Reading...
Play button
Play button
Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
116 Cards in this Set
- Front
- Back
|
EBOOK FOR BUS 100 STRAYER UNIVERSITY |
E-BOOK - VITAL BOOKSHELF BUSN 4, 6th EditionMarcella Kelly | Jim McGowen© 2014, 2012, 2011, 2010, 2009 Cengage Learning. All rights reserved ISBN: 978-1-285-88034-1 |
|
|
Chapter 1 Business Now
Chapter 2 Business Formation Chapter 3 Economics Chapter 4 SBusiness and Entrepreneurship Chapter 5 Marketing Chapter 6 Product and Promotion Chapter 7 Distribution and Pricing Chapter 8 Business Communication Chapter 9 Human Resource Management Chapter 10 Operations Management |
Chapter 11Accounting
Chapter 12 Finance Chapter 13 Financial Markets Chapter 14 Management, Motivation, and Leadership Chapter 15 Managing IT Chapter 16 Business Ethics and Social Responsibility Chapter 17 World Marketplace Personal Finance Appendix |
|
|
business
|
is any organization that provides goods and services in an effort to earn a profit.
|
|
|
Profit
|
is the financial reward that comes from starting and running a business. More specifically, profit is the money that a business earns in sales (or revenue), minus expenses such as the cost of goods and the cost of salaries.
|
|
|
VALUE
|
The relationship between the price of a good or a service and the benefits that it offers its customers.
|
|
|
LOSS |
When a business brings in less money than it needs to cover expenses, it incurs a loss.
|
|
|
entrepreneurs
|
People who risk their time, money, and other resources to start and manage a business.
|
|
|
standard of living
|
The quality and quantity of goods and services available to a population.
|
|
|
quality of life
|
The overall sense of well-being experienced by either an individual or a group.
|
|
|
The Industrial Revolution:
|
Technological advances fueled a period of rapid industrialization in America from the mid-1700s to the mid-1800s. As mass production took hold, huge factories replaced skilled artisan workshops. The factories hired large numbers of semiskilled workers who specialized in a limited number of tasks. The result was unprecedented production efficiency but also a loss of individual ownership and personal pride in the production process.
|
|
|
The Entrepreneurship Era:
|
Building on the foundation of the industrial revolution, large-scale entrepreneurs emerged in the second half of the 1800s, building business empires. These industrial titans created enormous wealth, raising the overall standard of living across the country. But many also dominated their markets, forcing out competitors, manipulating prices, exploiting workers, and decimating the environment. Toward the end of the 1800s, the government stepped into the business realm, passing laws to regulate business and protect consumers and workers, creating more balance in the economy.
|
|
|
The Production Era:
|
In the early part of the 1900s, major businesses focused on further refining the production process and creating greater efficiencies. Jobs became even more specialized, increasing productivity and lowering costs and prices. In 1913, Henry Ford introduced the assembly line, which quickly became standard across major manufacturing industries. With managers focused on efficiency, the customer was an afterthought. But when customers tightened their belts during the Great Depression and World War II, businesses took notice. The “hard sell” emerged: aggressive persuasion designed to separate consumers from their cash.© Fotosearch/Archive Photos/Getty Images
|
|
|
The Marketing Era:
|
After WWII, the balance of power shifted away from producers and toward consumers, flooding the market with enticing choices. To differentiate themselves from their competitors, businesses began to develop brands, or distinctive identities, to help consumers understand the differences among various products. The marketing concept emerged: a consumer focus that permeates successful companies in every department, at every level. This approach continues to influence business decisions today as global competition heats up to unprecedented levels.
|
|
|
The Relationship Era:
|
Building on the marketing concept, today, leading-edge firms look beyond each immediate transaction with a customer and aim to build long-term relationships. Satisfied customers can become advocates for a business, spreading the word with more speed and credibility than even the best promotional campaign. And cultivating current customers is more profitable than constantly seeking new ones. One key tool is technology. Using the Web and other digital resources, businesses gather detailed information about their customers and use these data to serve them better.1-3
|
|
|
nonprofits
|
Business-like establishments that employ people and produce goods and services with the fundamental goal of contributing to the community rather than generating financial gain
|
|
|
Factors of production
|
Four fundamental elements—natural resources, capital, human resources, and entrepreneurship—that businesses need to achieve their objectives.
|
|
|
business environment The setting in which business operates. |
The five key components are: economic environment, competitive environment, technological environment, social environment, and global environment.
|
|
|
business technology
|
Any tools—especially computers, telecommunications, and other digital products—that businesses can use to become more efficient and effective.
|
|
|
e-commerce
|
Business transactions conducted online, typically via the Internet.
|
|
|
World Wide Web
|
The service that allows computer users to easily access and share information on the Internet in the form of text, graphics, video, apps, and animation.
|
|
|
demographics
|
The measurable characteristics of a population. Demographic factors include population size and density, as well as specific traits such as age, gender, and race.
|
|
|
General Agreement on Tariffs and Trade (GATT)
|
The migration of jobs relates closely to the global movement toward free trade. In 1995, a renegotiation of the General Agreement on Tariffs and Trade (GATT)—signed by 125 countries—took bold steps to lower tariffs (taxes on imports) and to reduce trade restrictions worldwide.
|
|
|
Business Ownership Options: The Big Four
|
1. A sole proprietorship is a business that is owned, and usually managed, by a single individual. As far as the law is concerned, a sole proprietorship is simply an extension of the owner. Company earnings are treated just like the owner’s income; likewise, any debts the company incurs are considered to be the owner’s personal debts.sole proprietorship A form of business ownership with a single owner who usually actively manages the company.
|
|
|
2. A partnership is a voluntary agreement under which two or more people act as co-owners of a business for profit. As we’ll see later in the chapter, there are several types of partnerships. In its most basic form, known as a general partnership, each partner has the right to participate in the company’s management and share in profits—but also has unlimited liability for any debts the company incurs.general partnership A partnership in which all partners can take an active role in managing the business and have unlimited liability for any claims against the firm.partnership A voluntary agreement under which two or more people act as co-owners of a business for profit.
|
3. A corporation is a business entity created by filing a form (known in most states as the articles of incorporation) with the appropriate state agency, paying the state’s incorporation fees, and meeting other requirements. (The specifics vary among states.) Unlike a sole proprietorship or a partnership, a corporation is considered to be a legal entity that is separate and distinct from its owners. In many ways, a corporation is like an artificial person. It can legally engage in virtually any business activity a natural person can pursue. For example, a corporation can enter into binding contracts, borrow money, own property, pay taxes, and initiate legal actions (such as lawsuits) in its own name. It can even be a partner in a partnership or an owner of another corporation. Because of a corporation’s status as a separate legal entity, the owners of a corporation have limited liability—meaning they aren’t personally responsible for the debts and obligations of their company.limited liability When owners are not personally liable for claims against their firm. Owners with limited liability may lose their investment in the company, but their other personal assets are protected.articles of incorporation The document filed with a state government to establish the existence of a new corporation.corporation A form of business ownership in which the business is considered a legal entity that is separate and distinct from its owners.
|
|
|
4. A limited liability company (LLC)
|
is a hybrid form of business ownership that is similar in some respects to a corporation while having other characteristics that are similar to a partnership. Like a corporation, a limited liability company is considered a legal entity separate from its owners.
Also like a corporation—and as its name implies—an LLC offers its owners limited liability for the debts of their business. But it offers more flexibility than a corporation in terms of tax treatment; in fact, one of the most interesting characteristics of an LLC is that its owners can elect to have their business taxed either as a corporation or a partnership. limited liability company (LLC) A form of business ownership that offers both limited liability to its owners and flexible tax treatment. |
|
|
2-2a AdvantagesSole proprietorships offer some very attractive advantages to people starting a business: Ease of Formation: Compared to the other forms of ownership we’ll discuss, the paperwork and costs involved in forming a sole proprietorship are minimal. No special forms must be filed, and no special fees must be paid. Entrepreneurs who are eager to get a business up and running quickly can find this a compelling advantage. Retention of Control: As the only owner of a sole proprietorship, you’re in control. You have the ability to manage your business the way you want. If you want to “be your own boss,” a sole proprietorship might look very attractive. Pride of Ownership: One of the main reasons many people prefer a sole proprietorship is the feeling of pride and the personal satisfaction they gain from owning and running their own business. Retention of Profits: If your business is successful, all the profits go to you—minus your personal taxes, of course. Possible Tax Advantage: No taxes are levied directly on the earnings of sole proprietorships as a business. Instead, the earnings are taxed only as income of the proprietor. As we’ll see when we discuss corporations, this avoids the undesirable possibility of double taxation of earnings.
|
DisadvantagesEntrepreneurs thinking about forming sole proprietorships should also be aware of some serious drawbacks: Limited Financial Resources: Raising money to finance growth can be tough for sole proprietors. With only one owner responsible for a sole proprietorship’s debts, banks and other financial institutions are often reluctant to lend it money. Likewise, suppliers may be unwilling to provide supplies on credit. This leaves sole proprietors dependent on their own wealth plus the money that their firms generate. Unlimited Liability: Because the law views a sole proprietorship as an extension of its owner, the debts of the firm become the owner’s personal debts. If someone sues your business and wins, the court can seize your personal possessions—even those that have nothing to do with your business—and sell them to pay the damages. This unlimited personal liability means that operating as a sole proprietorship is a risky endeavor. Limited Ability to Attract and Maintain Talented Employees: Most sole proprietors are unable to pay the high salaries and substantial perks that highly qualified, experienced employees get when they work for big, well-established companies. Heavy Workload and Responsibilities: Being your own boss can be very rewarding, but it can also mean very long hours and a lot of stress. Sole proprietors—as the ultimate authority in their business—often must perform tasks or make decisions in areas where they lack expertise. Lack of Permanence: Because sole proprietorships are just extensions of their owners, they lack permanence. If the owner dies, retires, or withdraws from the business for some other reason, the company legally ceases to exist. Even if the company continues to operate under new ownership, in the eyes of the law, it becomes a different firm.
|
|
|
Advantages of General PartnershipsPartnerships
|
offer some key advantages relative to both sole proprietorships and corporations: Ability to Pool Financial Resources: With more owners investing in the company, a partnership is likely to have a stronger financial base than a sole proprietorship. Ability to Share Responsibilities and Capitalize on Complementary Skills: Partners can share the burden of running the business, which can ease the workload. Tasks and jobs can also be divided based on complementary skills, using each partner’s talents to best advantage. Ease of Formation: In theory, forming a partnership is easy. As we’ve already noted, it’s possible (but not advisable) to establish a partnership based on a simple verbal agreement. But we shouldn’t overemphasize this advantage. Working out all of the details of a partnership agreement can sometimes be a complex and time-consuming process. Possible Tax Advantages: Similar to a sole proprietorship, the earnings of a partnership “pass through” the business—untouched by the Internal Revenue Service (IRS)—and are taxed only as the partners’ personal income. Again, this avoids the potential for double taxation endemic to corporations.
|
|
|
Disadvantages of General PartnershipsGeneral partnerships also have some serious disadvantages.
|
y: As a general partner, you’re not only liable for your own mistakes but also for those of your partners. In fact, all general partners have unlimited liability for the debts and obligations of their business. So, if the assets they’ve invested in the business aren’t sufficient to meet these claims, the personal assets of the partners are at risk. When someone sues a general partnership, the lawsuit can target any individual partner or group of partners. In fact, lawsuits often go after the partners with the deepest pockets, even if they did not personally participate in the act that caused the legal action. In other words, if you have more personal wealth than the other partners, you could lose more than they do even if they were the ones at fault! Potential for Disagreements: If general partners can’t agree on how to run the business, the conflict can complicate and delay decision making. A well-drafted partnership agreement usually specifies how disputes will be resolved, but disagreements among partners can create friction and hard feelings that harm morale and undermine the cooperation needed to keep the business on track. Lack of Continuity: If a current partner withdraws from the partnership, the relationships among the participants will clearly change, potentially ending the partnership. This creates uncertainty about how long a partnership will remain in business.
|
|
|
limited partnership
|
A partnership that includes at least one general partner who actively manages the company and accepts unlimited liability and one limited partner who gives up the right to actively manage the company in exchange for limited liability. General partners have the right to participate fully in managing their partnership, but they also assume unlimited personal liability for any of its debts—just like the partners in a general partnership. Limited partners cannot actively participate in its management, but they have the protection of limited liability. This means that, as long as they do not actively participate in managing the company, their personal wealth is not at risk.
|
|
|
The limited liability partnership (LLP)
|
is another partnership arrangement that is attractive to partners who want to limit their personal risk. It is similar to a limited partnership in some ways, but it has the advantage of allowing all partners to take an active role in management, while also offering all partners some form of limited liability. In other words, there’s no need to distinguish between limited and general partners in an LLP
|
|
|
The Name GameOne
|
of the first tasks facing entrepreneurs starting a new business is the selection of the company’s name. It turns out that the process involved in naming a company depends on the form of ownership the entrepreneur chooses. The specific requirements differ somewhat from state to state. (You can check out the details for any specific state at http://www.business.gov/register/business-name/dba.html.)
|
|
|
There are several types of corporations. The most common is called a C corporation;
|
when people use the term “corporation” without specifying which type, they are generally referring to a C corporation. Because it’s the most common, we’ll devote most of our discussion to C corporations. However, we’ll also describe three other types of corporations: S corporations, statutory close (or closed) corporations, and nonprofit corporations.
|
|
|
-4b Ownership of C CorporationsOwnership of C corporations
|
is represented by shares of stock, so owners are called “stockholders” (or “shareholders”). Common stock represents the basic ownership interest in a corporation, but some firms also issue preferred stock.
|
|
|
institutional investor
|
An organization that pools contributions from investors, clients, or depositors and uses these funds to buy stocks and other securities
|
|
|
board of directors
|
The individuals who are elected by stockholders of a corporation to represent their interests.
|
|
|
Advantages of C CorporationsCorporations have become the dominant form of business because
|
Limited Liability: stockholders are not personally liable for the debts of their company. If a corporation goes bankrupt, the stockholders might find that their stock is worthless, but their other personal assets are protected.
Permanence: Unless the articles of incorporation specify a limited duration, corporations can continue operating as long as they remain financially viable and the majority of stockholders want the business to continue. Unlike a sole proprietorship or partnership, a general corporation is unaffected by the death or withdrawal of an owner. Ease of Transfer of Ownership: It’s easy for stockholders of publicly traded C corporations to withdraw from ownership—they simply sell their shares of stock. Ability to Raise Large Amounts of Financial Capital: Corporations can raise large amounts of financial capital by issuing shares of stock or by selling formal IOUs called corporate bonds. The ability to raise money by issuing these securities gives corporations a major financial advantage over most other forms of ownership. |
|
|
Disadvantages of C CorporationsIn addition to their significant benefits, C corporations have a number of drawbacks: E
|
Expense and Complexity of Formation and Operation: As we’ve already seen, establishing a corporation can be more complex and expensive than forming a sole proprietorship or partnership.
Corporations are also subject to more formal operating requirements. For example, they are required to hold regular board meetings and keep accurate minutes. Complications When Operating in More Than One State: When a business that’s incorporated in one state does business in other states, it’s called a “domestic corporation” in the state where it’s incorporated, and a “foreign corporation” in the other states. A corporation must register (or “qualify”) as a foreign corporation in order to do business in any state other than the one in which it incorporated. This typically requires additional paperwork, fees, and taxes. But registration as a foreign corporation is only necessary if the company is involved in substantial business activities within the state. Businesses that only engage in minor business activities typically are exempt from the registration requirement. For example, a firm operating a production facility or maintaining a district office in a state other than its corporate home would need to register as a foreign corporation, but a firm that simply held a bank account or solicited sales to customers in that state through the mail would not be required to do so. |
|
|
OTHER TYPES OF CORPORATIONS |
S corporation A form of corporation that avoids double taxation by having its income taxed as if it were a partnership.statutory close (or closed) corporation A corporation with a limited number of owners that operates under simpler, less formal rules than a C corporation.nonprofit corporation A corporation that does not seek to earn a profit and differs in several fundamental respects from C corporations.
|
|
|
acquisition
|
A corporate restructuring in which one firm buys another.
|
|
|
merger
|
A corporate restructuring that occurs when two formerly independent business entities combine to form a new organization.
|
|
|
divestiture
|
The transfer of total or partial ownership of some of a firm’s operations to investors or to another company.
|
|
|
horizontal merger
|
A combination of two firms that are in the same industry.
|
|
|
vertical merger
|
A combination of firms at different stages in the production of a good or service.
|
|
|
conglomerate merger
|
A combination of two firms that are in unrelated industries.
|
|
|
Advantages of LLCsWhy are LLCs becoming so popular? This form of ownership offers significant advantages:
|
Limited Liability: Similar to a corporation, all owners of an LLC have limited liability. Tax Pass-Through: As mentioned at the beginning of this chapter, for tax purposes the owners of LLCs may elect to have their companies treated as either a corporation or a partnership—or even as a sole proprietorship if owned by a single person. The default tax classification for LLCs with more than one owner—and the one most LLCs choose—is the partnership option. Under this arrangement, there is no separate tax on the earnings of the company. Instead, earnings “pass through” the company and are taxed only as income of the owners. This eliminates the double taxation of profits that is endemic to general corporations. However, there are some cases where it makes sense for LLCs to elect to be taxed as a corporation. For example, the owner of a single-person LLC can avoid paying self-employment taxes by electing to have the LLC treated as a corporation rather than as a sole proprietorship. Simplicity and Flexibility in Management and Operation: Unlike corporations, LLCs aren’t required to hold regular board meetings. Also, LLCs are subject to less paperwork and fewer reporting requirements than corporations. Flexible Ownership: Unlike S corporations, LLCs can have any number of owners. Also unlike S corporations, the owners of LLCs can include foreign investors and other corporations. However, some states do make it difficult to transfer ownership to outsiders.
|
|
|
Despite their increasing popularity, LLCs have some limitations and drawbacks:
|
Complexity of Formation: Because of the need to file articles of organization and pay filing fees, LLCs can take more time and effort to form than sole proprietorships. In general, forming an LLC is also more difficult than creating a partnership. But as we mentioned earlier, the formation of a partnership requires a “meeting of the minds” of the partners, which isn’t always easy to achieve. So in some cases, the formation of a partnership can prove to be every bit as challenging as the formation of an LLC.
|
|
|
franchisee
|
xcvxcvxcvxc The party in a franchise relationship that pays for the right to use resources supplied by the franchisor. |
|
|
business format franchise
|
A broad franchise agreement in which the franchisee pays for the right to use the name, trademark, and business and production methods of the franchisor.
|
|
|
distributorship
|
A type of franchising arrangement in which the franchisor makes a product and licenses the franchisee to sell it.
|
|
|
franchisor
|
The business entity in a franchise relationship that allows others to operate its business using resources it supplies in exchange for money and other considerations.
|
|
|
franchise
|
A licensing arrangement under which a franchisor allows franchisees to use its name, trademark, products, business methods, and other property in exchange for monetary payments and other considerations.
|
|
|
Advantages of Franchising
|
Both the franchisee and the franchisor must believe they’ll benefit from the franchise arrangement; otherwise, they wouldn’t participate. The advantages of franchising for the franchisor are fairly obvious. It allows the franchisor to expand the business and bring in additional revenue (in the form of franchising fees and royalties) without investing its own capital. Also, franchisees—business owners who are motivated to earn a profit—may have a greater incentive than salaried managers to do whatever it takes to maximize the success of their outlets.From the franchisee’s perspective, franchising offers several advantages: Less Risk: Franchises offer access to a proven business system and product. The systems and methods offered by franchisors have an established track record. People who are interested in buying a franchise can do research to see how stores in the franchise have performed and can talk to existing franchisees before investing. Training and Support: The franchisor normally provides the franchisee with extensive training and support. For example, Subway offers two weeks of training at its headquarters and additional training at meetings. The franchisor also sends out newsletters, provides Internet support, maintains a toll-free number for phone support, and provides on-site evaluations.18 Brand Recognition: Operating a franchise gives the franchisee instant brand-name recognition, which can be a big help in attracting customers. Easier Access to Funding: Bankers and other lenders may be more willing to lend money if the business is part of an established franchise than if it is a new, unproven business.
|
|
|
Disadvantages of Franchising
|
Franchising also has some drawbacks. From the franchisor’s perspective, operating a business with perhaps thousands of semi-independent owner–operators can be complex and challenging. With such a large number of owners, it can be difficult to keep all of the franchisees satisfied, and disappointed franchisees sometimes go public with their complaints, damaging the reputation of the franchisor. In fact, it isn’t unusual for disgruntled franchisees to sue their franchisors.Franchisees are also likely to find some disadvantages: Costs: The typical franchise agreement requires franchisees to pay an initial franchise fee when they enter into the franchise agreement and an ongoing royalty (usually a percentage of monthly sales revenues) to the franchisor. In addition, the franchisor may assess other fees to support national advertising campaigns or for other purposes. These costs vary considerably, but for high-profile franchises, they can be substantial. Exhibit 2.7 compares the franchise fees, royalties, and minimum total investment for several well-established franchises. (Total investment reflects the fact that the cost of starting a franchise generally requires the franchisee to invest in property, equipment, and inventory in addition to paying the franchise fee. The actual total investment that franchisees make is often substantially higher than the estimated minimum investment cited in Exhibit 2.7.) Lack of Control: The franchise agreement usually requires the franchisee to follow the franchisor’s procedures to the letter. People who want the freedom and flexibility to be their own boss can find these restrictions frustrating. Negative Halo Effect: The irresponsible or incompetent behavior of a few franchisees can create a negative perception that adversely affects not only the franchise as a whole but also the success of other franchisees. Growth Challenges: While growth and expansion are definitely possible in franchising (many franchisees own multiple outlets), strings are attached. Franchise agreements usually limit the franchisee’s territory and require franchisor approval before expanding into other areas. Restrictions on Sale: Franchise agreements normally prevent franchisees from selling their franchises to other investors without prior approval from the franchisor. Poor Execution: Not all franchisors live up to their promises. Sometimes the training and support are of poor quality, and sometimes the company does a poor job of screening franchisees, leading to the negative halo effect we mentioned previously.These considerations suggest that before buying a franchise, potential owners should carefully research the franchise opportunity.
|
|
|
Franchise Disclosure Document (FDD)
|
A detailed description of all aspects of a franchise that the franchisor must provide to the franchisee at least fourteen calendar days before the franchise agreement is signed.
|
|
|
The economy
|
is essentially a financial and social system
|
|
|
economy
|
A financial and social system of how resources flow through society, from production, to distribution, to consumption.
|
|
|
economics
|
The study of the choices that people, companies, and governments make in allocating society’s resources.
|
|
|
macroeconomics
|
The study of a country’s overall economic dynamics, such as the employment rate, the gross domestic product, and taxation policies.
|
|
|
microeconomics
|
The study of smaller economic units such as individual consumers, families, and individual businesses.
|
|
|
fiscal policy
|
Government efforts to influence the economy through taxation and spending.
|
|
|
budget surplus
|
Overage that occurs when revenue is higher than expenses over a given period of time.
|
|
|
budget deficit
|
Shortfall that occurs when expenses are higher than revenue over a given period of time.
|
|
|
federal debt
|
The sum of all the money that the federal government has borrowed over the years and not yet repaid.
|
|
|
ONLINE NATIONAL DEBT CLOCK |
As of September 2012, the total U.S. federal debt stood at more than $16 trillion, a staggering $51,148.90 for every U.S. citizen (see an online national debt clock at http://brillig.com/debt_clock/ for the latest figures).
|
|
|
monetary policy
|
Federal Reserve decisions that shape the economy by influencing interest rates and the supply of money.
|
|
|
commercial banks
|
Privately owned financial institutions that accept demand deposits and make loans and provide other services for the public.
|
|
|
money supply
|
The total amount of money within the overall economy.money Anything generally accepted as a medium of exchange, a measure of value, or a means of payment.
|
|
|
M1:
|
All currency—paper bills and metal coins—plus checking accounts and traveler’s checks.M1 money supply Includes all currency plus checking accounts and traveler’s checks.
|
|
|
M2:
|
All of M1 plus most savings accounts, money market accounts, and certificates of deposit (low-risk savings vehicles with a fixed term, typically less than one year).M2 money supply Includes all of M1 money supply plus most savings accounts, money market accounts, and certificates of deposit.
|
|
|
open market operations
|
The Federal Reserve function of buying and selling government securities, which include treasury bonds, notes, and bills.
|
|
|
Federal Deposit Insurance Corporation (FDIC)
|
sdss |
|
|
discount rate
|
The rate of interest that the Federal Reserve charges when it loans funds to banks.
|
|
|
reserve requirement
|
A rule set by the Fed, which specifies the minimum amount of reserves (or funds) a bank must hold, expressed as a percentage of the bank’s deposits.
|
|
|
economic system
|
A structure for allocating limited resources.
|
|
|
capitalism
|
An economic system—also known as the private enterprise or free market system—based on private ownership, economic freedom, and fair competition.
|
|
|
The Fundamental Rights of Capitalism
|
it however you see fit (within the limits of the law, of course). This right acts as a powerful motivator for business owners in a capitalist economy; the lower the tax rate, the higher the motivation. The U.S. government strives to maintain low tax rates to preserve the after-tax profit incentive that plays such a pivotal role in the free enterprise system. The right to private property: This means that individuals and private businesses can buy, sell, and use property—which includes land, machines, and buildings—in any way that makes sense to them. This right also includes the right to will property to family members. The only exceptions to private property rights are minimal government restrictions designed to protect the greater good. You can’t, for instance, use your home or business to produce cocaine, abuse children, or spew toxic smoke into the air. The right to free choice: Capitalism relies on economic freedom. People and businesses must be free to buy (or not buy) according to their wishes. They must be free to choose where to work (or not work) and where to live (or not live). Freedom of choice directly feeds competition, creating a compelling incentive for business owners to offer the best goods and services at the lowest prices. U.S. government trade policies boost freedom of choice by encouraging a wide array of both domestic and foreign producers to compete freely for our dollars. The right to fair competition: A capitalist system depends on fair competition among businesses to drive higher quality, lower prices, and more choices. Capitalism can’t achieve its potential if unfair practices—such as deceptive advertising, predatory pricing, and broken contracts—mar the free competitive environment. The government’s role is to create a level playing field by establishing regulations and monitoring the competition to ensure compliance.
|
|
|
Four Degrees of Competition
|
pure competition A market structure with many competitors selling virtually identical products. Barriers to entry are quite low.
|
|
|
sss |
monopolistic competition A market structure with many competitors selling differentiated products. Barriers to entry are low.
|
|
|
sss |
oligopoly A market structure with only a handful of competitors selling products that can be similar or different. Barriers to entry are typically high.
|
|
|
sss |
onopolym A market structure with one producer completely dominating the industry, leaving no room for any significant competitors. Barriers to entry tend to be virtually insurmountable.
|
|
|
sss |
natural monopoly A market structure with one company as the supplier of a product because the nature of that product makes a single supplier more efficient than multiple, competing ones. Most natural monopolies are government sanctioned and regulated.
|
|
|
supply
|
The quantity of products that producers are willing to offer for sale at different market prices.
|
|
|
supply curve
|
The graphed relationship between price and quantity from a supplier standpoint.
|
|
|
demand
|
The quantity of products that consumers are willing to buy at different market prices.
|
|
|
demand curve
|
The graphed relationship between price and quantity from a customer demand standpoint.
|
|
|
equilibrium price
|
The price associated with the point at which the quantity demanded of a product equals the quantity supplied.
|
|
|
socialism
|
An economic system based on the principle that the government should own and operate key enterprises that directly affect public welfare.
|
|
|
communism
|
An economic and political system that calls for public ownership of virtually all enterprises, under the direction of a strong central government.
|
|
|
mixed economies
|
Economies that embody elements of both planned and market-based economic systems.
|
|
|
privatization The process of converting government-owned businesses to private ownership
|
sss |
|
|
gross domestic product (GDP) The total value of all final goods and services produced within a nation’s physical boundaries over a given period of time.GDP is a vital measure of economic health. Business people, economists, and political leaders use GDP to measure the economic performance of individual nations and to compare the growth among nations.
|
sss |
|
|
unemployment rate The percentage of people in the labor force over age 16 who do not have jobs and are actively seeking employment.GDP is a vital measure of economic health.
|
sss |
|
|
The business cycle is the periodic contraction and expansion that occurs over time in virtually every economy.
|
sss |
|
|
contraction A period of economic downturn, marked by rising unemployment and falling business production.
|
sss |
|
|
recession An economic downturn marked by a decrease in the GDP for two consecutive quarters.
|
sss |
|
|
depression An especially deep and long-lasting recession.
|
sss |
|
|
Recovery is a period of rising economic growth and increasing employment, following a contraction. Businesses begin to expand. Consumers start to regain confidence, and spending begins to rise. The recovery is essentially the transition period between contraction and expansion.
|
sss |
|
|
Expansion is a period of robust economic growth and high employment. Businesses expand to capitalize on emerging opportunities. Consumers are optimistic and confident, which fuels purchasing, which fuels production, which fuels further hiring
|
sss |
|
|
inflation A period of rising average prices across the economy.
|
sss |
|
|
hyperinflation An average monthly inflation rate of more than 50 percent.
|
sss |
|
|
disinflation A period of slowing average price increases across the economy.
|
sss |
|
|
deflation A period of falling average prices across the economy.
|
sss |
|
|
consumer price index (CPI) A measure of inflation that evaluates the change in the weighted-average price of goods and services that the average consumer buys each month.
|
sss |
|
|
producer price index (PPI) A measure of inflation that evaluates the change over time in the weighted-average wholesale prices.
|
sss |
|
|
productivity The basic relationship between the production of goods and services (output) and the resources needed to produce them (input) calculated via the following equation: output/input = productivity.
|
sss |
|
|
Self-Reliance As an entrepreneur, the buck stops with you. New business owners typically need to do everything themselves, from getting permits, to motivating employees, to keeping the books—all in addition to producing the product or service that made them start the business in the first place. Self-reliance seems to come with an internal locus of control, or a deep-seated sense that the individual is personally responsible for what happens in his or her life. When things go well, people with an internal locus of control feel that their efforts have been validated,
|
sss |
|
|
external locus of control A deep-seated sense that forces other than the individual are responsible for what happens in his or her life.
|
sss |
|
|
And virtually no conventional lending source—private or government— will lend 100% of the start-up dollars for a new business. Most require that the entrepreneur provide a minimum of 25 to 30% of total start-up costs from personal resources.15
|
sss |
|
|
Another source for loans may be the U.S. Small Business Administration (SBA). The SBA doesn’t give free money to start-up businesses—neither grants nor interest-free loans—but it does partially guarantee loans from local commercial lenders.
|
This reduces risk for the lenders, who are, in turn, more likely to lend money to a new business owner. The SBA also has a microloan program that lends small amounts of money—$13,000 on average—to start-up businesses through community nonprofit organizations.16
|
|
|
Peer-to-peer lending offers yet another potential funding source for new business start-ups.
|
Websites such as Prosper.com and LendingClub.com bring together borrowers and investors so that both can benefit financially. Many entrepreneurs have found this is an easier way to get money, at more favorable terms, than through more-established sources.
|
|
|
angel investors
|
Individuals who invest in start-up companies with high growth potential in exchange for a share of ownership.
|
|
|
venture capital firms
|
Companies that invest in start-up businesses with high growth potential in exchange for a share of ownership.
|
|
|
Access SBA Resources The SBA offers a number of resources beyond money (which we’ll discuss in the next section).
|
The SBA website, www.sba.gov, provides a wealth of information from industry-specific statistics, to general trends, to updates on small business regulations. The SBA also works hand in hand with individual states to fund local Small Business Development Centers (SBDCs). SBDCs provide a range of free services for small businesses from developing your concept, to consulting on your business plan, to helping with your loan applications. And the SBA supports SCORE, the Service Corps of Retired Executives at www.score.org. They provide free, comprehensive counseling for small businesses from qualified volunteers.
|
|
|
Small Business Development Centers (SBDCS) Local offices—affiliated with the Small Business Administration—
|
that provide comprehensive management assistance to current and prospective small business owners.
|
|
|
SCORE (Service Corps of Retired Executives)
|
An organization—affiliated with the Small Business Administration—that provides free, comprehensive business counseling for small business owners from qualified volunteers.
|
|
|
business plan
|
A formal document that describes a business concept, outlines core business objectives, and details strategies and timelines for achieving those objectives.
|
