Chapter 1
The Nature of Business
A business tries to earn a profit by providing products that satisfy people’s needs. The outcomes
of its efforts are products that have both tangible and intangible characteristics that provide
satisfaction and benefits. When you purchase a product, you are buying the benefits and
satisfaction you think the product will provide.
business
individuals or organizations who try to earn a profit by providing products that satisfy people’s
needs.
product
a good or service with tangible and intangible characteristics that provide satisfaction and
benefits.
The Goal of Business
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. In addition, a business has to pay for all
expenses necessary to operate. If a company spends $8 to produce, finance, promote, and
distribute a product that it sells for $10, the business earns a profit of $2 on each product sold.
To earn a profit, a person or organization needs management skills to plan, organize, and control
the activities of the business and to find and develop employees so that it can make products
consumers will buy.
Profit
the difference between what it costs to make and sell a product and what a customer pays for it.
nonprofit organizations
organizations that may provide goods or services but do not have the fundamental purpose of
earning profits.
The People and Activities of Business
Employees are responsible for the work that goes on within a business. Owners can manage the
business themselves or hire employees to accomplish this task. The president and chief executive
officer (CEO) of Procter & Gamble, David S. Taylor, does not own P&G but is an employee
who is responsible for managing all the other employees in a way that earns a profit for
investors, who are the real owners.
Management.
management involves developing plans, coordinating employees’ actions to achieve the firm’s
goals, organizing people to work efficiently, and motivating them to achieve the business’s
goals. Management involves the functions of planning, organizing, leading, and controlling.
Marketing
the focus of all marketing activities is satisfying customers. Marketing includes all the activities
designed to provide goods and services that satisfy consumers’ needs and wants. Marketers
gather information and conduct research to determine what customers want.
Finance.
Finance refers to all activities concerned with obtaining money and using it effectively. People
who work as accountants, stockbrokers, investment advisors, or bankers are all part of the
financial world. Owners sometimes have to borrow money from banks to get started or attract
additional investors who become partners or stockholders.
Why Study Business?
Studying business can help you develop skills and acquire knowledge to prepare for your future
career, regardless of whether you plan to work for a multinational Fortune 500 firm, start your
own business, work for a government agency, or manage or volunteer at a nonprofit
organization. The field of business offers a variety of interesting and challenging career
opportunities throughout the world, such as marketing, human resources management,
information technology, finance, production, accounting, data analytics, and many more.
The Economic Foundations of Business
It is useful to explore the economic environment in which business is conducted.
Economics is the study of how resources are distributed for the production of goods and services
within a social system. You are already familiar with the types of resources available. Land,
forests, minerals, water, and other things that are not made by people are natural resources.
Human resources, or labor, refer to the physical and mental abilities that people use to produce
goods and services
Economics
the study of how resources are distributed for the production of goods and services within a
social system.
natural resources
land, forests, minerals, water, and other things that are not made by people.
human resources
(labor) the physical and mental abilities that people use to produce goods and services.
Economic Systems
An economic system describes how a particular society distributes its resources to produce goods
and services. A central issue of economics is how to fulfill an unlimited demand for goods and
services in a world with a limited supply of resources. Different economic systems attempt to
resolve this central issue in numerous ways, as we shall see.
Communism, socialism, and capitalism, the basic economic systems found in the world today
Communism.
Karl Marx (1818–1883) first described communism as a society in which the people, without
regard to class, own all the nation’s resources. In his ideal political-economic system, everyone
contributes according to ability and receives benefits according to need. In a communist
economy, the people (through the government) own and operate all businesses and factors of
production.
Socialism.
Socialism is an economic system in which the government owns and operates basic industries—
postal service, telephone, utilities, transportation, health care, banking, and some manufacturing
—but individuals own most businesses. Most socialist nations, such as Norway, India, and Israel,
are democratic and recognize basic individual freedoms. Citizens can vote for political offices,
but central government planners usually make many decisions about what is best for the nation.
Capitalism.
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 which goods and services are produced, how they are produced, and how they are
distributed. The United States, Canada, Japan, and Australia are examples of economic systems
based on capitalism.
free-market system
pure capitalism, in which all economic decisions are made without government intervention.
Modified capitalism differs from pure capitalism in that the government intervenes and regulates
business to some extent.
Mixed Economies.
No country practices a pure form of communism, socialism, or capitalism, although most tend to
favor one system over the others. Most nations operate as mixed economies, which have
elements from more than one economic system.
The Free-Enterprise System
Many economies—including those of the United States, Canada, and Japan—are based on free
enterprise, and many communist and socialist countries, such as China and Russia, are applying
more principles of free enterprise to their own economic systems. Free enterprise provides an
opportunity for a business to succeed or fail on the basis of market demand.
The Forces of Supply and Demand
In the United States and in other free-enterprise systems, the distribution of resources and
products is determined by supply and demand. Demand is the number of goods and services that
consumers are willing to buy at different prices.
Supply is the number of products that businesses are willing to sell at different prices at a
specific time. In general, because the potential for profits is higher, businesses are willing to
supply more of a good or service at higher prices.
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.
The Nature of Competition
Competition, the rivalry among businesses for consumers’ dollars, is another vital element in
free enterprise. According to Adam Smith, competition fosters efficiency and low prices by
forcing producers to offer the best products at the most reasonable price; those who fail to do so
are not able to stay in business.
Pure competition exists when there are many small businesses selling one standardized product,
such as agricultural commodities like wheat, corn, and cotton.
Monopolistic competition exists when there are fewer businesses than in a pure-competition
environment and the differences among the goods they sell are small. Aspirin, soft drinks, and
jeans are examples of such goods. These products differ slightly in packaging, warranty, name,
and other characteristics, but all satisfy the same consumer need.
An oligopoly exists when there are very few businesses selling a product. In an oligopoly,
individual businesses have control over their products’ price because each business supplies a
large portion of the products sold in the marketplace.
Economic Cycles and Productivity
Expansion and Contraction.
Economies are not stagnant; they expand and contract. 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 stimulates employment. The standard of living
rises because more people are employed and have money to spend.
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.
inflation a condition characterized by a continuing rise in prices
Economic contraction occurs when spending declines. Businesses cut back on production and
lay off workers, and the economy as a whole slows down.
depression a condition of the economy in which unemployment is very high, consumer spending
is low, and business output is sharply reduced.
Chapter 2
Business Ethics and Social Responsibility
Business ethics refers to the principles and values that guide the behavior of individuals and
organizations in the business world, including nonprofits. It dictates that organizations consider
the impact of their decisions on various stakeholders, such as customers, employees, suppliers,
shareholders and the communities they serve.
The ways an organization responds to right and wrong is a reflection of its business ethics. In
many ways, business ethics go hand-in-hand with social responsibility. Both concepts are
essential in every workplace, including nonprofit organizations’ activities and operations.
Social Responsibility
Focuses on ethical concerns that affect societies
Affects society as a whole
Requires accountability to the organization, stakeholders and the public
Business Ethics
Defines what is right and wrong
Affects the people within an organization
Requires ethical decision-making
The Role of Ethics in Business
Business ethics plays a critical role in today's society, as consumers demand more transparency
and accountability from companies. Ethical consumerism, where consumers make purchasing
decisions based on a company's ethical behavior, is on the rise. This trend is driving companies
to consider the social and environmental impact of their actions, and to implement practices that
align with the values of their customers.
Recognizing Ethical Issues in Business
Recognizing ethical issues is the most important step in understanding business ethics. An ethical
issue is an identifiable problem, situation, or opportunity that requires a person to choose from
among several actions that may be evaluated as right or wrong, ethical or unethical. Learning
how to choose from alternatives and make a decision requires not only good personal values, but
also knowledge competence in the business area of concern.
ethical issue
an identifiable problem, situation, or opportunity that requires a person to choose from among
several actions that may be evaluated as right or wrong, ethical or unethical.
bribery
which are payments, gifts, or special favors intended to influence the outcome of a decision. A
bribe benefits an individual or a company at the expense of other stakeholders.
Misuse of Company Time.
Theft of time is a common area of misconduct observed in the workplace. 14 One example of
misusing time in the workplace is by engaging in activities that are not necessary for the job. For
instance, many employees spend an average of one hour each day using social networking sites.
Abusive and Intimidating Behavior.
Abusive or intimidating behavior is the most common ethical problem for employees. These
page 44 concepts can mean anything from physical threats, false accusations, profanity, insults,
yelling, harshness, and unreasonableness to ignoring someone or simply being annoying; and the
meaning of these words can differ by person—you probably have some ideas of your own.
Misuse of Company Resources.
Misuse of company resources has been identified by the Ethics Resource Center as a leading
issue in observed misconduct in organizations. Issues might include spending an excessive
amount of time on personal e-mails, submitting personal expenses on company expense reports,
or using the company copier for personal use.
Conflict of Interest.
A conflict of interest, one of the most common ethical issues identified by employees, exists
when an individual must choose whether to advance the individual’s own personal interests or
those of others.
Fairness and Honesty
Fairness and honesty are at the heart of business ethics and relate to the general values of
decision makers. At a minimum, businesspersons are expected to follow all applicable laws and
regulations. But beyond obeying the law, they are expected not to harm customers, employees,
clients, or competitors knowingly through deception, misrepresentation, coercion, or
discrimination. Honesty and fairness can relate to how the employees use the resources of the
organization.
Making Decisions about Ethical Issues
It can be difficult to recognize specific ethical issues in practice. Managers, for example, tend to
be more concerned about issues that affect those close to them, as well as issues that have
immediate rather than long-term consequences. Thus, the perceived importance of an ethical
issue substantially affects choices. However, only a few issues receive scrutiny, and most receive
no attention at all.
Improving Ethical Behavior in Business
Understanding how people make ethical choices and what prompts a person to act unethically
may result in better ethical decisions. Ethical decisions in an organization are influenced by three
key factors: individual moral standards and values, the influence of managers and co-workers,
and the opportunity to engage in misconduct
codes of ethics
Codes of ethics, policies on ethics, and ethics training programs advance ethical behavior
because they prescribe which activities are acceptable and which are not, and they limit the
opportunity for misconduct by providing punishments for violations of the rules and standards.
The Nature of Social Responsibility
Social responsibility is an ethical theory in which individuals are accountable for fulfilling their
civic duty, and the actions of an individual must benefit the whole of society. In this way, there
must be a balance between economic growth, the welfare of people, and the environment.
Corporate citizenship
is the extent to which businesses meet the legal, ethical, economic, and voluntary
responsibilities placed on them by their various stakeholders. It involves the activities and
organizational processes adopted by businesses to meet their social responsibilities. A
commitment to corporate citizenship by a firm indicates a strategic focus on fulfilling the social
responsibilities expected of it by its stakeholders.
Relations with Owners and Stockholders. Businesses must first be responsible to their owners,
who are primarily concerned with earning a profit or a return on their investment in a company.
Employee Relations. Another issue of importance to a business is its responsibilities to
employees. Without employees, a business cannot carry out its goals. Employees expect
businesses to provide a page 57 safe workplace, pay them adequately for their work, and keep
them informed of what is happening in their company.
Consumer Relations. A critical issue in business today is business’s responsibility to customers,
who look to business to provide them with satisfying, safe products and to respect their rights as
consumers
consumerism the activities that independent individuals, groups, and organizations undertake to
protect their rights as consumers.
Sustainability Issues. Most people probably associate the term environment with nature,
including wildlife, trees, oceans, and mountains. Until the 20th century, people generally thought
of the environment solely in terms of how these resources could be harnessed to satisfy their
needs for food, shelter, transportation, and recreation.
sustainability conducting activities in a way that allows for the long-term well-being of the
natural environment, including all biological entities; involves the assessment and improvement
of business strategies, economic sectors, work practices, technologies, and lifestyles so that they
maintain the health of the natural environment.
Pollution. A major issue in the area of environmental responsibility is pollution. Water pollution
results from dumping toxic chemicals and raw sewage into rivers and oceans, oil spills, and the
burial of industrial waste in the ground where it may filter into underground water supplies.
Alternative Energy. With ongoing plans to reduce global carbon emissions, countries and
companies alike are looking toward alternative energy sources. Traditional fossil fuels are
problematic because of their emissions, but also because stores have been greatly depleted.
Response to Environmental Issues. Many firms are trying to eliminate wasteful practices, the
emission of pollutants, and/or the use of harmful chemicals from their manufacturing processes.
Other companies are seeking ways to improve their products.
Community Relations. A final, yet very significant, issue for businesses concerns their
responsibilities to the general welfare of the communities and societies in which they operate.
Many businesses simply want to make their communities better places for everyone to live and
work.