Week 1 Presentation 1 script
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BU106
Introduction to ManagementWeek One – Presentation 1
Business and Economic Systems
Welcome to today’s presentation; we’re going to discuss various economic systems that businesses operate in and the business cycle.
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The first thing we are going to talk about is business and some of the factors involved in business.
The term business is defined as all of the activities undertaken by individuals in order to supply goods and services to society to make business owners a profit. These goods and services are supplied in accordance with the demand of consumers.
There are different objectives for businesses; as business students we study businesses that are conceived for profit. There are businesses that are not-for-profit thatprovide services for the betterment of society instead of for profit.
For the sake of our course of study, we will be concentrating on those businesses that are formed in order to make a profit.
Businesses provide both goods and services to consumers; there are accounting companies, legal firms, tax preparation, and real estate companies that provide services while others provide more tangible goods such as electronics or food.
What the business sells is determined by what owners believe consumers demand. Business owners have an obligation to meet demand, if there is no demand for a product, a business won't be profitable because nobody will buy their product.
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One of the most important objectives of a business is to make a profit. Profit is defined as revenue minus all expenses. Revenue is the money from the sale of goods and services. Expenses include costs of goods sold or cost of revenue such as raw material and direct labor, administrative and selling expenses, and taxes. If a company doesn't make a profit, it will eventually deplete its resources and go bankrupt. Profit margin is a bit different, this is the percentage of sales dollar remaining after all costs and expenses are taken into account. These are expressed as a percentage. For example the gross profit margin would be the gross profit divided by sales or revenue expressed as a percentage. Profit margins may be increased by reducing expenses even if revenues remain stagnant or even decrease. Profit margins are utilized to determine the profitability of the company, regardless of profit levels. Two companies might have very different revenue and profit levels but if one company has lower profit levels, measured in dollars, but a higher profit margin, measured as a percentage, it means that they are more efficient in managing their expenses. Essentially they are keeping more of the money that they made.
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Publicly traded companies are owned by shareholders, and managers are tasked with maximizing share value and profit for the shareholders. This means they have an obligation to shareholders, or owners, to maximize profit. Small privately owned companies don't have to answer to shareholders, but if they do not make a profit for the owner,they will eventually go out of business. Share value is a function of profit as well as all other business decisions. The more profitable the company is, the more in demand shares for the company will be. This will increase to share price and value.
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Another objective of businesses is to maximize market share. Market share is measured as the number of customers the company has in relation to its competitors. In order to win more market share, a firm may lower its price attracting more customers. But it has to be careful that in doing so it does not reduce its revenue.
A company may also wish to grow and expand; they can do this by increasing sales and revenue or expanding into new markets. There are many ways to increase revenue; prices may be adjusted or the company may expand into new markets.
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Customer satisfaction is yet another objective of business because a satisfied customer is a repeat customer. Many shoppers will pay more for a product in order to shop at a business they know will provide them good customer service.
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Economics is a social science and is the study of the behavior of individuals, households, and businesses when it comes to the management and distribution of resources. It is how we make decisions as business owners or managers utilizing the data we have on hand. Many different economic principles have to be taken into account when making economic decisions. Price elasticity of demand and the law of demand dictate how we adjust prices in order to maximize revenue for example
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The science of economics is divided into two fields; microeconomics and macroeconomics.
Microeconomics emphasizes decision-making by individuals and businesses. For example, there are several microeconomic laws that dictate how much a retailer can charge for a good including the law of demand which tells us that price varies inversely with demand; as the price increases, demand decreases. Price elasticity of demand tells us how sensitive demand is to change in price; it compares the percentage change in demand with the percentage change in price.
Macroeconomics emphasizes factors such as national income, unemployment, inflation, government spending, and taxes. It is how we interpret the big picture in making decisions.
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There are questions that need to be answered when making economic decisions. And these questions are utilized in both micro and macroeconomics.
What goods and services will be produced, and in what quantities?
How will these goods and services be produced; what resources will be utilized in order to manufacture and distribute these goods and services?
For whom will these goods and services be produced? Who are the consumers of this output?
Who owns and controls the factors of production?
These are the questions that need to be answered when making economic decisions.
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At the firm level these answers decide what product the firm will produce. Apple started out making nothing but computers. Shortly thereafter they started manufacturing music players and soon after that, smart phones. They are now one of the number one manufacturers of smart phones. This is an example of the product decision. Who manufactures this product? This is the human resources utilized to produce goods. And who is going to buy these products? The is the market segmentation decision, who the company will target to buy their products. These are the questions being applied at the microeconomic level.
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At the macroeconomic level we answer these questions to determine our national output. What goods and services should be produced and how much? How and for whom should these goods be produced? This is the “guns and butter question.”Guns refers to investment in the military while butter refers to investment in the production of goods for the citizens. These are the questions being applied at the macroeconomic level.
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One of the economic questions is who owns and controls the factors of production.
There are several factors of production,or resources, including land, labor, capital, and entrepreneurship.
Land is defined as those natural resources such as land but also include things such as oil, water, and minerals. For example a company might own a diamond mine and this resource provides raw materials for the production of diamond jewelry.
Labor is defined as human resources; those employees that are needed tocreate, manufacture and distribute goods and services.
Capital refers to money, machinery, and equipment that companies utilize in their operations.
Finally, entrepreneurship refers to the organization of all of these resources. Anyone of these resources alone is not enough to create or distribute a product; it takes entrepreneurship to combine these resources in order to create a product or service.
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There are different types of economies.
Capitalism refers to an economy in which individuals own and run businesses for profit. However in running these businesses, they are not only benefiting themselves, they're benefiting others. This was what Adam Smith called the invisible hand in his book Wealth of Nations. As the business owner increases the size of profits, he or she is also increasing the size of their operations and this means providing more jobs to the community which benefits the economy.
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In a market economy, the business owner has some power in determining the price of their products however they do need to defer to market forces and economic law such as the law of demand and price elasticity. These laws determine what prices the business owner can reasonably set and still make a profit. If the price is too high and demand drops too low, profits will decrease.If the price is too low, demand will increase but profit may decrease. The market is comprised of consumers and they too have a hand in the prices the business owner may set; too high of a price will kill demand for goods and result in a loss of profit for the seller.
A mixed economy is one that exhibits many of the traits of capitalism but also some of the traits of socialism. The socialist economy is one in which many industries are controlled by the government. The United States is a mixed economy; we have many of the elements of a free market economy in which consumers decide what products will be sold only government does have a hand in what businesses provide.
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A command economy differs from a capitalist economy in that the government is who answers the economic questions.They are typically associated with socialist and communist governments.
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In the socialist government, key industries are controlled by the government and national goals dictate what is produced and how. The government decides what is produced instead of what consumers actually want. Unfortunately this may result in shortages of consumer goods. France and Sweden are examples of socialist countries.
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Communist governments were advocated by Karl Marx and is founded on the principles of communal ownership. Ideally, citizens own all economic resources and they would both contribute to and benefit from this economic model. North Korea and Cuba are communist countries utilizing command economies where the government answers the economic questions and has control of the economy
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The gross domestic product (GDP) is the largest measure of economic activity. It is defined as the value of all of the goods and services produced by a country.
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The gross domestic product is a simple equation which includes consumer spending, government spending, investment by businesses, and the trade balance. The trade balance is simply exports minus imports. This is something we will talk about later.
One of the biggest factors in the gross domestic product, and thus the economy, is consumer spending. When spending increases, it increases demand for goods which means someone has to manufacture, ship, and sell those goods or provide the services demanded by consumers, and this creates jobs.
The United States’ Gross Domestic Product for 2013 was $16.72 trillion making the United States the largest economy in the world except for the European Union which consists of 28 different countries.
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The business cycle refers to fluctuations in the economic activity of the country; this can be measuredby the changes in the Gross Domestic Product. Growth is defined as an increase in the Gross Domestic Product, while a recession is represented by two consecutive quarters of negative growth.
The graph shown is from the Federal Reserve. The vertical axis is measured in billions of dollars. It starts at $11,000 but since it is measured in billions, 11,000 billion dollars is actually $11.0 trillion.
You can see how the gross domestic product has grown from 2004 when it was nearly $12 trillion. The shaded area between 2008 and 2010 is a picture of the great recession, this is where the gross domestic product decreased in value. Since 2009, the gross domestic product has steadily increased to its current level of nearly $17 trillion.
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This chart is from the Bureau of Economic analysis and it shows quarterly growth of the gross domestic product. You can see from the graph, the second and third quarters of 2008, and the first and second quarters of 2009 showed negative growth in the gross domestic product. This is a graphical representation of the recession of 2008.
Our economy did not go into a depression; a depression is more severe than a recession, and there is a much larger decrease in business activity for a longer period of time.
Typically when the business cycle recesses there is negative economic growth. This recession is usually coupled with an increase in unemployment. While economic growth is characterized by an increase in jobs, negative growth is characterized by a decrease in jobs. Inflation is defined as an increase in prices over time, however, during the recession, unemployment typically increases and the market cannot tolerate an increase in prices. Therefore, during a recession, there may even be a period of deflation characterized by prices going down.
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We have discussed several important concepts regarding business including the definition of business, economics, different types of economies, the gross domestic product, and the business cycle and how these factors all fit together
This information will provide a foundation to understanding many of the concepts we will be covering later.
This concludes our presentation, thank you for joining me!
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References