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lOM oA RcPSD |266 833 4 Summary the Business Dimension of Europe Chapter 1. The U.S. business environment 1.1Business, profit and the External Environment

Business: an organization that provides goods or services to earn profits.

Profits: difference between a business’s revenues and its expenses. (what the business earns)

The benefits of businesses:

•Businesses produce most of the goods and services we consume •They employ most working people •They create most innovations •Business taxes support governments All businesses operate within a larger external environment.External environment: everything outside an organization’s boundaries that might affect it.The external environment plays a major role in determining the success or failure of any organization.

There are 6 different dimensions of the external environment:

1.Domestic business environment:

2.Global business environment: the international forces that affect a business.

(international economic conditions, political unrest) 3.Technological environment: all the ways by which firms create value for their product.(work methods, telecommunication) 4.Political-legal environment: the relationship between business and government. (the legal system defines in part what an organization can and cannot do) 5.Sociocultural environment: the customs, mores, values and demographic characteristics of the society in which an organization functions. (this determines what a society is likely to value and accept) 6.Economic environment: relevant conditions that exist in the economic system in which a company operates. (if one company pays employees a high salary, a different company will pay an higher salary to attract workers) 1.2Economic systems Economic system: a nation’s system for allocating (to give) its resources among its citizens.A basic difference between economic systems is the way in which a system manages its factors of production.Factors of production: the resources that a country’s businesses use to produce goods and services.

There are 5 factors of production:

1.Labor: the physical and intellectual contributions people make while engaged in

economic production. People who work for businesses provide labor. a.k.a: Human

resources/human capital.

2.Capital: the financial resources needed to operate a business.

3.Entrepeneurs: a person who accepts the risks and opportunities entailed in creating and operating a new business.

4.Physical resources: are the tangible (tastbare) things that organizations use to conduct their business. (They include natural resources and materials, offices, storage and production facilities, etc.) 5.Information resources: data and other information used by businesses. (such as market forecasts, specialized knowledge of people and economic data)

Types of economic systems:

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lOM oA RcPSD |266 833 4 -Planned economy: economy that relies on a centralized government to control all or most factors of production and to make all or most production and allocation decisions.

There are two basic forms of planned economies: communism and socialism.

Communism: a political system in which the government owns and operates all factors of production. Today, North Korea, Vietnam, Laos and Cuba are the only countries that are controlled by communist parties. (China is more a mixed market economy) -Market economy: economy in which individuals control production and allocation decisions trough supply and demand.Market: a mechanism for exchange between the buyers and sellers of a particular good or service.Market economies rely on capitalism and free enterprise to create an environment in which producers and consumers are free to sell and buy what they choose.Capitalism: allows the private ownership of the factors of production and encourages entrepreneurship by offering profits as an incentive (a motivation).-Mixed market economies: economic system featuring characteristics of both planned and market economies.When a government is making a change from a planned economy to a market economy, it usually begins to adopt market mechanisms through privatization.Privatization: a process of converting government enterprises into privately owned companies. For example: The postal system in many countries is government owned and managed. However, The Netherlands privatized its TNT Post Group N.V. and it is among the world’s most efficient post office operations.Socialism: planned economic system in which the government owns and operates only selected major sources of production.

1.3The economics of market systems Demand and supply in a market economy

Demand: the willingness and ability of buyers to purchase a good or service.

Supply: the willingness and ability of producers to offer a good or a service for sale.

Demand and supply follow basic laws:

•The law of demands: buyers will purchase (demand) more of a product as it price drops and less of a product as its price increases.•The law of supply: producers will offer (supply) more of a product for sale as its price rises and less of a product as its price drops.Demand and supply schedule: assessment (estimation) of the relationships among different levels of demand and supply at different price levels.The demand and supply schedule can be used to construct demand and supply curves.Demand curve: graph showing how many units of a product will be demanded (bought) at different prices.Supply curve: graph showing how many units of a product will be supplied (offered for sale) at different prices.Market price: profit-maximizing price at which the quantity of goods demanded and the quantity of goods supplied are equal. (also called the equilibrium price).Surplus: situation in which quantity supplied exceeds (is more than) quantity demanded.Shortage: situation in which quantity demanded (is more than) exceeds quantity supplied.

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