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Business: A Changing World, 4/e
O.C. Ferrell, Colorado State University
Geoffrey Hirt, DePaul University

The Dynamics of Business and Economics



A business is an individual or organization that tries to earn a profit by providing products that satisfy people's needs. The outcome of a business's efforts is a product, a good, or service that has both tangible and intangible characteristics that provide satisfaction and benefits. Most people associate the word product with tangible goods, such as an automobile, but a product can also be a service, which results when people or machines provide or process something of value to customers, or an idea, such as a solution to a problem.

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. 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. Not all organizations are businesses. Nonprofit organizations may provide goods and/or services but do not have the fundamental purpose of earning profits.

To earn a profit, a business needs management skills to plan, organize, and control its activities and to find and develop employees so that it can make products that consumers will buy. It needs marketing expertise to determine what products consumers need and want, and to develop, manufacture, price, promote, and distribute those products. It also needs financial resources and skills to fund, maintain, and expand its operations. Businesspeople must abide by laws and regulations; act in a socially responsible manner; and adapt to economic, technological, and social changes. All organizations, even those without a profit objective, engage in management, marketing, and finance activities to help reach their goals.

Figure 1.1 showed the people and activities involved in business. Owners put up the resources--money or credit--to start a business. Employees are responsible for the work that goes on within a business. Owners can manage the business themselves or hire managers to accomplish its tasks. A business's major role is to satisfy its customers. Figure 1.1 also indicated that forces beyond an organization's control--such as legal and regulatory forces, the economy, competition, technology, social responsibility and ethics--all affect operations.

Management involves coordinating employees' actions to achieve the firm's goals; organizing people to work efficiently; motivating them to achieve the business's goals; and acquiring, developing, and using resources effectively and efficiently. In essence, managers plan, organize, staff, and control the tasks required to carry out the work of the company. Marketing includes all the activities designed to provide goods and services that satisfy consumers' needs and wants. Marketers gather information to determine what customers want and then use promotion--advertising, personal selling, sales promotion, and publicity--to communicate the benefits and advantages of their products. Finance refers to activities concerned with obtaining money and using it effectively.

Business is important because it provides both employment for most people and the vast majority of products consumers need to survive and enjoy life. Additionally, business activities and skills occur in nonprofit organizations. Learning about business will help you prepare for your future career and can help you be a well-informed member of society.


Economics is the study of how resources are distributed for the production of goods and services within a social system. Land, forests, minerals, water, and other things that are not made by people are natural resources. Human resources, or labor, refers 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. These resources are also celled factors of production because they are used to make goods and services.

An economic system describes how a particular society distributes its resources to produce goods and services. Economic systems handle the distribution of resources in different ways, but all economic systems must address three important issues: (1) What goods and services and how much of each will satisfy consumers' needs? (2) How will goods and services be produced, and who will produce them and with what resources? and (3) How are the goods and services to be distributed to consumers? The basic economic systems found in the world today--communism, socialism, and capitalism--have fundamental differences in the way they address these issues.

Communism was first described by Karl Marx as an economic system in which the people, without regard to class, own all the nation's resources. In a communist economy, central government planning determines what goods and services will satisfy citizens' needs, how the goods and services will be produced, and how they will be distributed. Socialism is an economic system in which the government owns and operates basic industries, but individuals own most of the other businesses. Central government planning determines the answers to the three economic questions for basic products; the forces of supply and demand govern for other products. Capitalism, or free enterprise, is an economic system in which individuals own and operate the majority of businesses that provide goods and services. Competition, supply, and demand determine the answers to the three basic economic questions. In pure capitalism, or a free-market system, all economic decisions are made without government intervention; in modified capitalism, the government intervenes to a certain extent. Most nations operate as mixed economies, which have elements of more than one economic system.

The United States and many other countries have economies based on free enterprise, which depends on market demand and supply. For free enterprise to work and motivate participants to succeed, several rights must exist: the right to own private property, the right to earn and use profits, the right to make business decisions within the law, and the right of free choice.

The concepts of supply and demand drive the distribution of resources and products in a free-enterprise system. 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. Both can be shown graphically as supply and demand curves. Where a product's supply and demand curves intersect is the 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. Supply and demand change constantly in response to changes in economic conditions, availability of resources, and degree of competition. Critics of supply and demand say the system does not distribute resources equally.

Competition, the rivalry among businesses for consumers' dollars, is another vital element in free enterprise. Competition fosters efficiency and low prices by forcing producers to offer the best products at the most reasonable price. 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 and cotton. Producers cannot differentiate their products, so prices are determined by 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 are small. Businesses have some power over the price they charge because they can make consumers aware of product differences through advertising. An oligopoly exists when there are very few businesses selling a product. Nonetheless, the prices charged by different firms stay fairly close because a price cut or increase by one company will usually be matched by its competitors. A monopoly exists when there is just one business providing a product in a given market. Monopolies include government-regulated utilities and businesses that hold patents for a specified number of years.

Economies experience cycles of expansion and contraction, often in response to changes in consumer, business, and government spending, as well as war or natural disaster. 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 spurs employment. However, rapid expansions of the economy may result in inflation, a continuing rise in prices. Economic contraction occurs when spending declines. Businesses cut back on production and lay off workers, slowing down economic growth. Contractions lead to recession--a decline in production, employment, and income. Unemployment refers to the percentage of the population that wants to work but is unable to find jobs. A severe recession can become a depression, in which unemployment is very high, consumer spending is low, and business output is sharply reduced.

Countries measure the state of their economies to determine whether they are expanding or contracting and if corrective action is necessary to minimize the fluctuations. One common measure is 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. The United States has run a budget deficit for many years.


The United States is a mixed economy based on capitalism. The answers to the three economic questions are determined by competition, supply, and demand, although the federal government intervenes in economic decisions to a certain extent.

The United States was primarily an agricultural economy at first. As the nation grew, people began to utilize its natural resources for manufacturing. Under the domestic system, farm families turned raw materials into clothes and household goods. The Industrial Revolution brought about new technologies and the development of factories, in which work was specialized. The railroad helped expand the American economy. Industrialization brought increased prosperity, and the United States became a manufacturing economy--one devoted to the manufacture of goods and services rather than the production of agricultural commodities. Marketing made businesses more responsive to the needs of consumers. Americans achieved very high standards of living, and the nation gradually became a service economy--one devoted to the production of services that make life easier for consumers.

An entrepreneur is an individual who risks his or her wealth, time, and effort to develop for profit an innovative product or way of doing something. The free-enterprise system provides the conditions necessary for entrepreneurs to succeed. Entrepreneurs are constantly changing American business practices with new technology and innovative management techniques.

The American economic system is best described as modified capitalism because the federal (as well as state and local) government regulates business to a certain extent to preserve competition and protect consumers, employees, and the environment. Additionally, government agencies such as the U.S. Department of Commerce measure the health of the economy and, when necessary, take steps to minimize the disruptive effects of economic fluctuations and reduce unemployment.


To be successful in business, you need knowledge, experience, skills, and good judgment. This book will help you gain some of the knowledge you need. The examples, boxes, and case within each chapter describe experiences to help you develop good business judgment. Skill-building exercises and dilemmas will help you develop skills that may be useful in your future career. Good judgment is based on knowledge, experience, personal insight, and understanding, so you'll need more courses in business, along with some practical experience, to help you develop the special insight necessary to put your personal stamp on knowledge as you apply it.