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Test Bank for Foundations of Business 6th Edition by Robert J. Hughes, William M. Pride and Jack R. Kapoor
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TEST BANK FOR FOUNDATIONS OF BUSINESS, 6TH EDITION BY WILLIAM M. PRIDE, ROBERT J. HUGHES, JACK R. KAPOOR
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Foundations of Business
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CHAPTER 1Exploring the World of Business and Economics
Free enterprise is the system of business in which individuals are free to decide what to
produce, how to produce it, and at what price to sell it.
1.1. Your Future in the Changing World of Business
Why Study Business?
- For help in choosing a career
- To be a successful employee
Cultural (or workplace) diversity is the differences among people in a workforce owing
to a race, ethnicity, and gender.
- To Improve your management skills
(planning, organizing, leading and motivating, and controlling)
More skills required: interpersonal, analytic, technical and conceptual skills
- To start your own business
- To become a better informed customer and investor
2. Business
Business: the organized effort of individuals to produce and sell, for a profit, the goods and
services that satisfy society’s needs.
To be a business, it must: be organized, satisfy needs and earn a profit.
a. The organized effort of individuals
Organized business resources: material, human, financial, and informational.
- Material: raw materials, buildings, and machinery.
- Human: employees
- Financial: money to pay employees, purchase materials, and to keep the business
operating.
- Informational: tells managers how effectively other sources are being used and
combined.
Three types of businesses:
- Service businesses
- Manufacturing businesses (process various materials into tangible goods)
- Marketing intermediaries/ retailers (buy products from manufacturers and resell them).
e-business: the organized effort of individuals to produce and sell for a profit, the goods
and services that satisfy society’s needs through the facilities available on the internet.
b. Satisfying needs
- Ultimate aim of every firm: satisfy the needs of its consumers.
- When a business identifies and satisfies their customer’s needs, they are usually
successful.
c. Business profit
- sales revenue = expenses + profit
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, - If the expenses are greater than the sales revenue, it’s called a loss.
- Profit: what remains after all business expenses have been deducted from the sales
revenue.
- Stakeholder: all the different people or groups of people who are affected by an
organizations policies, decisions and activities.
- Employees, suppliers and lenders get paid before the business owners (profit is their
‘payment’). Therefore the first risk to business owners is not being paid, and the second
risk is them losing everything that they have invested into the business.
3. Types of economic systems
- Economics: the study of how wealth is created and distributed. (wealth refers to anything
of value)
- Experts study economics from two perspectives: microeconomics and macroeconomics.
- Microeconomics: the study of the decisions made by individuals and businesses. (for
example, examines how the prices of homes affects the number of homes individuals will
buy).
- Macroeconomics: the study of the national economy and the global economy. (examines
the economic effect of inflation, unemployment, taxes etc.)
- The decisions that business firms, individuals, government, and society make, and the way
in which people deal with the creation and distribution of wealth determine the kind of
economic system, or economy, that a nation has.
- Economy: the way in which people deal with the creation and distribution of wealth.
- Over the years, the economic systems of the world have differed in essentially two ways.
Firstly, the ownership of the factors of production and secondly, how they answer four
basic economic questions that direct a nation’s economic activity.
Factors of production are the resources used to produce goods and services. The four factors
of production are land and natural resources, labour, capital, and entrepreneurship. (an
entrepreneur is a person who risks his or her time, effort and money to start and operate a
new business)
A nations economic system significantly effects all the economic activities of individuals,
businesses, government, and society within a country. This far reaching impact becomes more
apparent when we consider that a country’s economic system determines how the factors of
production are used to meet the needs of society. The following questions will determine
whether an economy is capitalist or command:
i. What goods and services, and how much of each, will be produced?
ii. How will these goods and service be produced?
iii. For whom will these goods and services be produced?
iv. Who owns and who controls the major factors of production?
a. Capitalism
Capitalism is an economic system in which individuals own and operate the majority of
businesses that provide goods and services.
- Society’s best interests are served when individual within that society are allowed to
pursue their own self-interest.
- The invisible hand is a term created by Adam Smith to describe how an individual’s
personal gain benefits others and a nation’s economy.
(A shoe maker who needs income will make shoes, hire employees who will now have
shoes and income. Therefore the success of the shoemakers workers and the national
economy is tied in with the shoemaker’s success.)
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, Laissez-faire Capitalism
Right to create wealth
Right to own private property and resources
Right to economic freedom and freedom to compete
Right to limited government intervention
Adam Smith’s capitalism is based on the following fundamental issues:
i. The creation of wealth is the concern of private individuals, not the government.
ii. Individuals must own private property and the resources used to create wealth.
iii. Economic freedom ensures the existence of competitive markets that allow both
buyers and sellers to enter and leave the market as they choose.
iv. The role of the government should be limited to providing defence against
foreign enemies, ensuring internal order, and furnishing public works and
education.
- Government is to only act as a rule maker or umpire, they it should not interfere with
the economy.
- Laissez-faire capitalism is also based on a market economy (/free market economy)
which is an economic system in which businesses and individuals decide what to
produce and buy, and the market determines quantities sold and prices.
b. Capitalism in the United States
- The US is a mixed economy, an economy that exhibits elements of both socialism and
capitalism, due to the government being more involved than an umpire.
- In a mixed economy, the 4 basic questions (what, how, for whom and who) are
answered through the interaction of households, businesses and governments.
- Households: consumers of goods and services and the owners of some factors of
production. Resources owners determine how resources are used and enjoy their
benefits (income/ profits). e.g. members of household provide labour, and therefore
business pays income.
Consumer products: goods and services purchased by individuals for personal
consumption.
- Businesses: 1st exchange is money for resources, labour and capital and use these
resources to produce goods and services. 2nd is goods and services for sales revenue.
3rd, sales revenue is exchanged for resources which is used to produce and sell more
goods and services. If business does well dividends is paid out, and households will
then reinvest their money which can grow more businesses.
- Governments: government collects tax because some of its services would 1. either not
be produced by private business firms or 2. would be produced for only those who can
afford them.
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, c. Command Economies
A command economy is an economic system in which the government decides what goods
and services will be produced, how they will be produced, for whom available goods and
services will be produced, and who owns and controls the major factors of production.
Socialism and communism are two examples of command economies.
Socialism
- Key industries are owned and controlled by the government, as well as land, buildings
and raw materials.
- Some countries allow small businesses to be owned by individuals (people choose their
occupations or work for state-owned industries).
- National goals based on availability of recourses and needs, and determine what
needs to be produced and how.
- State controls distribution of services (wages, taxes and rent).
- Aims: equitable distribution of income, elimination of poverty and distribution of socials
services.
- Disadvantages: minimal incentive to work, and high tax rate.
Communism
- Karl Marx advocated that all citizens together owned all economic resources.
- All workers contribute by their abilities and benefits are based on needs.
- The basic 4 economic questions are answered through centralized government plans.
- Emphasis on production of goods and services based on the governments needs rather
than consumers (shortages on consumers goods).
4. Measuring Economic Performance
a. The importance of productivity in the global market place
One can assess a nations performance by its productivity. An increase in productivity
means economic growth as more goods and services are produced by a given labour
force. Productivity is the average level of output per worker per hour.
- Increased productivity means it takes fewer workers, therefore costs are reduced,
profits are increased, products can be sold for less, and business becomes more
competitive.
- Minimising costs and increasing efficiency improves productivity.
- Productivity growth means lower salary expenses for employers, but may also mean
retrenchments.
b. The nation’s gross domestic product
GDP can also be used to measure the well-being of the economy. Gross domestic product
is the total dollar value of all goods and services produced by all people within the
boundaries of the country during a specified time period – usually a one-year period.
- GDP facilitates comparisons between countries, and between time periods as it is the
standard used in international guidelines for economic accounting.
- When determining the real GDP, its essential to adjust the dollar amounts due to
inflation and deflation so the GDP is accurate. Inflation is a general rise in the level of
prices. Deflation is a general decrease in the level of prices. (these adjustments give
you constant dollars).
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