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K E Y T E R M S A N D D E F I N I T I O N S
budget deficit The condition in which a nation spends more than it takes in from
taxes.
business Individuals or organizations who try to earn a profit by providing
products that satisfy people’s needs.
depression A condition of the economy in which unemployment is very high,
consumer spending is low, and business output is sharply reduced.
economic contraction A slowdown of the economy characterized by a decline in spending
and during which businesses cut back on production and lay off
workers.
economic expansion The situation that 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 system A description of how a particular society distributes its resources to
produce goods and services.
economics The study of how resources are distributed for the production of
goods and services within a social system.
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human resources The physical and mental abilities that people use to produce goods
and services; also called labor.
inflation A condition characterized by a continuing rise in prices.
mixed economies Economies made up of elements from more than one economic
system.
monopolistic competition The market structure that exists when there are fewer businesses
than in a pure-competition environment and the differences
among the goods they sell are small.
monopoly The market structure that exists when there is only one business
providing a product in a given market.
natural resources Land, forests, minerals, water, and other things that are not made
by people.
pure competition The market structure that exists when there are many small
businesses selling one standardized product.
recession A decline in production, employment, and income.
socialism An economic system in which the government owns and operates
basic industries, but individuals own most businesses.
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C. The goal of business is to earn a profit, the difference between what it
costs to make and sell a product and what a customer pays for it.
1. Businesses have a right to keep their profits as they choose—within
legal limits—because profit is the reward they take in providing
which in turn provides money that is reinvested in the economy.
3. Nonprofit organizations do not have the fundamental purpose of
earning profits, although they may provide goods or services.
4. Both nonprofit organizations and businesses require management
skills, marketing expertise, and financial resources, and they must
abide by laws and regulations, act in an ethical and socially
social changes.
5. Earning a profit requires:
a. Management skills to plan, organize, and control the activities
of the business and to find and develop employees so that it
changes.
6. To earn a profit, businesses need to produce quality products,
operate efficiently, and be socially responsible and ethical in dealing
with stakeholders—groups that have a stake in the success and
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LO 1-2
Identify the main participants and activities of business and explain
why studying business is important.
• The People and Activities of Business
• Why Study Business?
Key Terms:
D. The people involved in business activities are the owners, employees,
and customers. Note that owners, employees, and customers are the
main stakeholders, whereas the external environment consists of
1. Owners have to put up the resources to start a business. They can
manage the business themselves or have employees as managers.
goods and services.
E. The activities of businesses include primarily management, marketing,
and finance.
employees because managers coordinate employees’ actions to
achieve the firm’s goals, organize people to work efficiently, and
motivate them to achieve business goals.
using resources effectively and efficiently in a business.
3. Owners and finance are in the same part of the circle (Figure 1.1)
and using it effectively.
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F. Why Study Business?
1. It can help you develop skills and acquire knowledge to prepare you
for your future career.
2. It can help you better understand the many activities necessary to
provide goods and services and appreciate the costs associated with
these activities.
3. Business activities help create jobs and contribute to the health of
local and global economies.
LO 1-3
Define economics and compare the four types of economic
systems
• The Economic Foundations of Business
o Economic Systems
o The Free-Enterprise System
Key Terms:
• Economics
• Natural resources
• Human resources
• Financial resources
• Economic resources
• Communism
• Socialism
• Capitalism (free
enterprise)
• Free-market system
• Mixed economies
II. The Economic Foundations of Business
A. Economics is the study of how resources—or factors of production—are
distributed for the production of goods and services within a social
system.
1. Natural resources are land, forests, minerals, water, and other
things not made by people.
2. Human resources are the physical and mental abilities that people
use to produce goods and services.
3. Financial resources, or capital, are the funds used to acquire the
natural and human resources needed to provide products.
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B. An economic system describes how a society distributes its resources to
produce goods and services that satisfy the needs of its people. All
economic systems must answer three questions:
1. What goods and services and how much of each will satisfy the
needs of the consumer?
2. How will the goods and services be produced? Who will produce
them and with what resources?
3. How are the goods and services to be distributed?
C. Types of economic systems found in the world: communism, socialism,
and capitalism (Table 1.1).
1. Karl Marx described communism as a society in which the people,
a. Central government planning determines what products will
satisfy citizens’ needs, how they are produced, and how they are
distributed.
b. In theory, communism appears efficient and equitable, but in
practice, communist economies have been marked by low
standards of living, critical shortages of consumer goods, high
prices, and little personal freedom.
c. Many countries have turned away from communism and begun
to experiment with economic systems governed by supply and
demand rather than by central planning.
and the availability of resources.
b. Most socialist nations are democratic and recognize basic
individual freedoms.
c. Socialist economies profess egalitarianism—equal distribution of
income and social services.
d. Taxes and unemployment are generally higher in socialist
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3. Capitalism, or free enterprise, is an economic system in which
individuals own and operate most of the businesses that provide
goods and services (U.S., Canada, & Japan).
a. Competition, supply, and demand determine which goods and
services are produced, how they are produced, and how they
are distributed.
b. There are two forms of capitalism:
1) Pure capitalism, or a free-market system, exists when all
economic decisions are made without government
intervention. Adam Smith, the father of capitalism, believed
that the invisible hand of competition would best regulate
the economy.
4. Modified capitalism differs from pure capitalism in that the
government intervenes and regulates business to a certain extent.
a. One way of regulating business is through laws.
c. Importance of government’s role in economy.
5. Mixed economies have elements from more than one economic
system. No country practices a pure form of communism, socialism,
b. Many communist and socialist countries apply free-enterprise
principles – including China and Russia.
c. Free enterprise allows a company to succeed or fail on the basis
of market demand.
D. The free-enterprise system provides an opportunity for a business to
succeed or fail on the basis of market demand. A number of basic
2. Individuals and businesses must have the right to earn and use
profits, within constraints of society’s laws.
3. Individuals and businesses must have the right to make decisions
that determine how the business operates, within the limits of the
law.
4. Individuals must have the right to decide what career to pursue,
where to live, what goods and services to purchase, and more.
Businesses can decide where to locate, what goods and services to
produce, what resources to use in the production process, and so
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LO 1-4
Describe the role of supply, demand, and competition in a free-
enterprise system.
• The Forces of Supply and Demand
• The Nature of Competition
Key Terms:
• Demand
• Supply
• Equilibrium price
• Competition
• Pure competition
• Monopolistic
competition
• Oligopoly
• Monopoly
• Economic expansion
• Inflation
• Economic contraction
• Recession
• Unemployment
• Depression
E. The Forces of Supply and Demand (Figure 1.2)
1. Demand is the quantity of goods and services that consumers are
willing to buy for different prices at a specific time. Consumers will
usually buy more of an item as its price falls.
2. Supply is the quantity of goods and services that businesses are
willing to sell for different prices at a specific time. Usually, sellers are
willing to sell more of a product at higher prices.
3. An equilibrium price is the point at which supply and demand curves
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F. The Nature of Competition
1. Competition is the rivalry among businesses for consumers’ dollars.
It is a vital element of free enterprise.
2. Free-enterprise systems offer four types of competitive
environments:
a. Pure competition exists when there are many small businesses
selling one standardized product. The trade in agricultural
b. Monopolistic competition exists when there are fewer
businesses than in a pure competition system and the differences
between the goods they sell are small. Aspirin, soft drinks, and
vacuum cleaners are examples.
c. An oligopoly exists when very few businesses sell a product, and
it is expensive for new firms to enter the marketplace. The airline
industry is an example.
2. Economic contraction occurs when spending declines.
a. It can lead to recessions, which are marked by a decline in
prices down, a condition known as deflation.
c. A depression is a severe recession in which unemployment is
sharply reduced.
3. Economies constantly expand and contract in response to changes in
consumer, business, and government spending.
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LO 1-5
Specify why and how the health of the economy is measured.
• Economic Cycles and Productivity
Key Terms:
• Gross domestic product
(GDP)
• Budget deficit
4. Countries measure the state of their economies to determine
whether they are expanding or contracting and whether corrective
action is necessary to minimize fluctuations.
a. Gross domestic product (GDP) is the sum of all goods and
services produced in a country during a year (Figure 1.4 & Table
1.2)
1) GDP measures only those products made within a country,
not profits earned from companies’ overseas operations. It
does include profits earned by foreign companies within the
country being measured.
2) It also does not take into account the sum relative to the
country’s population; GDP per capita does.
b. Budget deficits occur when a nation spends more than it takes
in from taxes. The national debt exceeded $16 trillion in 2013.
imports. If the balance is negative, as it has been since the mid-
1980s, it is called a trade deficit and is generally viewed as
services purchased for consumption by typical urban
households.
c. Per capita income: Indicates the income level of “average”
Americans. Useful in determining how much “average”
consumers spend and how much money Americans are earning.
d. Unemployment rate: Indicates how many working age Americans
are not working who otherwise want to work. (Americans who do
not work in a traditional sense, such as
househusbands/housewives, are not counted as unemployed.)
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LO 1-6
Trace the evolution of the American economy and discuss the role
of the entrepreneur in the economy.
• The American Economy
o A Brief History of the American Economy
o The Role of the Entrepreneur
o The Role of Government in the American Economy
o The Role of Ethics and Social Responsibility in
Business
• Can You Learn Business in a Classroom?
Key Terms:
• Entrepreneur
III. The American Economy
A. A Brief History of the American Economy
1. The Early Economy
a. Colonists established an agricultural economy
b. Most people were self-sufficient and produced almost
everything they needed
2. The Industrial Revolution
a. Machines and job specialization increased speed and efficiency
a. Industrialization brought about the manufacturing economy,
which was devoted to producing goods and services
4. The Service and New Digital economy
a. As quality of life improved, people had enough income to hire
on technology and digital media that provide:
1) Smartphones
2) Social networking
3) Virtual worlds
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B. The Role of the Entrepreneur
1. An entrepreneur risks his or her wealth, time, and effort to develop
for profit an innovative product or way of doing something.
2. The free enterprise system provides the conditions for
entrepreneurs to succeed.
3. Early American entrepreneurs were often inventors and captains of
industry (Thomas Edison (light bulb and record player), John D.
America and Gulf Oil), Henry Ford (automobile industry), and J.P.
Morgan (financial institutions)).
4. Modern American entrepreneurs are frequently changing business
practices with innovative technologies (Bill Gates (Microsoft
software) and Fred Smith (FedEx)).
2. Federal, state, and local governments sometimes intervene with
regulations aimed at promoting competition and consumer safety.
measure the economy’s health and intervene when economic health
is at stake.
D. The Role of Ethics and Social Responsibility in Business
by society to define appropriate and inappropriate conduct in the
workplace. In many cases these standards have been codified as
laws.
stakeholders.
IV. Can You Learn Business in a Classroom?
A. Absolutely! To be successful in business, you need knowledge, skills,
B. This book can help students gain some of the knowledge, develop skills,
and gain experience needed to be successful in business.
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LO 1-7
Evaluate a small-business owner’s situation and propose a course
of action.
Key Terms:
V. Solve the Dilemma—Mrs. Acres Homemade Pies
A. Produces specialty pies and sells them in local supermarkets and family
restaurants
B. In each of the first six months sold 2,000 pies for $4.50 each netting
$1.50 profit/pie
C. Had problems keeping up with demand.
1. To meet demand expanded operations, borrowed money, and
increased staff
2. Production and sales increased to 8,000 pies/month, and profits
soared to $12,000 per month
D. Shelly has several options:
1. Maintain current production levels and raises prices
E. Discussion questions:
1. Explain and demonstrate the relationship between supply and
demand for Mrs. Acres Homemade Pies.
When Shelly Acres started selling her pies, she had to find her own
restaurants and supermarkets in her products. As demand increased,
Shelly started producing more pies to meet this demand. At the
moment, she cannot supply all the demand. A way to decrease this
demand is to increase prices. She can also increase the production
level to meet the demand.
to lose her specific know-how by providing it to the national
restaurant chain. It also implies that Shelly does not own her
business any longer.
3. What would you do in Shelly’s position?
Answers will vary, but students should be able to defend the choices
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B O X E D T E X T D I S C U S S I O N Q U E S T I O N S
ENTER THE WORLD OF BUSINESS—Competition Is Good for Business
Competition can be a strong motivator for business success. It is not uncommon for two or three key players
to dominate an industry. These players often make it harder for new entrants to come in. Sometimes the
1. Why is competition important in a capitalist economy?
2. Why do businesses need to focus on both primary competitors as well as newer entrants?
3. How was Red Bull able to become a major competitor in an industry dominated by two main players?
RESPONDING TO BUSINESS CHALLENGES—Swatch Works to Restructure Company, Supply Less Parts to
Competition