Introduction to Business

H. James Williams

• Publisher: Collins Reference
• Year: 2011
• ISBN:
  9780062115171
• Topic: Education
• Subtopic: Education Teaching Methods

The Collins College Outline for Introduction to Business provides students with a detailed overview of the basic business studies curriculum. This guide covers business foundations, the global economy, company structure and formation, personnel and production management, labor-management relations, marketing concepts and logistics, statistical analysis, financial strategies, careers in business, and much more. Completely revised and updated by Dr. H. James Williams, Introduction to Business includes practical "test yourself" sections with answers and complete explanations at the end of each chapter. Also included are bibliographies for further reading, as well as charts, graphs, and illustrations.

The Collins College Outlines are a completely revised, in-depth series of study guides for all areas of study, including the Humanities, Social Sciences, Mathematics, Science, Language, History, and Business. Featuring the most up-to-date information, each book is written by a seasoned professor in the field and focuses on a simplified and general overview of the subject for college students and, where appropriate, Advanced Placement students. Each Collins College Outline is fully integrated with the major curriculum for its subject and is a perfect supplement for any standard textbook.

Part 1: The Foundations of Business in the Global Economy

CHAPTER 1

Understanding Basic Economics

Economics is the study of rational human behavior in trying to meet basic wants and needs. This is especially important because humans live in an environment of limited resources to fulfill those wants and needs. The better you understand economics the better you will be able to satisfy those basic wants and needs. In the final analysis, economics focuses on how individuals and nations make choices, in a world of limited resources, to meet basic wants and needs. Business is one important component of economics.

WHAT IS “BUSINESS”?

A business is an organized effort of individuals to produce and sell goods and services for a profit. Businesses vary in size, as measured by number of employees or by sales volume. Large companies such as ExxonMobil and General Motors count their employees in the hundred thousands and their sales revenues in the billions. But most (98 percent) of the businesses in the United States are small businesses—independently owned and operated and having fewer than twenty employees. The key people responsible for creating businesses, either as a result of their original ideas or willingness to bear the inherent risks—or both—are called entrepreneurs.

All businesses, whether they employ one person working at home, 100 working in a retail store, 10,000 working in a plant or factory, or 100,000 working in branch offices nationwide, share the same basic definition and are generally organized for the same primary purpose: to earn profits. Profit is the money that remains after the costs of a business (expenses and taxes) are subtracted from the revenue received from the sales of goods and services.

Goods and Services

The source of a business’s revenues and, therefore, of its profits, is its goods and services. Goods are tangible items; that is, products such as automobiles, shoes, iPods, computers, and cellular phones. Services are intangible items, such as the professional advice and assistance provided by lawyers, doctors, electricians, accountants, and hairdressers. Consumers and businesses will buy only those goods and services they need or want. Therefore, to be successful, businesses must provide goods and services that satisfy consumers’ and businesses’ needs and wants. Consumers need shoes and will buy shoes. Consumers may not need expensive high-tech sports shoes, but they may purchase them if they want them. In the same way, businesses need manufacturing and other materials to produce goods and services.. Thus, identifying consumer and business needs and wants are key factors in business success.

Factors of Production

All goods and services are produced from five specific resources: land, labor, capital, information resources, and entrepreneurs. These resources, known as the factors of production, are the basic elements a business uses to produce goods and services.

Land

Land includes not only real estate but the resources associated with land—water, minerals, and timber.

Labor

Labor, sometimes called human resources, refers to the mental and physical skills and abilities of employees. Labor includes all the employees, from top-level executives to truck drivers, who produce and distribute the goods and services a business sells.

Capital

All businesses require capital (money) to operate. Businesses need capital to buy buildings, machinery, and tools, all of which are also considered capital. In addition, they need capital to hire labor, distribute finished products, and so on.

Information Resources

Information resources supply the facts, intelligence, and knowledge needed to manage and operate a business. Because information resources enable managers to control and to effectively use all other resources, its value as a factor of production has increased greatly in recent years. In fact, the era in which we find ourselves is often referred to as the Information Age, emphasizing the importance of information access, processing, and utilization.

Entrepreneurs

Entrepreneurs are the risk-takers who create businesses; the persons who assemble all the other factors of production in an effort to start and operate a business and to make a profit. Entrepreneurs have vision. Recognizing consumers’ needs and wants for certain goods and services, they risk their time and financial resources, gather capital, and apply their information resources to create and manage a business enterprise.

AVAILABILITY OF RESOURCES

Economics is the study of how goods and services are produced, distributed, and consumed. In any society, the resources that are available are limited, and economics is concerned with (1) how one segment of society—that is, businesses—uses those limited resources to create and distribute goods and services; and (2) how the other segment of society—consumers, which includes individuals and other organizations, including other businesses—consume those goods and services.

Economics can be partitioned into two fields: macroeconomics and microeconomics. Macroeconomics addresses the broader, big picture of the behavior of the nation’s economy. Microeconomics has a narrower focus; it studies the behavior of individual organizations or people in particular markets. Business is applied economics. Moreover, because resources are limited, businesses must consider factors related to resource limitations, including scarcity and opportunity cost.

Scarcity

All resources, those related to humans as well as those related to nature, are limited in some ways. Here are several examples: (1) skilled labor may not be plentiful in a particular location; (2) capital is not free; (3) some natural resources, such as timber, are renewable, but others, such as oil, are nonrenewable. The scarcity of resources forces society, including businesses, to make choices.

Opportunity Cost

Opportunity cost is the foregone value of the next best alternative use of a resource. For example, one important opportunity cost of your attending college is the money you could otherwise earn if attending college prevented you from working full-time. You cannot receive the wages or salary (e.g., $12,000) you could earn from the alternative use of selling your services to an employer if you were not in college. Consequently, the total cost of your education is the actual cost (tuition, fees, and room and board), plus the $12,000 opportunity cost. Similarly, if you spend your last $100 dollars on an outfit, you cannot spend that $100 on another desirable product, say a pair of $100 shoes. The opportunity cost of purchasing the outfit is the “value” (presumed to be at least $100) you would place on owning the pair of shoes. The total cost of purchasing the outfit is, then, $200 ($100 actual purchase price plus the $100 opportunity cost). Note that every decision includes an opportunity cost component, yet few decision-makers explicitly consider the opportunity cost when considering the total cost of a purchase.

A business that purchases, for instance, new production-line equipment instead of hiring additional employees, must consider the opportunity cost (i.e., the value of that alternative use for that particular resource). Consequently, either explicitly or implicitly, opportunity cost shapes every decision.

ECONOMIC SYSTEMS

Every society must answer these three economic questions.

1. What will be produced? What goods and services will be produced, and in what quantity will each be produced?

2. How will these goods and services be produced? Who will produce these goods and services, and which resources will be used to produce them?

3. For whom will these goods and services be produced? Who gets what?

How a society answers these economic questions determines its economic system—that is, its methods for distributing resources to meet the needs of its people. Keep in mind that an economic system includes the production and distribution of goods and services, while a political system, for example, comprises the organization of government, ideology, conduct of public affairs, and the pursuit of national interests.

Three economic systems worth noting are the market economy, the planned economy, and the mixed economy.

• In a market economy, individuals control all or most of the factors of production and make all or most of the production decisions. The market economy (capitalism) is also called the free-market or free-enterprise system.
• In a planned economy (e.g., a communist system), the government controls all or most of the factors of production and makes all or most production decisions.
• In a mixed economy (e.g., a socialist system), as its name suggests, the system shares some of the features of both the market and planned economies.

Most countries do not rigidly follow one economic system but, rather, tend to mix to varying degrees some features of communism, socialism, and capitalism. For example, Britain, France, India, and other free-enterprise societies incorporate a degree of socialism. Most of the remaining communist societies (e.g., China) have incorporated elements of free-enterprise systems into their economies.

Capitalism

Capitalism is a market economy. It relies on free markets, not on government, to determine what, how, and for whom goods and services will be produced. In a market economy, businesses are owned by individuals and are controlled by owners or by managers who are accountable to the owners. The profits flow to the owners and investors. Market economies place a high premium on entrepreneurship. The economy is driven by the profit motive, the desire to maximize profits.

Socialism

In a socialist economy, the government controls key industries such as transportation, communications, banking, utilities, an...