ICS 200, Ch 1 and 2 Notes
ICS 200, Ch 1 and 2 Notes ICS 200
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This 17 page Class Notes was uploaded by Tatum Notetaker on Thursday September 15, 2016. The Class Notes belongs to ICS 200 at DePaul University taught by Paul Kessenich in Summer 2016. Since its upload, it has received 36 views. For similar materials see Introduction to Business in Business at DePaul University.
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Date Created: 09/15/16
ICS 200 Notes Ch. 1 & 2 CHAPTER 1 Entrepreneurship and Wealth Building Success in business is based on adapting to the market Business: activity that seeks to provide goods and services to others while operating at a profit Goods: tangible products Services: intangible products, people working for each other Entrepreneur: a person who risks time and money to start and manage a business Revenues, Profits, and Losses o Revenue: total amount of money a business takes in during a given period o Profit: the amount of money a business earns above what it spends for business expenses o Loss: when a business’s expenses are more than its revenues Matching Risk with Profit o Risk: the chance an entrepreneur takes of losing time and money on a business venture Standard of Living and Quality of Life o Businesses and their employees pay taxes to the federal gov’t and local communities o A nation’s businesses are part of an economic system that contributes to the standard of living and quality of life for everyone in the country o Standard of living: the amount of goods and services a person can buy with the money that they have Goods cost more in one country than in another because of higher taxes and stricter gov’t regulations The right level of taxes and regulation is important in making a country/city prosperous o Quality of life: the general well-being of a society Maintaining a high quality of life requires the combined efforts of businesses, nonprofit organizations, and gov’t agencies Responding to the Various Business Stakeholders o Stakeholders: every person who stands to gain or lost by the policies and activities of a business Includes: customers, employees, stockholders, suppliers, dealers, bankers, people in the community, media, environmentalists, unions, critics, and gov’t leaders A big challenge for organizations nowadays will be to recognize and respond to the needs of their stakeholders o Outsourcing: contracting with other companies (usually in foreign countries) to do some of the company’s functions o Insourcing: when foreign companies set up design and production facilities here in the US Creates new US jobs and offsets those jobs that are being outsourced Using Business Principles in Nonprofit Organizations 2 o Nonprofit organization: an organization whose goals do not include making a personal profit for its owners Make a major contribution to the welfare of society Entrepreneurship vs. Working for Others There are two ways to succeed in business: o 1. Rise through the ranks of a large company advantage: somebody else assumes the company’s entrepreneurial risk and provides you with benefits such as vacation time and insurance o 2. Become an entrepreneur riskier, but can be more exciting advantage: freedom to succeed disadvantage: freedom to fail, don’t receive benefits Opportunities for Entrepreneurs o The number of Hispanic-owned businesses in the US has grown dramatically o Women now own over 1/3 of all businesses The Importance of Entrepreneurs to the Creation of Wealth o Factors of production: resources used to create wealth Land Labor Capital Entrepreneurship 3 Knowledge o Rich countries are rich today based on the citizen’s entrepreneurship and knowledge o Also important is economic and political freedom The Business Environment Business Environment: the surrounding factors that either help or hinder the development of businesses Five elements in the business environment o 1. The economic and legal environment o 2. The technological environment o 3. The competitive environment o 4. The social environment o 5. The global business environment The Economic and Legal Environment o The economic system and the way gov’t works with or against businesses has a strong impact on the level of risk that goes into creating a business o To favor business: Gov’t can minimize spending and keep taxes and regulations to a minimum Allow for private ownership of businesses (promotes entrepreneurship) Minimize interference with the free exchange of goods and services Passing laws that enable businesspeople to write enforceable contracts Establish a currency that’s tradable in world markets 4 Minimize corruption in businesses and in its own ranks o Many laws in the US attempt to minimize corruption Ethics is super important to the success of businesses and the economy as a whole The capitalist system relies heavily on honesty, integrity, and high ethical standards The Technological Environment o The emergence of information technology has had the most comprehensive and lasting impact on businesses o Advantage of working for others: company provides you the tools and technology to make your job more productive o Technology: all the various software and items that make business processes more effective, efficient, and productive Effectiveness – producing the desired result Efficiency – producing goods and services using the least amount of resources o Productivity: the amount of output you generate given the amount of input o E-Commerce: the buying and selling of goods over the Internet Two major types of E-Commerce – Business-to- Consumer, and Business-to-Business o Businesses most responsive to customer wants and needs tend to succeed more frequently o Database: an electronic storage file for info 5 Enable stores to carry only the merchandise their local population wants The legit collection of personal customer info opens the door to identity theft o Identity theft: obtaining individuals’ personal info for illegal purposes The Competitive Environment o Businesses have a competitive edge if they focus on quality but they must also have good value for their products and great service o Successful organizations listen to their customers’ wants and needs and then adjust their products, policies, and practices o Empowerment: giving frontline workers the responsibility, authority, freedom, training, and equipment needed to respond quickly to customer requests The Social Environment o Demography: statistical study of human population with regard to size, density, and other characteristics o Diversity has come to mean more than recruiting minority and female workers Also include recruiting and keeping people with disabilities, seniors, non-heterosexuals, extroverts, introverts, married people, single people, and the devout o People ages 65-74 are currently the richest demographic in the US 6 Businesses that cater to older customers will have the opportunity for exceptional growth in the near future o Social Security is a major issue in the US We have too many seniors and not enough young people to put money into social security o The rapid growth of single-parent households has had a major effect on businesses They have to cater to this group by allowing for more time off The Global Environment o Two important changes 1. Growth of global competition 2. Increase of free trade among nations o Globalization (world trade) has grown because of the development of efficient distribution systems and the internet o War and terrorism have drained billions of dollars from the US economy Threat of terrorism adds to organizational costs, such as the cost of insurance To lessen global tensions, we should promote global economic growth among profit-making and nonprofit organizations o New jobs will be created in manufacturing and service industries as businesses expand to serve global markets These rapid changes create a need for continuous learning 7 o Climate change: the movement of the temperature of the planet over time o Greening: trend toward saving energy and producing products that are less harmful to the environment The Evolution of US Business Businesses in the US have become so productive that they need fewer workers to produce the same amount of goods Progress in Service Industries o The fastest-growing firms are service industries such as: law, health, tele-communications, entertainment, and finance o Services make up over 70% of the value of the US economy o There are more high-paying jobs in the service industry Your Future in Business o We’re in the midst of an information-based global and technical revolution that will change the economy o Businesses will not prosper without cooperation of global gov’t and social leaders CHAPTER 2 How Economic Conditions Affect Businesses A major part of the US’s business success was due to an economic and social climate that allowed businesses to operate freely 8 Changes in the US economic or political system has a major influence on the success of businesses Global economics and global politics also influence’s US businesses What is Economics? o Economics: the study of how society chooses to employ resources to produce goods/services and distributes them among various competitors/individuals o Macroeconomics: looks at the operation of a nation’s economy as a whole o Microeconomics: looks at the behavior of people and organizations in particular markets/communities o Not possible to maintain global peace and prosperity by merely diving resources among the existing nations We don’t have enough resources to do that Resource development: study of how to increase resources to create conditions that will make better use of said resources Businesses can contribute to an economic system by inventing products that increases available resources The Secret to Creating a Wealthy Economy o Thomas Malthus thought that there would soon be too many people and not enough food in the late 1700’s-early 1800’s Called economics “the dismal science” Followers of this thought believe that the solution to poverty is radical birth control The study of the effects of population growth on the economy is part of macroeconomics 9 o Some economists believe the opposite of Malthus; that a large, educated population is a valuable resource Business owners provide jobs and economic growth for employees and communities o Macroeconomists must implement policies and programs that leads to increasing prosperity globally Adam Smith and the Creation of Wealth o Smith believed freedom was vital to the survival of the economy Freedom to own land or property Freedom to keep the profits of your own labor and/or running a business How Businesses Benefit the Community o Invisible Hand: describes the process that turns self- directed gain into social and economic benefits for all; Adam Smith o The poverty rate in the US is high and there is a large difference between the amount of money the wealthy have and the amount of money the poor have Called inequality Understanding Free-Market Capitalism Capitalism: economic system in which most of the factors of production and distribution are privately owned and for-profit o Led to the wealth creation in much of the world o NO country is purely capitalist o Disadvantage: inequality is a major issue State Capitalism: combination of free-market and some gov’t control The Foundations of Capitalism o Four basic rights under free-market capitalism: 1. The right to own private property 10 2. The right to own a business and keep all that business’s profits 3. The right to freedom of competition 4. The right to freedom of choice o Benefit of these rights is that people are willing to take more risks How Free-Markets Work o A free-market is one in which decisions about what and how much to produce are made by the market o The price tells producers how much they need to produce How Prices Are Determined o Not determined by the sellers o Determined by the buyers and sellers negotiating in the marketplace The Economic Concept of Supply o Supply: the quantity of products that manufacturers are willing to sell at different prices o The amount supplied will increase as the price increases The Economic Concept of Demand o Demand: the quantity of products that people are willing to buy at different prices o The amount demanded will increase as the price decreases The Equilibrium Point, or Market Price o The supply curve and the demand curve would cross where quantity demanded and quantity supplied are equal Called the equilibrium point or equilibrium price o Market price: the price determined by supply and demand Competition within Free-Markets o Four different degrees of competition: 11 Perfect Competition: there are many sellers in a market and none is large enough to dictate the price of a product Monopolistic Competition: a large number of sellers produce very similar products that buyers perceive as different Advertising is the key to success – have to make buyers think that similar products are different and therefore one is better Example is cell phone companies (one company may have better prices than the other company, even though they are selling the same product – a cell phone) Oligopoly: a few sellers dominate the market Products all tend to be priced the same – price competitions would lower profits for everyone because every company would be able to match the price Product differentiation is usually the key to success Example is fast food companies (one company may say that the quality of their food is better, even though they are selling the same product for essentially the same price) Monopoly: only one seller controls the total supply of a product or service and sets the price Example is a utility company (only ComEd operates and controls the electricity in Chicago) Benefits and Limitations of Free-Markets o Benefits: Allows open competition between companies Led to the wealth of industrialized countries 12 o Limitations: Brought inequality Allows people to led greed determine how they act Understanding Socialism Socialism: economic system based on the premise that most businesses should be operated and owned by the gov’t, and profits are evenly distributed among the citizens Benefits of Socialism o Social equality Gov’t takes income from the wealthy in the form of taxes and redistributes it to poor people through gov’t programs The Negative Consequences of Socialism o Takes away business people’s incentives o Brain drain: loss of the best and brightest people to other (typically capitalist) countries where they can make more money o Tends to result in fewer inventions and less innovation Understanding Communism Communism: economic and political system in which the gov’t makes all economic decisions and owns all major factors of production Some communist countries don’t allow citizens to practice certain religions, change jobs, or move Problems with communism o Gov’t has no way of knowing how much of what to produce Prices can’t reflect supply and demand without a free-market o Doesn’t inspire business people to work hard because they don’t have any incentives 13 o Suffer severe economic depression The Trend Toward Mixed Economies Global economies are typically divided between: o Free-market economy: market largely determines what goods and services get produced, who gets them, and how the economy grows o Command economy: gov’t largely determines what goods and services are produced, who gets them, and how the economy grows o All countries actually have a mix of the two systems o Free-markets don’t respond well enough the needs of the poor, elderly, or disabled and may not do enough for the environment o Command economies don’t create enough jobs or wealth to keep economies growing fast enough o Mixed economies: some allocation of resources is made by the market and some made by the gov’t Understanding the US Economic System Key Economic Indicators o Three major indicators of economic conditions are: 1. The gross domestic product (GDP) 2. The unemployment rate 3. Price indexes Though another important stat is the increase or decrease in productivity o GDP: total value of final goods and services produced in a country in a given year Gross output (GO): a measure of total sales volume at all stages of production Considered to be a better indicator of the business cycle More consistent with economic growth theory 14 A major influence on the growth of GDP is the productivity of the workforce o Unemployment rate: number of civilians who are of working age and have tried to find a job but have been unsuccessful within the last four weeks Four types of unemployment: frictional, structural, cyclical, and seasonal o Price indexes gauge the health of the economy by measuring inflation, disinflation, deflation, and stagflation Inflation: rise in the prices of goods and services over time Disinflation: situation in which price increases are slowing (inflation rate is declining) Deflation: situation in which prices are declining Stagflation: situation when the economy is slowing but prices are still going up o Consumer Price Index (CPI): monthly statistics that measure the pace of inflation or deflation Core inflation: CPI minus food and energy costs Gov’t relies more on the info from core inflation Productivity in the US o Productivity has risen because of computers and technology that makes production faster and easier o The higher the productivity, the lower the costs of producing goods and services Leads to lower prices o High productivity can lead to high unemployment Productivity in the Service Sector o Problem with the service industry Adding machinery can improve the quality of the service, but not necessarily the productivity of the worker, or output per worker o Productivity measures should include quality of service based on technology 15 The Business Cycle o Business Cycles: periodic rise and fall that occurs in economies over time o Four phases of long-term business cycles: Economic boom Recession: two or more consecutive quarters of decline in the GDP Depression: a severe recession, usually accompanied by deflation Recovery – economy stabilizes and starts to grow o Goal of economists is to predict the ups and downs Stabilizing the Economy through Fiscal Policy o Fiscal Policy: the federal gov’t’s efforts to stabilize the economy by increasing or decreasing taxes and gov’t spending o First tool: taxation High tax rates slows the economy, money is drawn away from the private sector and put into the gov’t o Second tool: gov’t spending Spending on highways, social programs, education, etc. National deficit is the amount of money the gov’t spends beyond what it gathers in taxes during the fiscal year o National debt: the sum of the gov’t deficits over time o If the gov’t takes in more taxes than it spends then there is a national surplus o One way to lessen deficits is to cut gov’t spending o Some people believe that gov’t spending helps the economy grow, but others believe that the money the gov’t spends comes from consumers and business people which slows growth Fiscal Policy in Action during an Economic Crisis 16 o Keynesian economic theory: theory that a gov’t policy of increasing spending could stimulate the economy during a recession Using Monetary Policy to Keep the Economy Growing o The Federal Reserve Bank (the Fed) adds and subtracts money from the economy Not under direct control of the gov’t o Monetary Policy: management of the money supply and interest rates by the Federal Reserve The Fed’s most visible role Raising and lowering interest rates should help control the rapid ups and downs of the economy o Fed also control money supply The more money the Fed makes available to business people and others, the faster the economy is supposed to grow o Two major tools for managing the economy of the US Fiscal policy (gov’t) Monetary policy (the Fed) o Goal is to keep the economy growing so that more people can rise up the economic ladder and enjoy a higher standard of living and quality of life 17