Unit 1 Study Guide and Review: The Context of Business

1a: Identify foundational business practices.

A. Milton Friedman, the author of "Capitalism and Freedom," famously said that businesses are only obliged to focus on their profit margin. He believed businesses contribute to society when they increase profits, provide goods and services, and employ people in the local community.

  • Define business.
  • Define profit margin.
  • Define stakeholder, corporation, corporate social responsibility (CSR).
  • Define profit maximization, social benefit, innovation as a goal.
  • Define contract theory, stakeholder theory, business as property.
  • Name three elements included in a general description of business.
  • Name some different business goals and thoughts on profit maximization.

Review this material in Section 1: The Goals of a Business, of What is a Business?

B. While profit maximization is a fundamental goal for most businesses, other foundational business practices influence how to organize a business to make it more efficient.

  • Define efficiency, delegation, and departmentalization.
  • Define specialization and division of work.
  • List some common organizational structures that reduce the daily burden of running a business.
  • List five common approaches for departmentalization.
  • Which approach would work best in a company where employees perform repetitive duties?

Review this material in Section 2: Benefits of Organization, of What is a Business?

C. In addition to profit maximization and having a sound organizational structure, businesses are also defined by the product they offer (a service or good).

  • Define market and market needs.
  • List seven methods businesses use to identify market needs.
  • Name some business goals and theories regarding addressing market needs.
  • How does a business choose what product to offer its consumers?

Review this material in Section 3: Addressing Market Needs, of What is a Business?

 

1b: Describe economic indicators.

A. We can use a number of economic indicators to explain the condition of the economy at any given moment, such as gross domestic product (GDP), the consumer price index (CPI), and interest rates.

These indicators are either leading (predicting the direction the economy is going), coincident (looking at the current state of the economy), or lagging (fluctuating for months after a change in the economy has taken place). Some indicators provide more relevant information about the economy than others.

  • Define economic indicator.
  • Define gross domestic product (GDP), the consumer price index (CPI), and interest rates.
  • Define and explain the difference among leading, coincident and lagging economic indicators.
  • Identify the economic indicators (leading, coincident or lagging) that are most relevant to businesses in different industries, such as the auto industry or real estate.
  • The Consumer Confidence Index is an example of a leading indicator. The Consumer Product Index is a lagging indicator. Which of these indicators provides a better tool for predicting future inflation?

Review this material in the section Economic Indicators, on page 81 in Introduction to Business: Readings and Workbook.

B. Try inserting some numbers in the U.S. Bureau of Labor Statistics CPI calculator to compare the buying power of today’s dollar with the buying power of the dollar in past years.

C. Let’s review some indicators that can help predict future economic activity.

  • List ten examples of leading economic indicators.
  • List four examples of coincident economic indicators.
  • List seven examples of lagging economic indicators.
  • Which leading economic indicator includes the confidence of investment and the movement of interest rates?

Review this material in the section Economic Indicators, on page 81 of Introduction to Business: Readings and Workbook.

D. The construction industry provides a common indicator for economic activity since so many businesses are intertwined with construction. For example, an increase or decrease in the number of new houses or businesses being built can tell investors and consumers about the general level of confidence in the economy.

  • List some economic indicators the construction industry uses.
  • What does an increase in construction activity tell us about the economy?
  • Explain how to calculate gross domestic product (GDP).

Review this material in the section The Economy, on page 52 of Introduction to Business: Readings and Workbook.

 

1c: Identify positive and negative impacts of business on society.

A. While most businesses benefit the societies in which they operate, some can negatively impact their local community. Some companies commit to a triple bottom line approach agree to strive toward three goals: economic profits, social and moral responsibility, and environmental sustainability.

  • Identify three benefits a local business provides its community.
  • How does corporate social responsibility positively impact business stakeholders?
  • Define triple-bottom-line approach.
  • Why do companies agree to promote a triple bottom line approach?

Review the positive impact businesses have on society in Section 2.5 Corporate Social Responsibility of Exploring Business.

Review the triple bottom line approach in the section Corporate Social Responsibility, on page 252 of Introduction to Business: Readings and Workbook.

B. Companies should identify any potential negative impacts they may have on their local community and put processes in place to mitigate these negative effects. Consider two areas where businesses could negatively impact their local communities: social disruption and environmental damage.

  • Name three examples of how companies can negatively impact their local community.
  • How can businesses limit social disruption to communities, such as when they decide to close a facility?
  • How can businesses limit environmental damage, such as when they decide to open a facility?

Review some negative impacts business can have on society in Section 2.6 Environmentalism, of Exploring Business.

 

1d: Use economic indicators to describe the state and health of an economy.

A. While news reports usually give inflation a negative connotation, inflation is necessary to a growing economy. In addition to periods of inflation, politicians also use the terms depression and recession to describe the state of the economy. Business owners know these descriptors of the economy can play a large role in their decision making.

  • Define inflation.
  • Describe the circumstances in which inflation is positive.
  • Define and describe the differences between a depression and a recession.
  • Is depression or recession more likely to impact a business’s decision to downsize its workforce?

Review the section Inflation, on page 69 of Introduction to Business: Readings and Workbook.

Review the section 1.6 Measuring the Health of the Economy, of Exploring Business.

B. Economic indicators provide more than simple data points politicians incorporate into their political speeches: business managers and consumers use this data to determine whether they should hire additional employees, open up a new store, build a new production plant, or wait until a more favorable time when their customers can afford to buy more of their products or services. Companies use the statistics they obtain from the U.S. Census Bureau to help them make these decisions.

  • List some economic indicators relevant to making business decisions.
  • Which indicator tells businesses consumers are overextended and cannot afford to make new purchases?

Review an explanation of economic indicators and the inflation rate, beginning with the graph Inflation Rate, on page 70 of Introduction to Business: Readings and Workbook.

Review how managers track and use economic indicators in section 1.6 Measuring the Health of the Economy, of Exploring Business.

Review a list of the economic indicators the U.S. Census Bureau collects (everything from construction spending, to rental vacancy rates, to monthly retail inventories) in U.S. Census Bureau: Economic Indicators.

 

1e: Identify and explain current economic trends.

A. Business managers use economic indicators to predict economic trends so they can make decisions, such as calculating how their company will fare during a particular phase of the business cycle. These different phases represent the economic climate, or trends that are taking place in the country or within a certain industry. Each phase of the business cycle presents an economic trend during a given time period.

  • Define business cycle.
  • Define the four phases of the business cycle: expansion, peak, contraction, and trough.
  • Which two of the four phases of the business cycle represent a turn in the cycle?
  • Define the gross domestic product (GDP).
  • What business cycle corresponds to a period of inflation?

Review the following image of the business cycle in terms of the economic indicator, gross domestic product, GDP, on page 75 of Introduction to Business: Readings and Workbook.

Review the business cycle in the sections The Business Cycle, and The Business Cycle: Definitions and Phrases, from Boundless Business.

 

1f: Identify the four phases of the business cycle in real-life situations.

A. The four phases of the business cycle are extremely important in real-life situations: they help business managers make decisions for their companies. For example, knowing what phase the economy is in can help managers predict whether it is a good time to spend their savings to make needed investments in their company. Making investments during an inopportune time could put their organization at risk.

Today's companies are more interconnected than ever, on a national and global scale. For example, when a company or industry sees fewer sales due to a contraction in the economy, they may need to lay off workers, buy fewer raw materials, or postpone buying a warehouse to house a new production facility. Fewer workers means real estate sales plummet, and local small businesses suffer when no one comes into their stores to make purchases.

However, the global economy can protect companies from these economic trends. For example, while the U.S. economy is experiencing a recession, companies may find new buyers of their products in foreign countries that are experiencing an expansion.

  • During an expanding economy, businesses tend to need to produce more products. How will this affect employment and other economic indicators?
  • When the economy is in a trough and customers are not buying products, what are business owners likely to do? How will this affect employment and other economic indicators?

Review how to evaluate the implications and attributes of the different phases of the business cycle in Business Cycles, in the infographic on page 74 of Introduction to Business: Readings and Workbook.

 

1g: Use economic indicators to predict where a business is heading in the business cycle.

A. Business managers use economic indicators to predict where their company may be heading in the business cycle. In other words, economic indicators help managers predict the future. Consider the following scenario: a real estate company hires additional sales people to respond to an increase in the volume of new houses it has listed during the past three months.

  • For this scenario, what phase of the business cycle is the real estate business in? List the factors that led you to this conclusion.
  • What phase would the company be in if it were reducing its salesforce?

B. The U.S. Federal Reserve plays a large role in making changes to the business cycle. Typically, the Federal Reserve creates policy to control the money supply and inflation, which can influence employment levels in the United States.

  • Define the money supply.
  • Describe the functions of the U.S. Federal Reserve?
  • Define and describe the difference between fiscal and monetary policy.
  • Can the actions of the U.S. Federal Reserve cause changes in the business cycle?
  • How does an increase in money supply and inflation affect the business cycle?

Review this material in the sections, Fiscal policy, on page 77, and Monetary Policy, on page 79 of Introduction to Business: Readings and Workbook. Be sure to study the infographic on monetary policy on page 79.

C. We have reviewed how the business cycles correlates with gross domestic product (GDP). Other economic indicators can also predict where the economy is heading in terms of the business cycle.

  • How do economists use employment levels to predict the direction of the economy and the business cycle?
  • How do economists use the consumer price index (CPI) to measure inflation?

Review this material in the section The Consumer Price Index, in 1.6 Measuring the Health of the Economy, of Exploring Business.

 

1h: Describe global trade restrictions.

A. Many companies like to do business globally because it expands their pool of potential customers, which can lead to increased profits. However, business managers have to consider and overcome many barriers to global trade, such as trade restrictions foreign governments impose on outside businesses. Luckily, pathways exist to help alleviate the burden of these government-imposed restrictions.

  • List the trade restrictions governments can impose on foreign businesses.
  • Define and describe the difference between a trade embargo and quotas?
  • Define and describe the difference between tariffs and quotas?
  • How do tariffs, quotas and embargoes affect the economy of the country that imposes the restrictions? How about the individual industry involved?
  • How do tariffs, quotas and embargoes affect the economy of the country that wants to sell goods to a country that has imposed these restrictions? How about the individual industry involved?

Review this material in section International Trade Barriers, from Boundless Business.

B. Differences in currencies present another barrier to global trade. Since most countries use different currencies, how can businesses and consumers know whether they are making an equitable deal? They need to be able to compare and determine the value of each currency in terms of the other. These calculations involve using a currency exchange rate, that can change rapidly.

  • Define the currency exchange rate.
  • What does it mean if the exchange rate in the United States decreases relative to a foreign currency?
  • What does it mean if the exchange rate in the United States increases relative to a foreign currency?
  • Is it more or less beneficial for U.S. businesses to trade with a country that has a currency whose value is stronger or weaker than the U.S. dollar?

Review this material in the sections on the General Agreements on Tariffs and Trade (GATT) and International Trade Barriers from Boundless Business.

 

1i: Identify factors affecting the success of businesses.

A. Entrepreneurs need to be aware of many factors that can influence their business success.

  • List some factors that can affect the success of a business.
  • Define infrastructure.
  • How important is infrastructure, such as availability of roads or railways, to the success of a business?

B. One key factor affecting the success of business is understanding the customer. Who are they? What do they need? How can my product help consumers?

  • Define demographics.
  • How important is it for businesses to understand the demographics of its customers?
  • How would changing demographics have an adverse effect on the profit margins for a business?

Review how to identify consumer trends on page 99 of Introduction to Business: Readings and Workbook.

 

1j: Evaluate the feasibility of doing business in a specific country.

A. We have examined barriers for conducting global business in terms of the restrictions governments place on foreign businesses. Corporations need to consider other factors as they look to expand globally.

  • List some barriers to international business.
  • What is an example of a national rivalry that could prevent a company from operating successfully in a foreign country?

B. Companies conduct business differently in "industrialized" and "non-industrialized" nations.

  • Define industrialized and non-industrialized country.
  • Which of the factors you listed in the previous section are most important to doing business in a non-industrialized country?
  • How does available technology affect the distribution of goods?

Review the explanation of external factors that influence business activities in section 1.2 Getting Down to Business, of Exploring Business.

C. In the previous section we looked at factors that can contribute to, or hinder, business success.These factors are also important to global competition.

  • Which of the barriers to business you listed above are relevant to doing business globally?
  • How does the availability of natural resources influenced small countries, such as Japan, in the global marketplace?

D. Processes that have made it easier for companies to conduct business on a global scale include the formation of economic communities.

  • Define economic community.
  • List some prominent economic communities and the countries that participate in them.
  • How do these economic communities ease global market access?

Review methods for conducting business in foreign countries in section The Drive for International Trade, from Boundless Business, and on pages 56–69 of Introduction to Business: Readings and Workbook.

 

1k: Describe methods for business entry into the global marketplace.

A. Once a company has decided to explore avenues of international trade, it needs to consider the best method for launching their business abroad. For example, the originating business could choose to maintain or relinquish control over its operations.

  • List the methods businesses use to enter the global marketplace. Indicate the advantages and disadvantages of these methods, in terms of risk, cost, and control.
  • Which methods allow foreign business managers to maintain the most control over their product and operations?
  • How does subcontracting differ from licensing?

B. Since the primary goal of most companies is to make a profit, cost is an important consideration when choosing the best method for entering a foreign marketplace.

  • How does importing differ from franchising?
  • Which method businesses use to enter the global marketplace is the least expensive option?

Review this material in section Types of International Business, from Boundless Business.

 

1l: Identify trade facilitators.

A. Barriers to entering a global marketplace include overcoming government-imposed restrictions and other obstructions that can make international ventures risky. Organizations exist whose sole purpose is to help businesses navigate these potential barriers to facilitate international trade.

  • List the major international trade facilitators and their major responsibilities.
  • Which trade facilitator is most likely to resolve trade disputes?

B. Some trade facilitators help businesses understand legal differences while some help them manage the monetary aspects of doing business globally.

  • How does the mission of the World Bank differ from that of the International Monetary Fund?
  • Where should a company go if it wants to conduct business with a foreign company, but needs a third party to "hold" its money until they can take possession of the product?

Review a variety of trade facilitators in section International Trade Agreements and Organizations, from Boundless Business.

 

Unit 1 Vocabulary

  • Business
  • Coincident economic indicator
  • Competition
  • Consumer Confidence Index
  • Consumer Price Index (CPI)
  • Consumer Product Index
  • Contraction
  • Contract Theory
  • Corporation
  • Corporate social responsibility (CSR)
  • Currency exchange rate
  • Delegation
  • Demographics
  • Departmentalization
  • Depression
  • Direct Investment
  • Division of work
  • Economic indicator
  • Economic union
  • Efficiency
  • Expansion
  • Export
  • Fiscal policy
  • Franchising
  • Gross domestic product (GDP)
  • Globalization
  • Import
  • Industrialized and non-industrialized
  • Inflation
  • Infrastructure
  • Innovation
  • Instability
  • Interest rate
  • International Monetary Fund (IMF)
  • Lagging economic indicator
  • Leading economic indicator
  • Licensing
  • Market
  • Market needs
  • Money supply
  • Monetary policy
  • Organization
  • Overextended
  • Peak
  • Prime rate
  • Product
  • Profit margin
  • Profit maximization
  • Quota
  • Recession
  • Service
  • Social benefit
  • Social disruption
  • Specialization
  • Stakeholder
  • Stock
  • Subcontracting
  • Tariff
  • Trade agreements
  • Trade embargo
  • Triple bottom line approach
  • Trough
  • Unemployment
  • U.S. Federal Reserve
  • World Bank
  • World Trade Organization
Last modified: Thursday, March 28, 2019, 5:17 PM