Chapter# 1

The Dynamics of
Business and Economics
• Definition: A business is an organization or entity
that sells goods or services for a profit. The
important part of this definition is that a business
is something that operates in order to make a
profit. Not all businesses actually are successful
enough make a profit, but their main purpose is
to generate profits.
 The Nature of Business
• A business tries to earn a profit by providing
products that satisfy people’s needs. The
outcomes of its efforts are products that have
both tangible and intangible characteristics that
provide satisfaction and benefits.
• A Subway sandwich, for example, may be
purchased to satisfy hunger,
• while a Honda Accord may be purchased to
satisfy the need for transportation and the desire
to present a certain image.
• Product is a good or service with tangible and
intangible characteristics that provide satisfaction and
benefits.
• The Goal of Business
• The primary goal of all businesses is to earn a profit,
the difference between what it costs to make and sell a
product and what a customer pays for it.
• If a company spends $8.00 to manufacture, finance,
promote, and distribute a product that it sells for
$10.00, the business earns a profit of $2.00 on each
product sold.
• Businesses have the right to keep and use
their profits as they choose—within legal
limits—because profit is the reward for the
risks they take in providing products.
• Earning profits contributes to society by
providing employment, which in turn provides
money that is reinvested in the economy.
• Not all organizations are businesses, however.
• Nonprofit organizations, such as Abdul sattar
edhi, UN, WHO, Habitat for Humanity, and
other charities, do not have the fundamental
purpose of earning profits, although they may
provide goods or services and engage in fund
raising.
The Economic Foundations of Business
• Economics is the study of how resources are
distributed for the production of goods and
services within a social system.
• You are already familiar with the types of
resources available. Land, forests, minerals,
water, and other things that are not made by
people are natural resources.
• Human resources or labor, refer to the physical
and mental abilities that people use to produce
goods and services.
• Financial resources, or capital, are the funds used
to acquire the natural and human resources
needed to provide products.
• Because natural, human, and financial resources
are used to produce goods and services, they are
sometimes called factors of production.
 Economic Systems
• A n e c o n o m i c sy s t e m d e s c r i b e s h o w a
particular society distributes its resources to
produce goods and services.
• A central issue of economics is how to fulfill an
unlimited demand for goods and services in a
world with a limited supply of resources.
• Different economic systems attempt to resolve
this central issue in numerous ways.
 Communism
• In a communist economy, the people (through
t h e go ve r n m e nt ) o w n a n d o p e rate a l l
businesses and factors of production.
• Central government planning determines
what goods and services satisfy citizens’ needs,
how the goods and services are produced, and
how they are distributed.
 Socialism
• Socialism is an economic system in which the
government owns and operates basic industries—
postal service, telephone, utilities, transportation,
health care, banking, and some manufacturing.
•
• Socialism is an economic system in which the basic
industries are owned by the government or by the
private sector under strong government control. A
socialist state controls critical, large-
scale industries such as transportation,
communications, and utilities
 Capitalism
• an economic system in which individuals own
and operate the majority of businesses that
provide goods and services.
• Competition, supply, and demand determine
which goods and services are produced, how
t h e y a r e p ro d u c e d , a n d h o w t h e y a r e
distributed.
 The Forces of Supply and Demand
• In the United States and in other free-enterprise
systems, the distribution of resources and
products is determined by supply and demand.
• Demand is the number of goods and services that
consumers are willing to buy at different prices at
a specific time.
• Supply is the number of products that businesses
are willing to sell at different prices at a specific
time.
• In general, because the potential for profits is
higher, businesses are willing to supply more
of a good or service at higher prices.
• equilibrium price the price at which the
number of products that businesses are
willing to supply equals the amount of
products that consumers are willing to buy at
a specific point in time.
 The Nature of Competition
• According to Adam Smith, competition fosters
efficiency and low prices by forcing producers
to o ffer the best pro duc ts at the mo st
reasonable price; those who fail to do so are
not able to stay in business.
• Thus, competition should improve the quality
of the goods and services available or reduce
prices.
• There are four types of competitive environments.
• Pure competition exists when there are many
small businesses selling one standardized product,
such as agricultural commodities like wheat, corn,
and cotton.
• No one business sells enough of the product to
influence the product’s price. And, because there
is no difference in the products, prices are
determined solely by the forces of supply and
demand.
 Monopolistic competition
• exists when there are fewer businesses than in
a pure competition environment and the
differences among the goods they sell is small.
• E.g soft drinks
• These products differ slightly in packaging,
name, and other characteristics, but all satisfy
the same consumer need.
– Monopolistic competition is a market with the
following characteristics:
§ A large number of firms.
§ Each firm produces a differentiated product.
§ Firms compete on product quality, price, and
marketing.
§ Firms are free to enter and exit the industry.
 oligopoly
• exists when there are very few businesses selling
a product.
• In an oligopoly, individual businesses have control
over their products’ price because each business
supplies a large portion of the products sold in
the marketplace.
• Nonetheless, the prices charged by different
firms stay fairly close because a price cut or
increase by one company will trigger a similar
response from another company.
• In the airline industry, for example, when one
airline cuts fares to boost sales, other airlines
quickly follow with rate decreases to remain
competitive.
 Monopoly
• the market structure that exists when there is only one
business providing a product in a given market.
• Utility companies that supply electricity, natural gas,
and water are monopolies.
• The government permits such monopolies because the
cost of creating the good or supplying the service is so
great that new producers cannot compete for sales.
• Some monopolies exist because of technological
developments that are protected by patent laws.
• An example of this type of monopoly is the dry-copier
process developed by Xerox.
 Monopoly Features
1. One seller & large number of buyers: Under monopoly there should be
single producer of the commodity. The buyers of the product are in large
number. Consequently, no buyer can influence the price but the seller can.
2. Monopoly is also an industry: Under monopoly situation, there is only one
firm & the difference between firm & industry disappears. There is no
difference between the study of a firm and industry.
3. Restrictions on the entry of new firms: There are some restrictions on the
entry of new firms into monopoly industry. There is no competitor of a
monopoly firm.
4. No close substitutes: The commodity produced by the firm should have no
close substitute, otherwise the monopolist will not be able to determine
the price of his commodity as per his discretion.
5. Price maker: Price of the commodity is fully under the control of the
monopolist. In case, the monopolist increases the supply of the commodity,
the price of it will fall. If he reduces the supply, the price of it will rise. A
monopolist may also indulge in price discrimination. In other words, he
may charge different prices of the same product from different buyers.
 Economic Cycles and Productivity
• Economies are not stagnant; they expand and
contract.
• Economic expansion occurs when an economy
is growing and people are spending more
money.
• Their purchases stimulate the production of
goods and services, which in turn stimulates
employment.
 Economic contraction
• occurs when spending declines. Businesses cut
back on production and layoff workers, and the
economy as a whole slows down.
• Contractions of the economy lead to recession—a
decline in production, employment, and income.
• Recessions are often characterized by rising levels
of unemployment, which is measured as the
percentage of the population that wants to work
but is unable to find jobs.
 Measuring the Economy
• Countries measure the state of their economies to
determine whether they are expanding or contracting
and whether corrective action is necessary to minimize
the fluctuations.
• Gross domestic product (GDP) the sum of all goods
and services produced in a country during a year.
• GDP measures only those goods and services made
within a country and therefore does not include profits
from companies’ overseas operations; it does include
profits earned by foreign companies within the country
being measured.
• Another important indicator of a nation’s
economic health is the relationship between
its spending and income (from taxes).
• When a nation spends more than it takes in
from taxes, it has a budget deficit.