jobs had an interest in computers He attended lectures at Packard after school and worked for the company during the summer months Hetook a job at Atari after graduating from high school and saved his money to make apilgrimage to India to search for spiritual enlightenment Following his India trip,

Hewlett-he attended Steve Wozniak’s “Homebrew Computer Club” meetings, wHewlett-here tHewlett-he ideafor building a personal computer surfaced.Lee Angelelli, “Steve Paul Jobs,”

http://ei.cs.vt.edu/~history/Jobs.html(accessed November 2, 2008) “Manycolleagues describe Jobs as a brilliant man who can be a great motivator andpositively charming At the same time his drive for perfection is so strong thatemployees who do not meet his demands are faced with blistering verbalattacks.”Lee Angelelli, “Steve Paul Jobs,”http://ei.cs.vt.edu/~history/Jobs.html

(accessed November 2, 2008) Not everyone at Apple appreciated Jobs’s brillianceand ability to motivate Nor did they all go along with his willingness to spendwhatever it took to produce an innovative, attractive, high-quality product So atage thirty, Jobs found himself ousted from Apple by John Sculley, whom Jobshimself had hired as president of the company several years earlier It seems thatSculley wanted to cut costs and thought it would be easier to do so without Jobsaround Jobs sold $20 million of his stock and went on a two-month vacation tofigure out what he would do for the rest of his life His solution: start a newpersonal computer company called NextStep In 1993, he was invited back to Apple(a good thing, because neither his new company nor Apple was doing well)

Steve Jobs is definitely not humble, but he is a visionaryand has a right to be proud of his accomplishments

Some have commented that “Apple’s most successfuldays have occurred with Steve Jobs at the helm, both inthe early days with the original Macintosh and morerecently with the first iMac and the iPod.”Cyrus Farivar,

“Apple’s first 30 years; three decades of contributions to

the computer industry,” Macworld, June 2006, 2 Jobs did

what many successful CEOs and managers do: helearned, adjusted, and improvised.Dan Barkin, “Hemade the iPod: How Steve Jobs of Apple created the new

millennium’s signature invention,” Knight Ridder Tribune Business News, December 3, 2006, 1 Perhaps the most

important statement that can be made about him is this:

he never gave up on the company that once turned itsback on him So now you have the facts Here’s amultiple-choice question that you can’t get wrong:

Apple’s success is due to (a) its products, (b) itscustomers, (c) luck, (d) willingness to take risks, (e)Steve Jobs, or (f) some combination of these options

buyers, along with owners of the previous version who were upgrading to newer software, experienced massive gridlock on the phone’s network as millions attempted to activate or upgrade service.

Photo by Valerie Macon/Getty Images

1.1 Introduction

As the story of Apple suggests, today is an interesting time to study business

Advances in technology are bringing rapid changes in the ways we produce anddeliver goods and services The Internet and other improvements in

communication now affect the way we do business Companies are expandinginternational operations, and the workforce is more diverse than ever

Corporations are being held responsible for the behavior of their executives, andmore people share the opinion that companies should be good corporate citizens.Plus—and this is a big plus—businesses today are facing what many economistsbelieve is the worst financial crisis since the Great Depression.Jon Hilsenrath,Serena Ng, and Damian Paletta, “Worst Crisis Since ’30s, With No End Yet in Sight,”

Wall Street Journal, Markets, September 18, 2008,http://online.wsj.com/article/SB122169431617549947.html(accessed November 2, 2008) Economic turmoil thatbegan in the housing and mortgage industries as a result of troubled subprimemortgages quickly spread to the rest of the economy Credit markets froze up andbanks stopped making loans Lawmakers tried to get money flowing again bypassing a $700 billion Wall Street bailout, yet businesses and individuals were stilldenied access to needed credit Without money or credit, consumer confidence inthe economy dropped and consumers cut back their spending Businesses

responded by producing fewer products, and their sales and profits dropped

Unemployment rose as troubled companies shed the most jobs in five years and760,000 Americans marched to the unemployment lines.“How the Economy Stole

the Election,” CNN.com,http://money.cnn.com/galleries/2008/news/0810/

gallery.economy_election/index.html(accessed November 2, 2008) The stockmarket reacted to the financial crisis and its stock prices dropped by 44 percentwhile millions of Americans watched in shock as their savings and retirementaccounts took a nose dive In fall 2008, even Apple, a company that had enjoyedstrong sales growth over the past five years, began to cut production of its populariPhone Without jobs or cash, consumers would no longer flock to Apple’s fancyretail stores or buy a prized iPhone.Dan Gallagher, “Analyst says Apple is cutting

back production as economy weakens,” MarketWatch, November 3, 2008,

production/story.aspx?guid=%7B7F2B6F99-D063-4005-87AD-

http://www.marketwatch.com/news/story/apple-cutting-back-iphone-D8C36009F29B%7D&dist=msr_1(accessed November 2, 2008)

As you go through the course with the aid of this text, you’ll explore the excitingworld of business We’ll introduce you to the various activities in which

businesspeople engage—accounting, finance, information technology, management,marketing, and operations We’ll help you understand the roles that these activitiesplay in an organization, and we’ll show you how they work together We hope that

by exposing you to the things that businesspeople do, we’ll help you decide whether

business is right for you and, if so, what areas of business you’d like to studyfurther.

1.2 Getting Down to Business

L E A R N I N G O B J E C T I V E

1 Identify the main participants of business, the functions that mostbusinesses perform, and the external forces that influence businessactivities

Abusiness1is any activity that provides goods or services to consumers for thepurpose of making a profit When Steve Jobs and Steve Wozniak created AppleComputer in Jobs’s family garage, they started a business The product was theApple I, and the company’s founders hoped to sell their computers to customers formore than it cost to make and market them If they were successful (which theywere), they’d make aprofit2

Before we go on, let’s make a couple of important distinctions concerning the terms

in our definitions First, whereas Apple produces and sells goods (iPhone, iPod, Mac), many businesses provide services Your bank is a service company, as is your

Internet provider Airlines, law firms, movie theaters, and hospitals are also servicecompanies Many companies provide both goods and services For example, yourlocal car dealership sells goods (cars) and also provides services (automobilerepairs)

Second, some organizations are not set up to make profits Many are established toprovide social or educational services Suchnot-for-profit (or nonprofit)

organizations3include the United Way of America, Habitat for Humanity, the Boysand Girls Clubs, the Sierra Club, the American Red Cross, and many colleges anduniversities Most of these organizations, however, function in much the same way

as a business They establish goals and work to meet them in an effective, efficientmanner Thus, most of the business principles introduced in this text also apply tononprofits

Business Participants and Activities

Let’s begin our discussion of business by identifying the main participants ofbusiness and the functions that most businesses perform Then we’ll finish thissection by discussing the external factors that influence a business’s activities

1 Activity that provides goods or

services to consumers for the

purpose of making a profit.

2 Difference between the

revenue that a company brings

in from selling goods and

services and the costs of

generating this revenue.

3 Organization that has a

purpose other than returning

profits to owners.

Figure 1.2

Hospitals specialize in an intangible product—health care.

© 2010 Jupiterimages Corporation

Participants

Every business must have one or more owners whose primary role is to invest

money in the business When a business is being started, it’s generally the ownerswho polish the business idea and bring together the resources (money and people)

needed to turn the idea into a business The owners also hire employees to work for

the company and help it reach its goals Owners and employees depend on a third

group of participants—customers Ultimately, the goal of any business is to satisfy

the needs of its customers

Functional Areas of Business

The activities needed to operate a business can be

divided into a number of functional areas: management,

operations, marketing, accounting, and finance Let’sbriefly explore each of these areas

Management

Managers are responsible for the work performance ofother people.Management4involves planning for,organizing, staffing, directing, and controlling acompany’s resources so that it can achieve its goals

Managers plan by setting goals and developing strategies for achieving them They organize activities

and resources to ensure that company goals are met

They staff the organization with qualified employees and direct them to accomplish organizational goals.

Finally, managers design controls for assessing the

success of plans and decisions and take corrective actionwhen needed

oversees the transformation of resources into goods or services is called an

operations manager5 This individual is also responsible for ensuring that products

4 Process of planning for,

organizing, directing, and

controlling a company’s

resources so that it can achieve

its goals.

Marketing6consists of everything that a company does to identify customers’needs and design products to meet those needs Marketers develop the benefits andfeatures of products, including price and quality They also decide on the bestmethod of delivering products and the best means of promoting them to attract andkeep customers They manage relationships with customers and make them aware

of the organization’s desire and ability to satisfy their needs

Accounting

Managers need accurate, relevant, timely financial information, and accountantsprovide it.Accountants7measure, summarize, and communicate financial andmanagerial information and advise other managers on financial matters There are

two fields of accounting Financial accountants prepare financial statements to help

users, both inside and outside the organization, assess the financial strength of the

company Managerial accountants prepare information, such as reports on the cost of

materials used in the production process, for internal use only

Finance

Finance8involves planning for, obtaining, and managing a company’s funds

Finance managers address such questions as the following: How much money doesthe company need? How and where will it get the necessary money? How and whenwill it pay the money back? What should it do with its funds? What investmentsshould be made in plant and equipment? How much should be spent on researchand development? How should excess funds be invested? Good financial

management is particularly important when a company is first formed, becausenew business owners usually need to borrow money to get started

6 Set of processes for creating,

communicating, and delivering

value to customers and for

improving customer

relationships.

7 Financial advisor responsible

for measuring, summarizing,

and communicating financial

and managerial information.

8 Activities involved in planning

for, obtaining, and managing a

company’s funds.

Figure 1.3 Business and Its Environment

External Forces That Influence Business Activities

Apple and other businesses don’t operate in a vacuum: they’re influenced by anumber of external factors These include the economy, government, consumertrends, and public pressure to act as good corporate citizens.Figure 1.3 "Businessand Its Environment"sums up the relationship among the participants in abusiness, its functional areas, and the external forces that influence its activities.One industry that’s clearly affected by all these factors is the fast food industry A

strong economy means people have more money to eat out at places where food standards are monitored by a government agency, the Food and Drug

Administration Preferences for certain types of foods are influenced by consumer trends (eating fried foods might be okay one year and out the next) Finally, a number of decisions made by the industry result from its desire to be a good corporate citizen For example, several fast-food chains have responded to environmental

concerns by eliminating Styrofoam containers.David Baron, “Facing-Off in Public,”

Stanford Business, April 15, 2006,http://www.gsb.stanford.edu/news/bmag/

sbsm0308/feature_face_off.shtml As you move through this text, you’ll learn more

• The activities needed to run a business can be divided into fivefunctional areas:

1 Management involves planning, organizing, staffing,

directing, and controlling resources to achieveorganizational goals

2 Operations transforms resources (labor, materials, money,

and so on) into products

3 Marketing works to identify and satisfy customers’ needs.

4 Finance involves planning for, obtaining, and managing

company funds

5 Accounting entails measuring, summarizing, and

communicating financial and managerial information

E X E R C I S E S

1 (AACSB) Analysis

The Martin family has been making guitars out of its factory inNazareth, Pennsylvania, factory for more than 150 years In 2004,Martin Guitar was proud to produce its millionth instrument Go

tohttp://www.martinguitar.comto link to the Martin GuitarWeb site and read about the company’s long history You’lldiscover that, even though it’s a family-run company with afairly unique product, it operates like any other company

Identify the main activities or functions of Martin Guitar’sbusiness and explain how each activity benefits the company

2 (AACSB) Analysis

Name four external factors that have an influence on business

Give examples of the ways in which each factor can affect thebusiness performance of two companies: McDonald’s and GeneralMotors

1.3 What Is Economics?

L E A R N I N G O B J E C T I V E S

1 Define economics and identify factors of production.

2 Explain how economists answer the three key economics questions

3 Compare and contrast economic systems

To appreciate how a business functions, we need to know something about theeconomic environment in which it operates We begin with a definition ofeconomics and a discussion of the resources used to produce goods and services

Resources: Inputs and Outputs

Economics9is the study of how scarce resources are used to produceoutputs—goods and services—to be distributed among people.Resources10are the

inputs used to produce outputs Resources may include any or all of the following:

• Land and other natural resources

• Labor (physical and mental)

• Capital, including buildings, equipment, and money

• Entrepreneurship

Resources are combined to produce goods and services Land and natural resourcesprovide the needed raw materials Labor transforms raw materials into goods andservices Capital (equipment, buildings, vehicles, cash, and so forth) are needed forthe production process Entrepreneurship provides the skill and creativity needed

to bring the other resources together to capitalize on an idea

Because a business uses resources to produce things, we also call these resources

factors of production11 The factors of production used to produce a shirt wouldinclude the following:

• The land that the shirt factory sits on, the electricity used to run theplant, and the raw cotton from which the shirts are made

• The laborers who make the shirts

• The factory and equipment used in the manufacturing process, as well

as the money needed to operate the factory

9 Study of how scarce resources

are used to produce

11 Resources consisting of land,

labor, capital (money,

buildings, equipment), and

entrepreneurial skills

combined to produce goods

and services.

• The entrepreneurship skill used to coordinate the other resources toinitiate the production process

Input and Output Markets

Many of the factors of production (or resources) are provided to businesses byhouseholds For example, households provide businesses with labor (as workers),land and buildings (as landlords), and capital (as investors) In turn, businesses payhouseholds for these resources by providing them with income, such as wages, rent,and interest The resources obtained from households are then used by businesses

to produce goods and services, which are sold to the same households that providebusinesses with revenue The revenue obtained by businesses is then used to buyadditional resources, and the cycle continues This circular flow is described in

Figure 1.4 "The Circular Flow of Inputs and Outputs", which illustrates the dualroles of households and businesses:

• Households not only provide factors of production (or resources) butalso consume goods and services

• Businesses not only buy resources but also produce and sell both goodsand services

Figure 1.4 The Circular Flow of Inputs and Outputs

The Questions Economists Ask

Economists study the interactions between households and businesses and look atthe ways in which the factors of production are combined to produce the goods andservices that people need Basically, economists try to answer three sets of

questions:

1 What goods and services should be produced to meet consumers’ needs? In

what quantity? When should they be produced?

2 How should goods and services be produced? Who should produce them,

and what resources, including technology, should be combined toproduce them?

3 Who should receive the goods and services produced? How should they be

allocated among consumers?

Economic Systems

The answers to these questions depend on a country’seconomic system12—themeans by which a society (households, businesses, and government) makesdecisions about allocating resources to produce products and about distributingthose products The degree to which individuals and business owners, as opposed tothe government, enjoy freedom in making these decisions varies according to thetype of economic system Generally speaking, economic systems can be divided into

two systems: planned systems and free market systems.

Planned Systems

In a planned system, the government exerts control over the allocation anddistribution of all or some goods and services The system with the highest level ofgovernment control iscommunism13 In theory, a communist economy is one inwhich the government owns all or most enterprises Central planning by thegovernment dictates which goods or services are produced, how they are produced,and who will receive them In practice, pure communism is practically nonexistenttoday, and only a few countries (notably North Korea and Cuba) operate underrigid, centrally planned economic systems

Undersocialism14, industries that provide essential services, such as utilities,banking, and health care, may be government owned Other businesses are ownedprivately Central planning allocates the goods and services produced by

government-run industries and tries to ensure that the resulting wealth isdistributed equally In contrast, privately owned companies are operated for thepurpose of making a profit for their owners In general, workers in socialisteconomies work fewer hours, have longer vacations, and receive more health,education, and child-care benefits than do workers in capitalist economies Tooffset the high cost of public services, taxes are generally steep Examples ofsocialist countries include Sweden and France

Free Market System

The economic system in which most businesses are owned and operated byindividuals is thefree market system15, also known ascapitalism16 As we will see

next, in a free market, competition dictates how goods and services will be allocated.

Business is conducted with only limited government involvement The economies ofthe United States and other countries, such as Japan, are based on capitalism

12 Means by which a society

makes decisions about

allocating resources to produce

and distribute products.

13 Economic system featuring the

highest level of government

control over allocation and

distribution.

14 Economic system falling

between communism and

capitalism in terms of

government control over

allocation and distribution.

15 Economic system in which

most businesses are owned and

operated by individuals.

How Economic Systems Compare

In comparing economic systems, it’s helpful to think of a continuum withcommunism at one end and pure capitalism at the other, as inFigure 1.5 "TheSpectrum of Economic Systems" As you move from left to right, the amount ofgovernment control over business diminishes So, too, does the level of socialservices, such as health care, child-care services, social security, and unemploymentbenefits

Figure 1.5 The Spectrum of Economic Systems

Mixed Market Economy

Though it’s possible to have a pure communist system, or a pure capitalist (freemarket) system, in reality many economic systems are mixed Amixed market economy17relies on both markets and the government to allocate resources We’vealready seen that this is what happens in socialist economies in which the

government controls selected major industries, such as transportation and healthcare, while allowing individual ownership of other industries Even previouslycommunist economies, such as those of Eastern Europe and China, are becomingmore mixed as they adopt capitalistic characteristics and convert businessespreviously owned by the government to private ownership through a process called

privatization18

The U.S Economic System

Like most countries, the United States features a mixed market system: though theU.S economic system is primarily a free market system, the federal governmentcontrols some basic services, such as the postal service and air traffic control TheU.S economy also has some characteristics of a socialist system, such as providingsocial security retirement benefits to retired workers

The free market system was espoused by Adam Smith in his book The Wealth of Nations, published in 1776.According to many scholars, The Wealth of Nations not only

17 Economic system that relies on

both markets and government

to allocate resources.

18 Process of converting

government-owned businesses

to private ownership.

is the most influential book on free-market capitalism but remains relevant today.According to Smith, competition alone would ensure that consumers received thebest products at the best prices In the kind of competition he assumed, a seller whotries to charge more for his product than other sellers won’t be able to find anybuyers A job-seeker who asks more than the going wage won’t be hired Becausethe “invisible hand” of competition will make the market work effectively, therewon’t be a need to regulate prices or wages.

Almost immediately, however, a tension developed among free market theorists

between the principle of laissez-faire—leaving things alone—and government

intervention Today, it’s common for the U.S government to intervene in theoperation of the economic system For example, government exerts influence onthe food and pharmaceutical industries through the Food and Drug Administration,which protects consumers by preventing unsafe or mislabeled products fromreaching the market

To appreciate how businesses operate, we must first get an idea of how prices areset in competitive markets Thus, the next section begins by describing how

markets establish prices in an environment of perfect competition.

K E Y T A K E A W A Y S

• Economics is the study of how scarce resources (or factors of

production) are used to produce the goods and services that will be

distributed among people

• Economists address these three questions: (1) What goods and servicesshould be produced to meet consumer needs? (2) How should they beproduced, and who should produce them? (3) Who should receive goodsand services?

• The answers to these questions depend on a country’s economic

system The primary economic systems that exist today are planned and

free market systems

• In a planned system, such as communism and socialism, the

government exerts control over the production and distribution of all orsome goods and services

• In a free market system, also known as capitalism, business is

conducted with only limited government involvement Competitiondetermines what goods and services are produced, how they areproduced, and for whom

E X E R C I S E S

1 If you started a business that made surfboards, what factors ofproduction would you need to make your product? Where would you getthem? Where would you find the money you’d need to pay for additionalresources?

2 Which three key questions do economists try to answer? Will answers tothese questions differ, depending on whether they’re working in theUnited States or in Cuba? Explain your answer

Figure 1.6

Produce, like these apples, is a standardized product available from numerous businesses.

© 2010 Jupiterimages Corporation

1.4 Perfect Competition and Supply and Demand

four types of competition—perfect competition, monopolistic competition, oligopoly, and monopoly We’ll introduce the first of these—perfect competition—in this section

and cover the remaining three in the following section

Perfect Competition

Perfect competition19exists when there are manyconsumers buying a standardized product fromnumerous small businesses Because no seller is bigenough or influential enough to affect price, sellers andbuyers accept the going price For example, when acommercial fisher brings his fish to the local market, hehas little control over the price he gets and must acceptthe going rate

The Basics of Supply and Demand

To appreciate how perfect competition works, we need

to understand how buyers and sellers interact in amarket to set prices In a market characterized byperfect competition, price is determined through the

mechanisms of supply and demand Prices are influenced

both by the supply of products from sellers and by thedemand for products by buyers

and define supply and create a supply curve Finally, we’ll see how supply and demand interact to create an equilibrium price—the price at which buyers are willing

to purchase the amount that sellers are willing to sell

Demand and the Demand Curve

Demand20is the quantity of a product that buyers are willing to purchase at variousprices The quantity of a product that people are willing to buy depends on its price

You’re typically willing to buy less of a product when prices rise and more of a product when prices fall Generally speaking, we find products more attractive at

lower prices, and we buy more at lower prices because our income goes further

Figure 1.7 The Demand Curve

Using this logic, we can construct ademand curve21that shows the quantity of aproduct that will be demanded at different prices Let’s assume that the diagram in

Figure 1.7 "The Demand Curve"represents the daily price and quantity of applessold by farmers at a local market Note that as the price of apples goes down,buyers’ demand goes up Thus, if a pound of apples sells for $0.80, buyers will bewilling to purchase only fifteen hundred pounds per day But if apples cost only

20 Quantity of a product that

buyers are willing to purchase

at various prices.

21 Graph showing the quantity of

a product that will be bought at

certain prices.

$0.60 a pound, buyers will be willing to purchase two thousand pounds At $0.40 apound, buyers will be willing to purchase twenty-five hundred pounds.

Supply and the Supply Curve

Supply22is the quantity of a product that sellers are willing to sell at various prices.The quantity of a product that a business is willing to sell depends on its price

Businesses are more willing to sell a product when the price rises and less willing to sell it when prices fall Again, this fact makes sense: businesses are set up to make

profits, and there are larger profits to be made when prices are high

Figure 1.8 The Supply Curve

Now we can construct asupply curve23that shows the quantity of apples thatfarmers would be willing to sell at different prices, regardless of demand As youcan see inFigure 1.8 "The Supply Curve", the supply curve goes in the oppositedirection from the demand curve: as prices rise, the quantity of apples that farmers

22 Quantity of a product that

sellers are willing to sell at

Equilibrium Price

We can now see how the market mechanism works under perfect competition We

do this by plotting both the supply curve and the demand curve on one graph, aswe’ve done inFigure 1.9 "The Equilibrium Price" The point at which the two curvesintersect is theequilibrium price24 At this point, buyers’ demand for apples andsellers’ supply of apples is in equilibrium

Figure 1.9 The Equilibrium Price

You can see inFigure 1.9 "The Equilibrium Price"that the supply and demandcurves intersect at the price of $0.60 and quantity of two thousand pounds Thus,

$0.60 is the equilibrium price: at this price, the quantity of apples demanded bybuyers equals the quantity of apples that farmers are willing to supply If a farmertries to charge more than $0.60 for a pound of apples, he won’t sell very many andhis profits will go down If, on the other hand, a farmer tries to charge less than theequilibrium price of $0.60 a pound, he will sell more apples but his profit per poundwill be less than at the equilibrium price

What have we learned in this discussion? We’ve learned that without outsideinfluences, markets in an environment of perfect competition will arrive at an

24 Price at which buyers are

willing to buy exactly the

amount that sellers are willing

to sell.

equilibrium point at which both buyers and sellers are satisfied But we must beaware that this is a very simplistic example Things are much more complex in thereal world For one thing, markets rarely operate without outside influences.

Sometimes, sellers supply more of a product than buyers are willing to purchase; in

that case, there’s a surplus Sometimes, they don’t produce enough of a product to satisfy demand; then we have a shortage.

Circumstances also have a habit of changing What would happen, for example, ifincome rose and buyers were willing to pay more for apples? The demand curvewould change, resulting in an increase in equilibrium price This outcome makesintuitive sense: as demand increases, prices will go up What would happen if applecrops were larger than expected because of favorable weather conditions? Farmersmight be willing to sell apples at lower prices If so, the supply curve would shift,resulting in another change in equilibrium price: the increase in supply would bringdown prices

K E Y T A K E A W A Y S

• In a free market system, buyers and sellers interact in a market to setprices

• When the market is characterized by perfect competition, many small

companies sell identical products Because no company is large enough

to control price, each simply accepts the market price The price isdetermined by supply and demand

• Supply is the quantity of a product that sellers are willing to sell at

various prices

• Demand is the quantity of a product that buyers are willing to purchase

at various prices

• The quantity of a product that people will buy depends on its price:

they’ll buy more when the price is low and less when it’s high

• Price also influences the quantity of a product that producers are willing

to supply: they’ll sell more of a product when prices are high and lesswhen they’re low

• In a competitive market, the decisions of buyers and sellers interact

until the market reaches an equilibrium price—the price at which

buyers are willing to buy the same amount that sellers are willing to sell

E X E R C I S E

(AACSB) Analysis

You just ran across three interesting statistics: (1) the world’s current supply

of oil is estimated to be 1.3 trillion barrels; (2) the worldwide use of oil isthirty billion barrels a year; and (3) at this rate of consumption, we’ll run out

of oil in forty-three years Overcoming an initial sense of impendingcatastrophe, you remember the discussion of supply and demand in thischapter and realize that things aren’t as simple as they seem After all, manyfactors affect both the supply of oil and the demand for products made from

it, such as gasoline These factors will influence when (and if) the world runsout of oil Answer the following questions, and provide explanations for youranswers:

a What’s the major factor that affects the supply of oil? (Hint: It’s the same major factor affecting the demand for oil.)

b If producers find additional oil reserves, what will happen to the price ofoil?

c If producers must extract oil from more-costly wells, what will happen

to the price that you pay to fill up your gas tank?

d If China’s economy continues to expand rapidly, what will happen to theprice of oil?

e If drivers in the United States start favoring fuel-efficient cars overSUVs, will gas be cheaper or more expensive?

f In your opinion, will oil producers be able to supply enough oil to meetthe increasing demand for oil-related products, such as gasoline?