Chapter One

What is Business?
McGraw-Hill/Irwin
Introduction to Business

2007 The McGraw-Hill Companies, Inc., All Rights

Reserved.

Learning Objectives
1. Differentiate the three meanings of business
as commerce, business as occupation and
business as organization and identify the four
main kinds of productive resources.
2. Understand how the forces of supply and
demand determine fair, or market, prices.
3. Appreciate how a companys business model
is the source of its competitive advantage and
can mean the difference between merely
making a profit and profitability
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Learning Objectives
4. Recognize the way specialization and the
division of labor lead to increasing profit and
wealth via the markets invisible hand.
5. List the reasons why business organizations
are created and how they facilitate commerce
and lower transaction costs.

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What is Business?
Business
- goal-directed behavior aimed at getting and
using productive resources to buy, make,
trade, and sell goods
and services that can
be sold at a profit

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Key Business Terms

Productive resources
- the four crucial ingredients land, labor,
capital, and enterprise that are needed to
profit from business

Operating costs
- the cost of acquiring and using the four
productive resources to make and sell
goods and services
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Productive Resources and Operating Costs

Figure 1.1
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Key Business Terms

Product
- any kind of good or service that other
people value and want to buy

Value
- how much utility a product gives customers,
how well it satisfies their desires or needs

Price
- a way of measuring the value of a product
by how much customers are willing to pay
for it
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Products
What products are
found at
thinkgeek.com?
What competitive
advantage does
ThinkGeek have?

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Key Business Terms

Business Model
- a companys plan of action to use
resources to create a product that will give
it a competitive advantage

Competitive advantage
- a companys ability to offer customers a
product that has more value to them than
similar products offered by other
companies
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Question?
What is the amount of money or income that
a company generates from the sale of
the product?
A. Net income
B. Profit
C. Sales revenue
D. IBIT

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Key Business Terms

Sales revenue
- the amount of money or income that a
company generates from the sale of the
product

Profit
- the total amount of money left over after
operating costs have been deducted from
sales revenues
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Key Business Terms

Capital
- profit that is kept in a company and
invested in its business

Wealth
- the sum total of the resources, assets,
riches, and material possessions owned by
people and groups in society

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Key Business Terms

Franchising
- a business practice whereby investors are
allowed to purchase the right to own and
operate a business using a companys
name and business model

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Key Business Terms

Nonprofit organization
- an organization that is not in business to
make profit but to provide value to the
people and groups it serves

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The Three Meanings of Business

Business system
- the combination of commerce, occupations,
and organizations that result in the
production and distribution of goods and
services people value

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The Business System: Commerce, Occupation, Organization

Figure 1.2
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Business as Commerce
Business commerce
- the process by which people produce and
exchange valuable goods and services that
fulfill their wants and needs

Trade
- the exchange of products through the use
of money

Barter
- the exchange of one product for another
product
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Demand, Supply, and

the Market Price
Diminishing marginal utility
- the principle that the value people receive
from an additional unit of a product declines
as they obtain more of a product

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Demand, Supply, and

the Market Price
Law of demand
- the principle that states as the price of a
product rises, consumers will buy less of it,
and as the price of it falls, consumers will
buy more of it

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Demand, Supply, and

the Market Price
Law of supply
- the principle that states that as the price of
a product rises, producers will supply more
of it, and that as the price of it falls,
producers will supply less of it

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Demand, Supply, and

the Market Price

Figure 1.3

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Determining the Market Price

Market
- buyers and sellers
for a particular
product

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Question?
What is a group of companies that makes
similar products and competes for the
same customers?
A. Industry
B. Factory set
C. Trade group
D. NSCA cluster
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The Business Model and

Profitability
Industry
- a group of companies that makes similar
products and competes for the same
customers

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Profit and Profitability

Profitability
- a measurement of how well a company is
making use of its resources relative to its
competitors

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Increasing Profitability
Companies are in competition to:
1. Develop new and improved products to
attract customers
2. Use their resources more productively in
order to reduce their operating costs

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Increasing Profitability
Premium price
- the higher price a seller is able to charge
versus what its competitors can charge

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Positive and Negative Effects of Self-Interested Behavior

Figure 1.5
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Business as an Occupation
Specialization
- the process by which people become more
skilled and productive when they perform a
narrowly defined range of tasks specific to
an occupation or job

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Business as an Occupation
Business occupation
- the acquired set of
skills that enable a
person to create
valuable goods
and service that
can be traded at a
profit

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How Specialization and the Division of Labor Increase Capital and Wealth

Figure 1.6
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The Invisible Hand of the Market

Invisible hand
- the principle that the pursuit of self-interest
in the marketplace naturally leads to the
improved well-being of society in general

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The Invisible Hand of the Market

Monopoly
- a situation in which one company controls
the supply of a product and can charge an
artificially high price for it

Human capital
- a persons stock of knowledge, skills,
experience, judgment, personality, and
abilities
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Transaction Costs Related to

Business
Transaction Costs
- the costs of bargaining, negotiating,
monitoring, and regulating exchanges
between people in business

Teamwork
- a phenomenon that occurs when people
pool their skills to create more valuable
products than they could create alone
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How Business Organizations Lower

Transaction Costs
Business organizations
- a tool that empowers people to shape and
control the behavior of other people to
produce goods and services

Organizational structure
- the framework of task and authority
relationships that coordinates people so
they work towards a common goal
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How Business Creates Value for

People
Functional activities
- the task-specific operations needed to
convert resources into finished goods and
services sold to customers

Value chain
- the coordinated series or sequence of
functional activities necessary to transform
resources into the products customers want
to buy
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How Business Creates Value for

People
Primary functions
- functions directly responsible for utilizing
scarce resources most efficiently and
effectively to create goods and services

Secondary functions
- functions not directly responsible for getting
products to customers but whose activities
contribute to the efficiency and
effectiveness of other functions
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Primary and Secondary Value-Chain Functions

Figure 1.9
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Video - Todd McFarlane

This video features a discussion with Todd
McFarlane, CEO of McFarlane Companies
in Tempe Arizona.
1. From Todd McFarlanes perspective, what is
the key element of his business model?
2. What are the four main productive factors in
business organizations?
3. What influences people to buy or not buy a
product such as the comic book Spawn
created by McFarlane?
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