Chapter 01 – Taking Risks and Making Profits within the Dynamic Business Environment
1. Businesses provide goods, jobs, and services to others.
2. Businesses seek to earn a profit by providing goods and services to others.
3. Revenue is the amount a business earns above and beyond what it spends for expenses
and costs.
4. Profit is the amount of money a business earns above and beyond what it spends for
salaries and other expenses.
5. Since all businesses make a profit, starting a business is not risky.
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6. An entrepreneur risks time and money to start and manage a business.
7. If a business’s costs and expenses are greater than its revenue, it will suffer a loss.
8. Profits of a business include the salaries paid to its employees.
9. Revenue is the total amount of money a business takes in during a given period by selling
goods and services.
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10. Risk is the chance an entrepreneur takes of losing time and money on a business that may
not prove profitable.
11. The United States has one of the highest standards of living in the world.
12. The term “standard of living” refers to the amount of debt people can incur on a given
income.
13. Health care availability, a clean environment, and good schools all contribute to a high
quality of life.
14.
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Maintaining a high quality of life requires the combined efforts of businesses, nonprofit
organizations, and government agencies.
15. Stakeholders are all the people who stand to gain or lose by the policies and activities of a
business.
16. Stakeholders include customers, employees, stockholders, suppliers, dealers, bankers,
government officials and environmentalists.
17. Outsourcing means selling goods and services to people in other countries.
18.
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Outsourcing has caused many complications in many states where jobs have been lost to
overseas companies.
19. Insourcing refers to the practice of global companies setting up design and production
facilities in the United States.
20. The knowledge and skills learned in business courses are seldom relevant to students who
work for nonprofit organizations or volunteer groups.
21. Businesses and nonprofit organizations often strive to accomplish the same objectives.
22.
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Nonprofit organizations use financial gains to meet stated social or educational goals of
the organization rather than personal profit.
23. Social entrepreneurs are people who start and manage organizations that are not-for-
profit. Their mission is to help others improve their quality of life.
24. The only real purpose of a business is to make money for entrepreneurs.
Feedback: Businesses don’t just make money for entrepreneurs. Businesses provide all of us
with necessities such as food, clothing, housing, medical care, and transportation, as well as
other goods and services that make our lives easier and better.
25. The only way a firm can increase its profits is to increase its sales revenue.
Feedback: Revenues minus expenses = profits. A firm with stable or even declining sales
might be able to improve profits by reducing expenses.
26.
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The amount of profit or loss earned by a business can be found by subtracting the firm’s
expenses from its revenues.
Feedback: Revenues minus expenses = profits.
27. Nonprofit organizations are similar to businesses in that they often provide goods and
services that satisfy the needs of society.
Feedback: Businesses are not the only organizations that produce goods and services.
Government agencies, public schools, and charities such as the Salvation Army provide goods
or services, but are classified as nonprofit organizations since there is no profit motive.
28. Unlike businesses, employees of nonprofit organizations are not required to learn the
business skills of information management, marketing, or financial management.
Feedback: In order to achieve their goals, nonprofit organizations need people with many of
the same skills required by for profit businesses. For example, even though nonprofit
organizations do not seek a profit, they still may deal with large sums of money and must
keep financial records. Nonprofit organizations also need people with leadership, marketing,
and information management skills.
29.
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Business decisions should consider the interests of customers, employees, suppliers,
government leaders, and stockholders.
Feedback: All stakeholders stand to gain or lose by the policies and activities of a business. A
major challenge of businesses is to improve profits while trying to accommodate the interests
of all stakeholders.
30. By balancing the demands of customers and stockholders, businesses satisfy the
demands of all stakeholders.
Feedback: Customers are interested in benefiting from the products and/or services produced
by businesses. Stockholders are usually profit oriented. Stakeholders encompass customers,
suppliers, employees, stockholders, government organizations, environmental groups, and
other organizations that are somehow affected by the business in question.
31. An effort to please one group of stakeholders eventually pleases all stakeholders.
Feedback: Balancing the demands of all stakeholders is a tremendous challenge for
organizations. Tradeoffs are common. Benefiting one group may have a negative impact on
another group of stakeholders. For example, the need to stay competitive may call for
outsourcing jobs to other countries, but that might do great harm to the community because
many jobs would be lost.
32.
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Insourcing creates new jobs, and helps offset the number of jobs being outsourced.
Feedback: Many companies are setting up design and production facilities here in the United
States. For example, Hyundai is doing design and engineering work in Detroit and producing
cars in Montgomery, Alabama. Such insourcing creates many new jobs, and helps offset the
number of jobs being outsourced.
33. Robin has started her own Internet consulting firm. While she recognizes the risks
involved in operating a business, she is still willing to invest her time, effort, and money
in hopes of earning a profit. Robin is an example of an entrepreneur.
Feedback: An entrepreneur is someone who risks time and money to start and manage a
business
34. Backstreet Books, an eclectic bookstore on a large college campus generated total
revenues of $15 million while incurring expenses of $12 million. During the year
Backstreet Books earned a profit of $3 million.
Feedback: The profit a firm earns is found by subtracting total costs from total revenue.
35.
Chapter 01 – Taking Risks and Making Profits within the Dynamic Business Environment
Since businesses strive to earn a profit, their owners benefit at the expense of the rest of
society.
Feedback: In the pursuit of profit, businesses create jobs, produce goods and services that
contribute to a higher standard of living, and pay taxes that support important government
programs. Thus, businesses benefit others in society as well as their owners.
36. John earned the same amount of money this year as he did last year. Thus, his standard of
living must be the same as it was last year.
Feedback: The standard of living refers to the amount of goods people can buy with the
money they have. There are two factors that determine the standard of living: a person’s
earnings and the price of goods and services. If the prices of goods and services have
increased or decreased over the past year, John’s standard of living will change even if the
amount of money he earns is the same.
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37. Susan quit her job in a big city to take a less stressful position in a small town located in
a scenic area. She earns less money at her new job and has had to cut back on her
purchases of material goods, but she has more leisure time and really enjoys the clean air
and scenic beauty of her new home. Susan has accepted a lower standard of living in order
to enjoy a higher quality of life.
Feedback: The standard of living is the amount of goods and services people can buy with the
money they have. The quality of life is a broader measure of social welfare that refers to the
general well being of a nation’s citizens. If citizens benefit from a cleaner environment, more
political freedom, or more leisure time, their overall welfare (quality of life) may improve
even if they are not able to purchase more goods and services with their incomes.
38. Political freedom, quality education, access to health care, and a clean environment are all
factors that contribute to an improved quality of life.
Feedback: The quality of life focuses on the general well-being of a society, and includes
factors such as freedom, security, leisure time, and other factors beyond the goods and
services people can buy with their incomes.
39.
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People living in San Jose, CA on average earn more money than people living in St.
Louis, MO. The citizens of San Jose enjoy a higher standard of living than the citizens of
St. Louis.
Feedback: The standard of living depends on the price level as well as the income people
earn. For example, as our text indicates, people in Germany and Japan may earn more money
than Americans, but they have a lower standard of living because the prices they pay for
goods and services are higher.
40. The major difference between businesses and nonprofit organizations is that only
businesses can increase the standard of living, while only nonprofit organizations can
improve the quality of life.
Feedback: The standard of living refers to the amount of goods people can buy with their
money. Both businesses and nonprofit organizations can produce and distribute goods and
services, so they both affect the standard of living. Similarly, both businesses and nonprofit
organizations can have an impact on the physical environment, health care, and other
determinants of the quality of life.
41.
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A charitable organization, such as the American Red Cross or Salvation Army, is
classified as a for-profit organization.
Feedback: A charitable organization is not classified as a for-profit organization since it does
not seek a profit. Charities are classified as nonprofit organizations.
42. It was reported by a Beijing newspaper that China succeeded in improving its people’s
standard of living and establishing a relatively affluent society in the past seven years.
This report clearly indicates that both income levels and the price of goods and services
rose significantly during that time period.
Feedback: If the people of China improved their standard of living, this means that they can
purchase more with their current income than they were able to do in the past. In order to
purchase the same or more goods than they were able to purchase in the past, the price of
goods and services either stayed the same or decreased; or the price of goods and services
stayed the same, but income levels rose.
43. Starting a business is a riskier path toward business success than working your way up
the ranks of a large business.
44.
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Working as an entrepreneur is the only way to succeed in business.
45. Paid vacations and health care insurance are among the benefits provided by the
government to entrepreneurs.
46. Women currently own less than ten percent of all businesses.
47. The number of businesses owned by Asians, Hispanics, and Native Americans has grown
dramatically.
48.
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Land, sometimes called natural resources, is the most critical factor of production in
explaining why some countries are poor while others are rich.
49. Money is one of the five factors of production that contribute to the creation of wealth.
50. Tools, machinery, and buildings are examples of capital resources.
51. The major advantage rich nations have over poor nations is an abundance of land and
labor.
52.
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Entrepreneurship is one of the five factors of production that contribute to the creation of
wealth.
53. Business consultant Peter Drucker said that the most important factor of production is
knowledge.
54. Most business experts agree that entrepreneurship and the effective use of knowledge are
the most important contributors to the creation of wealth.
55. The business environment refers to the surrounding factors that either help or hinder the
development of businesses.
56.
Chapter 01 – Taking Risks and Making Profits within the Dynamic Business Environment
Jing is a recent U.S. college graduate who is interested in starting an import tea business.
If she follows through with her plans, she will be a pioneer, because only a handful of
women choose to start businesses in the U.S.
Feedback: During the past two decades there has been a rapid increase in the number of
women-owned businesses, increasing from about 3 million firms in 1980 to over 10.6 million
women-owned firms today. Women currently own over a third of all businesses.
57. Countries with an inadequately trained work force and few entrepreneurs often achieve
the highest levels of income by relying on a large number of workers.
Feedback: Poor countries often have plenty of labor and access to adequate capital. However,
the two factors of production that are most critical in generating national wealth are
entrepreneurship and knowledge. A country found lacking in these will experience relatively
low levels of income.
58. If they wish to create more wealth, poor nations should focus on policies that increase
entrepreneurship and the effective use of knowledge.
Feedback: Poor nations often have plenty of labor and land, as well as access to capital.
However, the absence of entrepreneurship and knowledgeable workers seems to be the reason
that most poor countries remain poor.
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59. To realize his passion, Alex recently opened Original Tunes, Inc., a small state of the art
recording studio in Nashville, TN. He probably could have set-up shop in several major
cities, but Nashville offered him the two most important factors that he learned in business
school would enhance the creation of wealth: labor and political freedom.
Feedback: According to leading economists and business analysts like Peter Drucker,
Entrepreneurship and knowledge are the two key factors that enhance the creation of wealth.
60. Greg recently completed his college degree in construction management. He is heading
to Mexico City to start a business developing apartment dwellings. After researching
several potential areas, he chose Mexico City due to its high population. Greg felt that this
factor would create a large labor pool, the most important of the five factors of
production.
Feedback: While labor is included in the factors of production, entrepreneurship and
knowledge are considered the most important factors in the creation of wealth.
61.
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Jared is supposed to be cramming for finals but his mind keeps wandering to the
Colorado slopes. Several years ago, his Uncle Mike made it big and now owns a ski lodge
just north of Aspen. He promised Jared a management trainee position and the opportunity
to buy into the company by contributing a portion of his paycheck each month back into
the business. As he dreams about the opportunity to be his own boss, reality bites as Jared
scans his business book and reads, “freedom to succeed also means freedom to fail.”
Feedback: Entrepreneurship promises its participants the opportunity for great success;
however the potential of failure also looms in the process.
62. Taxes and government regulations are part of the economic and legal environment in
which businesses operate.
63. High taxes and government restrictions help to encourage entrepreneurs by providing
greater incentives for people to work hard and create profit.
64.
Chapter 01 – Taking Risks and Making Profits within the Dynamic Business Environment
One of the best things the governments of developing countries can do to increase wealth
is to minimize interference with the free exchange of goods and services.
65. In countries where businesses cannot enter into binding contracts, business owners
assume additional risk.
66. In an effort to increase wealth and their country’s standard of living, many governments
are taking over major industries and operating them as nonprofit organizations.
67. Corruption and illegal activities are expected in a capitalist system and can be beneficial.
68.