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1 Chapter 1, Understanding the chapter Bus. System Business Essentials, 6 th Canadian Edition 1 Chapter 1, Understanding the chapter Bus. System Business Essentials, 6 th Canadian Edition Ebert economic systems chapter 1 canadian ed. developed 2017 Power. Point Presentation prepared by Carol Vollmer Pope Alverno College

LEARNING OBJECTIVES After reading this chapter, you should be able to: 1. Define the LEARNING OBJECTIVES After reading this chapter, you should be able to: 1. Define the nature of business and Identify Its main goals. 2. Describe different types of global economic systems according to the means by which they control the factors of production through input and output markets. 3. Show demand supply affect resource distribution. 4. Identify the elements of private enterprise. economic systems chapter 1 canadian ed. developed 2017 2

Exercise A. Write four things you know about business. Write 4 things you would Exercise A. Write four things you know about business. Write 4 things you would like to know? economic systems chapter 1 canadian ed. developed 2017 3

The Concept of Business and Profit • Business – An organization that provides goods The Concept of Business and Profit • Business – An organization that provides goods or services that are then sold to earn profits. • Profits – The positive difference between a business’s revenues and its expenses. The rewards owners get for risking their money and time. © 2009 Pearson Education, Inc. economic systems chapter 1 canadian ed. developed 2017 4

The Benefits of Business 1. Provision of goods and services 2. Employment of workers The Benefits of Business 1. Provision of goods and services 2. Employment of workers 3. Innovation and opportunities 4. Increased quality of life and standard of living 5. Enhanced personal incomes of owners and stockholders 6. Tax payments support government 7. Support for charities and community leadership © 2009 Pearson Education, Inc. economic systems chapter 1 canadian ed. developed 2017 5

1 chapter Factors of Production • Factors of production – the resources that a 1 chapter Factors of Production • Factors of production – the resources that a country’s businesses use to produce goods and services economic systems chapter 1 canadian ed. developed 2017

Factors of production A. Labor: The people who work for businesses. Labor includes both Factors of production A. Labor: The people who work for businesses. Labor includes both physical and mental contributions. A country with a highly educated workforce is considered rich in this resource. B. Capital: The funds needed to create and operate a business. Sources include personal investment by owners, loans, sale of stock and bonds, and revenue from the sale of product. economic systems chapter 1 canadian ed. developed 2017 7

Factors of production A. Entrepreneurs: People who are willing to accept the risks that Factors of production A. Entrepreneurs: People who are willing to accept the risks that are part of creating and operating businesses, in return for the potential profits. B. Physical resources: Tangible things organizations use in the conduct of their business. Possibilities include natural resources, raw materials, office equipment and facilities, computers, transportation and communication infrastructure, etc. C. Information resources: Data and other information used by business. This factor has become increasingly important in the last decade. economic systems chapter 1 canadian ed. developed 2017 8

Information Resources Information resources include: the specialized knowledge and expertise of people who work Information Resources Information resources include: the specialized knowledge and expertise of people who work in businesses, as well as information that is found in market forecasts and various other forms of economic data. economic systems chapter 1 canadian ed. developed 2017 9

Example Factors of productions used in a supermarket: Labor: manager of the supermarket and Example Factors of productions used in a supermarket: Labor: manager of the supermarket and labor. Capital: personal capital invested in establishing and buying things, credit from suppliers. Entrepreneur: the founder and owner. Physical resources: computer, furniture, shelfs, car for business delivery. Information recourses: data saved about customer purchasing, information about competitors and suppliers, relevant government statistics about market. economic systems chapter 1 canadian ed. developed 2017 10

Exercise: group Discussion 1. In your faculty of commerce, list the factors of production Exercise: group Discussion 1. In your faculty of commerce, list the factors of production that were used to provide higher education service. 2. What are the factors of production used to produce plastic chairs? 3. Factors of production in a breaks factory. 4. Factors of production in a restaurant. economic systems chapter 1 canadian ed. developed 2017 11

Economic Environment – The relevant conditions that exist in the economic system in which Economic Environment – The relevant conditions that exist in the economic system in which a company operates (out of bus. control) – Examples: recession and growth. © 2009 Pearson Education, Inc. economic systems chapter 1 canadian ed. developed 2017 12

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

Economic Environment – Examples: • If an economy is doing well enough that most Economic Environment – Examples: • If an economy is doing well enough that most people have jobs, a growing company may find it necessary to pay higher wages and offer more benefits in order to attract workers from other companies. • If many people in an economy are looking for jobs, a firm may be able to pay less and offer fewer benefits. © 2009 Pearson Education, Inc. economic systems chapter 1 canadian ed. developed 2017 14

Economic Systems • Economic System – A nation’s system/methods for allocating its resources among Economic Systems • Economic System – A nation’s system/methods for allocating its resources among its citizens, both individuals and organizations • Factors of Production are the resources. © 2009 Pearson Education, Inc. economic systems chapter 1 canadian ed. developed 2017 15

Types of Economic Systems • Planned Economy (command) – A centralized government controls all Types of Economic Systems • Planned Economy (command) – A centralized government controls all or most factors of production and makes all or most production and allocation decisions for the economy. Planned Economy (command) includes: communism and socialism. – With communism—as currently operating in North Korea—all sources of production are owned and operated by the government. © 2009 Pearson Education, Inc. economic systems chapter 1 canadian ed. developed 2017 16

Planned Economies • Communism – A system Karl Marx envisioned in which individuals would Planned Economies • Communism – A system Karl Marx envisioned in which individuals would contribute according to their abilities and receive benefits according to their needs. • The government owns and operates all factors of production. • The government assigns people to jobs and owns all businesses and controls business decisions. © 2009 Pearson Education, Inc. economic systems chapter 1 canadian ed. developed 2017 17

Socialism In the partially planned system called socialism, the government owns and operates selected Socialism In the partially planned system called socialism, the government owns and operates selected major industries. Smaller businesses such as clothing stores and restaurants may be privately owned. Although workers in socialist countries are usually allowed to choose their occupations or professions, a large proportion generally work for the government. economic systems chapter 1 canadian ed. developed 2017 18

Types of Economic Systems • Market Economy – Individual producers and consumers control production Types of Economic Systems • Market Economy – Individual producers and consumers control production and allocation by creating combinations of supply and demand. • Market – A mechanism of exchange between buyers and sellers of a good or service. © 2009 Pearson Education, Inc. economic systems chapter 1 canadian ed. developed 2017 19

The Concept of Business and Profit • Consumer Choice and Demand – The freedom The Concept of Business and Profit • Consumer Choice and Demand – The freedom of consumers to choose how to satisfy their wants and needs. – The freedom of business owners to decide how to meet those wants and needs. • Opportunity and Enterprise – Success in business requires spotting a promising opportunity and then developing a good plan for capitalizing on it. © 2009 Pearson Education, Inc. economic systems chapter 1 canadian ed. developed 2017 20

Market Economics Capitalism: The political basis for the free market economy, which allows private Market Economics Capitalism: The political basis for the free market economy, which allows private ownership. The government supports private ownership and encourages entrepreneurship. – Individuals choose where to work, what to buy, and how much to pay. – Producers choose who to hire, what to produce, and how much to charge. © 2009 Pearson Education, Inc. economic systems chapter 1 canadian ed. developed 2017 21

“Circular Flow in Market Economy” SUPPLY OUTPUT MARKETS DEMAND Goods Services FIRMS • Supply “Circular Flow in Market Economy” SUPPLY OUTPUT MARKETS DEMAND Goods Services FIRMS • Supply products in output markets • Demand resources in input markets DEMAND Copyright © 2003 Prentice Hall, Inc. HOUSEHOLDS INPUT MARKETS Labor Capital Entrepreneurs Physical Resources Information Resources economic systems chapter 1 canadian ed. developed 2017 • Demand products in output markets • Supply resources in input markets SUPPLY 22 1 - 22

Mixed Market Economy A. Mixed Market Economies: mixed of planned and market economies; many Mixed Market Economy A. Mixed Market Economies: mixed of planned and market economies; many countries are moving from planned systems to mixed market systems through privatization, which involves the transformation of governmentcontrolled businesses into privately owned enterprises. © 2009 Pearson Education, Inc. economic systems chapter 1 canadian ed. developed 2017 23

Nationalization -converting private firms into government owned firms. Venezuela, for example, nationalized its telecommunications Nationalization -converting private firms into government owned firms. Venezuela, for example, nationalized its telecommunications industry. economic systems chapter 1 canadian ed. developed 2017 24

Deregulation means a reduction in the number of laws affecting business activity and in Deregulation means a reduction in the number of laws affecting business activity and in the powers of government enforcement agencies. This trend also developed during the 1990 s, and deregulation occurred in many industries, including airlines, pipelines, banking, trucking, and communications. But this trend has also slowed (and even reversed in some cases) due to the 2008 recession. For example, there have been calls for a dramatic tightening up of the laws regulating business activity, particularlysystemsthe financial sector. in chapter 1 canadian ed. economic developed 2017 25

Interactions between Business and Government How Government Influences Business A. Government plays several key Interactions between Business and Government How Government Influences Business A. Government plays several key roles In the economy, and each of these roles influences business activity in some way. The roles government plays are as follows: economic systems chapter 1 canadian ed. developed 2017 26

Interactions between Business and Government The roles government plays are as follows: A. Government Interactions between Business and Government The roles government plays are as follows: A. Government as a Customer: Government buys thousands of different products and services. E. g. , PA buys medicines. B. Government as a Competitor. C. Government as Regulator: Reasons for regulating business activity include protecting competition, protecting consumers, achieving social goals, and protecting the environment. economic systems chapter 1 canadian ed. developed 2017 27

Interactions between Business and Government The roles government plays are as follows. A. Promoting Interactions between Business and Government The roles government plays are as follows. A. Promoting Competition: Competition is crucial to a market economy. B. Protecting Consumers. C. Government as a Taxation Agent: Taxes are Imposed and collected by governments. economic systems chapter 1 canadian ed. developed 2017 28

Interactions between Business and Government The roles government plays are as follows. A. Government Interactions between Business and Government The roles government plays are as follows. A. Government as a Provider of Incentives and Financial Assistance. B. Government as a Provider of Essential Services. E. g. , PA provides health, education services and electricity. economic systems chapter 1 canadian ed. developed 2017 29

The Economics of Market Systems • Demand – The willingness and ability of buyers The Economics of Market Systems • Demand – The willingness and ability of buyers to purchase a product (a good or a service). • Supply – The willingness and ability of producers to offer a good or service for sale. © 2009 Pearson Education, Inc. economic systems chapter 1 canadian ed. developed 2017 30

The Economics of Market Systems • The Laws of Demand Supply in a Market The Economics of Market Systems • The Laws of Demand Supply in a Market Economy – Demand: Buyers will purchase (demand) more of a product as its price drops and less of a product as its price increases. – Supply: Producers will offer (supply) more of a product for sale as its price rises and less of a product as its price drops. © 2009 Pearson Education, Inc. economic systems chapter 1 canadian ed. developed 2017 31

Private Enterprise in a Market Economy • Private Enterprise System – Allows individuals to Private Enterprise in a Market Economy • Private Enterprise System – Allows individuals to pursue their own interests with minimal government restriction. • Elements of a Private Enterprise System – Private property rights – Freedom of choice – Profits – Competition economic systems chapter 1 canadian ed. © 2009 Pearson Education, Inc. developed 2017 32

Economic Indicators • Economic Indicators –Statistics that show whether an economic system is strengthening, Economic Indicators • Economic Indicators –Statistics that show whether an economic system is strengthening, weakening, or remaining stable –Measure key goals of the economic system: economic growth and economic stability economic systems chapter 1 canadian ed. © 2009 Pearson Education, Inc. developed 2017 33

Economic Indicators –Economic growth indicators • Aggregate output, standard of living, gross domestic product, Economic Indicators –Economic growth indicators • Aggregate output, standard of living, gross domestic product, and productivity –Economic stability indicators • Inflation and unemployment economic systems chapter 1 canadian ed. © 2009 Pearson Education, Inc. developed 2017 34

Economic Growth: Aggregate Output, and Standard of Living The elements: • Business Cycle –The Economic Growth: Aggregate Output, and Standard of Living The elements: • Business Cycle –The pattern of short-term ups and downs (or, better, expansions and contractions/ reductions) in an economy. economic systems chapter 1 canadian ed. © 2009 Pearson Education, Inc. developed 2017 35

Economic Growth: Aggregate Output, and Standard of Living The elements: • Aggregate Output –Growth Economic Growth: Aggregate Output, and Standard of Living The elements: • Aggregate Output –Growth during the business cycle is measured by the total quantity of goods and services produced by an economic system during a given period. It measures the growth during the business cycle (quarter 1 year) economic systems chapter 1 canadian ed. © 2009 Pearson Education, Inc. developed 2017 36

Economic Growth, Aggregate Output, and Standard of Living • Standard of Living –The total Economic Growth, Aggregate Output, and Standard of Living • Standard of Living –The total quantity and quality of goods and services that consumers can purchase with the currency used in their economic systems chapter 1 canadian ed. © 2009 Pearson Education, Inc. developed 2017 37

Gross Domestic Product (GDP) – An aggregate output measure of the total value of Gross Domestic Product (GDP) – An aggregate output measure of the total value of all goods and services produced within a given period by a national economy through domestic factors of production on the soil of the country. In US $14 trillion, in PA 7. 5 billion (Gaza 2 Billion) (year 2013). • If GDP is going up, aggregate output is going up; if aggregate output is going up, the nation is experiencing economic growth. economic systems chapter 1 canadian ed. developed 2017 38

Gross National Product (GNP) – The total value of all goods and services produced Gross National Product (GNP) – The total value of all goods and services produced by a national economy within a given period, regardless of where the factors of production are located. – E. g. , When a Japanese automobile produces cars at its factory in USA, the profits from that factory are included in the American GDP, and in the Japanese GNP. economic systems chapter 1 canadian ed. © 2009 Pearson Education, Inc. developed 2017 39

Economic Growth • Productivity – Level of employee productivity in Arab public sector 25 Economic Growth • Productivity – Level of employee productivity in Arab public sector 25 minuets. – according to IMF (2017) to period 2016 the GDP per capita in selected countries are: – Qatar $64, 400 - United States $59, 600 – Singapore $51, 400 – United Arab Emirates $40, 000 – Israel $39, 000 – Japan $38, 000 - Saudi Arabia $21, 800 – Russia $10, 800 – China $8500 - Palestine (WB and GS) $2, 000. – GDP in Palestine year 2015 $12. 6 billion. (Gaza $2. 6 billion) (PCBS, 2015) economic systems chapter 1 canadian ed. © 2009 Pearson Education, Inc. developed 2017 40

Economic Growth • Productivity – A measure of economic growth that compares how much Economic Growth • Productivity – A measure of economic growth that compares how much product a system produces with the resources needed to produce that product. – Productivity: output/input (resources used) • If more product is produced with fewer factors of production, the price of the product decreases. • The standard of living in an economy improves through increases in productivity. economic systems chapter 1 canadian ed. © 2009 Pearson Education, Inc. developed 2017 41

Balance of Trade – The economic value of all the products a country exports Balance of Trade – The economic value of all the products a country exports minus the economic value of its imported products. • Positive balance of trade: When a country exports (sells to other countries) more than it imports (buys from other countries). • Negative balance of trade: When a country imports more than it exports. Commonly called a trade deficit. economic systems chapter 1 canadian ed. © 2009 Pearson Education, Inc. developed 2017 42

Gross Domestic Product (cont. ) 1 chapter economic systems chapter 1 canadian ed. developed Gross Domestic Product (cont. ) 1 chapter economic systems chapter 1 canadian ed. developed 2017

1 chapter World Prices of a Big Mac economic systems chapter 1 canadian ed. 1 chapter World Prices of a Big Mac economic systems chapter 1 canadian ed. developed 2017

FIGURE 1. 4 Balance of Trade economic systems chapter 1 canadian ed. © 2009 FIGURE 1. 4 Balance of Trade economic systems chapter 1 canadian ed. © 2009 Pearson Education, Inc. developed 2017 45

Managing the Economy • Stabilization Policy –Coordinating fiscal and monetary policies to smooth fluctuations Managing the Economy • Stabilization Policy –Coordinating fiscal and monetary policies to smooth fluctuations in output and unemployment and to stabilize prices. economic systems chapter 1 canadian ed. © 2009 Pearson Education, Inc. developed 2017 46

Types of Policies Monetary Policy: Designed to control the amount of money flowing around Types of Policies Monetary Policy: Designed to control the amount of money flowing around the economy (the money supply). This policy is used to tackle inflation and balance of payments. Methods under this policy: 1. Interest rates: 2. The government may impose restrictions on financial institutions to affect borrowing. 3. The central bank can control bank assets and the amount of lending. Level of reserves economic systems chapter 1 canadian ed. developed 2017 47

Types of Policies Fiscal policy: Aims to control the total spending in the economy. Types of Policies Fiscal policy: Aims to control the total spending in the economy. 1. Government spending. 2. Change in direct taxation. 3. Change in indirect taxation. economic systems chapter 1 canadian ed. developed 2017 48

Business Environment Few things will be mentioned. The following elements are part of chapter Business Environment Few things will be mentioned. The following elements are part of chapter 2. economic systems chapter 1 canadian ed. developed 2017 49

The External Environments of Business • External Environment – Everything outside an organization’s boundaries The External Environments of Business • External Environment – Everything outside an organization’s boundaries that might affect it and business cannot control 1. The domestic business environment 2. The global business environment 3. The technological environment 4. The political-legal environment 5. The socio-cultural environment 6. The economic. Pearson Education, Inc. environment © 2009 economic systems chapter 1 canadian ed. developed 2017 50

Domestic Business Environment (Industrial Environment) – The environment in which a firm conducts its Domestic Business Environment (Industrial Environment) – The environment in which a firm conducts its operations and derives its revenues by: 1. Seeking to be close to its customers 2. Establishing strong relationships with its suppliers 3. Distinguishing itself from its competitors 4. Example, look at the IUG. © 2009 Pearson Education, Inc. economic systems chapter 1 canadian ed. developed 2017 51

Industry Analysis economic systems chapter 1 canadian ed. developed 2017 52 Industry Analysis economic systems chapter 1 canadian ed. developed 2017 52

Global Business Environment – The international forces that affect business: 1. International trade agreements Global Business Environment – The international forces that affect business: 1. International trade agreements (EU, NAFTA, WTO) 2. International economic conditions: inflation 3. Political unrest: Arab spring revolutions. 4. International market opportunities: expand into China. 5. Suppliers outsourcing: contract with consultant companies. 6. Cultural differences: language, religion, tradition. 7. Competitors and Currency values. Low currency © 2009 Pearson value encourageeconomic systems chapter 1 canadian ed. export. Education, Inc. developed 2017 53

Technological Environment – All the ways by which firms create value for their constituents: Technological Environment – All the ways by which firms create value for their constituents: it includes: 1. Human knowledge: e. g. technical skills 2. Work methods: use of robotics, inventory management. 3. Physical equipment: machines. 4. Electronics and telecommunications: computers, cell phones, video conferencing 5. Various business activity processing systems: e. g. enterprise planning system. © 2009 Pearson Education, Inc. economic systems chapter 1 canadian ed. developed 2017 54

Political-Legal Environment – The regulatory relationship between business and the government (legal system) and Political-Legal Environment – The regulatory relationship between business and the government (legal system) and its agencies that define what organizations can and can’t do: 1. Product identification laws (ingredients to be listed). 2. Local zoning requirements e. g. , obtain a license to operate 3. Advertising practices: provide true and ethical information. 4. Safety and health considerations, warnings on cigarette packages. 5. Acceptable standards of business conduct, green marketing, pollution – Pro- or anti-business sentiment/attitude in government and political stability are also important considerations, especially for international firms. canadian ed. © 2009 Pearson Education, economic systems chapter 1 Inc. developed 2017 55

Socio-cultural Environment – The customs (e. g. , wedding celebrations), mores/traditions (e. g. , Socio-cultural Environment – The customs (e. g. , wedding celebrations), mores/traditions (e. g. , beliefs), values (e. g. , importance of religion), and demographic characteristics of the society in which an organization functions (e. g. , education level). – Socio-cultural processes determine the goods, services, and standards of business conduct a society is likely to accept, e. g. , children labor, selling certain food. © 2009 Pearson Education, Inc. economic systems chapter 1 canadian ed. developed 2017 56

Discussion Why will customers choose to buy from your business, instead of your competition? Discussion Why will customers choose to buy from your business, instead of your competition? Hint: In this section, describe what will be unique about your business. For example, is the product special, will customer service be exceptional, or will you offer the product at a lower price? economic systems chapter 1 canadian ed. developed 2017 57

Homework Answer the following question: Analyze how the factors of production (labour, capital, entrepreneurs, Homework Answer the following question: Analyze how the factors of production (labour, capital, entrepreneurs, Natural ressources, and information) work together for providing higher education service at university. economic systems chapter 1 canadian ed. developed 2017 58

Research Write a small report (5 -10 pages) about the role of small businesses Research Write a small report (5 -10 pages) about the role of small businesses in Gaza’s economy. Try to define small business- overview on Gaza economy- how to create small business- why small not big business may be needed in Gaza. economic systems chapter 1 canadian ed. developed 2017 59