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Business Chapter 1-4


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Those organizations that try to create value for the customer
The difference between revenue and expenditure
Not-For-Profit Organization
A organization whose primary objective is to provide goods and services for the community without the goal of making a profit
The probability of failure
Four Evolutions of Business
-Industrail Revolution/Factory System
-Railroad Era
-Assembly Line/Depression
-Post WII/Globalization
Factory System
A method of mass production in which everything is in one location to produce goods less expensively
Specialization of Labor
Grouping employees to work on assigned tasks on the basis of their specific skills and factory demand
Laissez Faire
The economic doctrine that advocates total governemnt inaction in business, so business can do what they want
Market Domination
A strategy of either acquiring competitors or colluding with the to control product prices and prevent new competitors
Antitrust Policies
Government laws designed to break up monopolies and control monopoly abuses by business
The organization sets rules of conduct for international trade policy and is headquartered in Geneva
The process of intergrating the market for goods and services worldwide
New Economy
An economy largely driven by developments in information technology and the Internet
Knowledge Workers
Workers with a job that need a formal or advanced schooling
Main Characteristics of Knowledge Workers
-Upwardly Mobile
-Offered the potentaial for success
Economic Resources
Land,labor,capital,and technology that are scarce
Economic system that is based on private property rights, the free market, pursuit of self-interest, freedom to choose, and ability to borrow money
Free Market System
Economic system in which consumers demand certain goods and services and are willing to pay a price based on their budget, and producers are willing to supply the goods and services on the basis of a price that will cover their costs and provide a profit margin
Theory/Law of Demand
The statement, which appears to hold, that consumers will buy more when prices fall and less when prices are up
Demand Curve
The cruve that shows the relationship between the quantity demanded and the price of a product or service for a particular customer, group, or country
Price Inelastic Demand
The demand where significant increases in the price of a product or service will have little effect on the quantity of the product or services sold
Price Elastic Demand
The demand where a small change in the price will have a significant impact on the quantity of the product or service demanded
Theory/Law of Supply
The statement, which appears to hold, that producers will be willing to sell more when the prices rise and less when prices fall
Supply Curve
The curve that shows the relationship between the quantity supplied and the price of a product or service
Price Inelastic Supply
The supply where a large change in the price will have little impact on the quantity of a good or service supplied by the producer
Price Elastic Supply
The supply where a small change in the price will bring about significant increases in the quantity of a product or service supplied by the producer
Market Clearing/Equilibrium
The price at which supply will equal demand
The amount of a good or service that will not be available when the price of the good or service is set below the equilibrium price
(Demand will exceed supply)
The amount of a good or service that will not be sold when the price of the good or service is set about the equilibrium price
(Supply will exceed demand)
Product Life Cycle Theory
The theory that explains the different stages that a product goes through before it fades away
The Life Cycle of a Product
Market Structure
The organization of an industry determined by the level of competition within the industry
Pure Competition
The industry market structure where there are a large number of suppliers that produce essentially identical products, which are sold at a price determined by the market
The industry market structure where there is essentially a single supplier of goods or services that has the power to set the prices
Imperfect Competition
The industry market structure where the industry's output of goods or services is supplied by a relatively small number of firms and price is largely determined by market forces
Firm Concentration Ratios
The percentage of total industry output that can be accounted for by the four largest firms and so a measure of the sellers' market power
Barriers to Competition
Barriers that arise when certain legal restrictions that reduce the level of competition are imposed on an industry
The Three Different Trade Barriers to Competition
Awards to companies or individuals by governments to protect their inventions for a set period of time
The practice in which a company or individual provides the foreign partner the technology to manufacture and sell products or services for an annual license fee
Taxes on imports
The industry market structure where a few producers of almost identical products cater to the needs of the whole market
Product Differentation
A strategy that firms employ to make their product seem different from those of their competitors
Command/Planned Economic System
The economic system in which the ownership and control of the factors of production are totally in government hands
The Command/Planned Economic System's Objectives
-Utilize as much of domestic resources as possible
-Employ whoever wants to work to solve unemployment
-Minimize income inequality among workers
-Provide limited choice to workers
State Enterprises
Goverment owned firms that produce goods and services, generally in command and mixed economic systems
Mixed Economic System
The economic system that exhibits elements of both the capitalist and the command economic systems
The process of selling state enterprizes to private entrepreneurs
Economic Transition
The move from a command economic system to a capitalist economic system
A wide array of useful goods or services that are either consumed or used for further production in business
Factors of production or commodities or services that are used by firms in their production process
People with initiative who seize opportunites as they see them to get things done or make things happen, generally for profit
Capital Goods
Finished goods like machinery and equipment that can be used as inputs for further production of goods and services
Those who have a financial stake in a business, small or large, and expects to receive a return on their invested capital
The sum of the quantities of all goods or services sold times their price
The portion of profits distributed to stockholders
Retained Earnings
The portion of profits not distributed as dividends but reinvested back into the company to generate future profits
Increasing Shareholder Wealth
Increasing dividends and stock prices
Stakeholder Company
A business that takes into consideration the interests of all its partners, including its customers, management, employees, suppliers, and society
Business Ethics
The principles governing whether certain business practices are morally acceptable
The dollar output of goods and services per dollar input of labor
Unsold goods in stock
Consumer Confidence Index
An indicator that measures the self-assurance of consumers and is crucial in determining consumer spending habits that have a direct impact on business prospects and the economy
Target Group
A population segment whose members have more or less similar consumption habits
Market Segmentation
The breakdown of target consumers into categories on the basis of age, gender, education, ethnic backgrond, etc
The analysis and understanding of the consumer's mind to identify consumer likes, dislikes, or preferences
The behavior patterns, beliefs, and institutions that underpin all human activities
Gross National Product (GNP)
The value of all final goods and services produced in an economy and measured at current prices over a given time period, usually a year
Gross National Income (GNI)
The expenditures that make up GNP and are equal to the income that the factors of production receive
The amount used by private domestic residents
The amount spent by private firms on new plant and equipment for future production and profit
Government Expenditures
The purchase of goods and services by the government to serve the public's interest
Net Exports
Exports minus imports of goods and services
Gross Domestic Product (GDP)
The total dollar value of all final goods and services produced each year within a country's borders
Nominal GNI, GNP, or GDP
Economic output measured in current prices
Real GNI, GNP, or GDP
Economic output measured on an inflation-adjustment basis
Purchasing Power Parity (PPP)
The purchasing power of an international dollar, which will have the same purchasing power in any country as the U.S. dollar has in the United States
Business Cycle
The up and downswings in real GNI, GNP, or GDP levels over time
Digital Era
The period of transformation within our lifestyle to make the Internet and related technologies a part of our everyday lives
The amount of data and other info that can be transferred in a second via the Internet
E-Business Trends
-Companies are transforming on a massive scale
-Customers are becoming smarter and more demanding
-Business is becoming more nimble
-Knowledge is the key asset
-Transparency and openness are crucial for business success.
Business to consumer electronic commerce
Business to business electronic commerce
Three major issues that impact business today
Sound Economic Management Objective
-High levels of output with GDP growth
-High levels of employment
-Low rates of inflation
-Stable exchange rates
Stable Currency
A currency with a value that does not fluctuate wildly
Two Major Elements of Fiscal Policy
-Government Expenditure
Fiscal Policy
A government policy of using expenditures and taxation to guide the economy to meet economic goals
Disposable Income
The money left over after taxes are taken out of a person's paycheck
Monetary Policy
A policy followed by the central bank to control money supply in an economy, to manage inflation, growth, employment, and exchange rate
Incomes policies
Strategies based on wage and price controls that are used by government to curb inflation and at the same time maintain employment and keep economic output stable
Trade Policy
Gov policy implemented primarily through changes in tariff rates or quotas with the objective of encouraging exports or discouraging imports
Exchange Rate Policy
A policy of managing the country's exchange rate, to improve the country's balance of payments position
International Trade
The imports or export of goods or services from or to other countries by individuals, firms, or governments
Goods or services that are purchased from abroad
Goods or services that are sold to citizens abroad
Free Trade Regime
A system in which imports and exports of goods or services take place voluntarily, without government restrictions and based on a principle of free market
International Trade Benefits for Consumers
-A greater amount of choice
-Lower prices for goods
-Higher living standards
Absolute Advantage
The ability of one country to produce a good or service more efficiently than the other
Comparative Advantage
The ability of one country that has an absolute advantage in the production of two or more goods to produce one of them relatively more efficiently than the other
Foreign Direct Investment (FDI)
An overseas investment in plant and equipment to produce goods or services for local consumption or for exports
The government practice of impsing trade barriers to shield domestic producers from international competition
Five Major Trade Barriers
-Voluntary Restraints
-Counter Trade
Quantitative Restrictions (QR)
Quotas that limit the amount of imports that can come into a country
Voluntary Restraints
Self-imposed export quotas on specific sensitive products to a specific country/countries for a set period of time
Counter Trade
A barter system of exchange in which trade between specific countries is conducted without the use of monetary transactions
Trade sanctions that are imposed on a country and that restrict trade with that country
Foreign Exchange Market
Financial centers where a network of international banks and currecny traders transact business
Three Largest Foreign Exchange Markets
-New York
Exchange Rate
The price of one currency compared with that of another currency
Floating Exchange Rate System
The system in which currency values are determined by the demand for and supply of currencies in a foreign exchange market
Managed Floating Exchange Rate System
A floating exchange rate system in which the values of some currencies are partly determined by active government intervention
Fixed Exchange Rate System
The system in which a country fixes its currency value at a fixed rate to a major currecy or a basket of currencies
Free Trade Area
An area in which two or more countries agree to eliminate all barriers to trade such as tariffs, while at the same time they keep their own external tariffs against nonmembers
Customs Union
A group of free trade member countries that have adopted a common external tariff with nonmember countries
Common/Single Market
A market formed when member countries of a customs union remove all barriers to the movement of capital and labor within the customs union
Economic and Monetary Union
A union formed when members of a common market agree to implement common social programs and coordinated macroeconomic policies that would lead to the creation of a single regional currency and an apex central bank
Political Union
The union created when member countries of an economic and monetary union work closely with each other to arrive at common defense and foreign policies and behave as a single country
The Triad Economies
Risk Profile
The potential loss that entrepreneurs are willing to take in a business
Export-Import Business
A relatively low-risk operation that involves penetrating foreign markets or importing merchandise at competitive prices for domestic consumption
The practice in which a firm is obligated to provide specialized equipment and service suppport, and at times even some seed money, in return for an annual fee from the franchisee
International Jointventure
A business that is jointly owned that pool their resources, tech, and management to penetrate host country markets, generate profits, and share the commercial risk
Strategic Alliances
Marriages of convenience between two or more firms that do not involve the creation of a separate entity with joint ownership and in which the firms stand to gain through cooperation with each other for specific purposes and for a given period of time
Multinational Enterprises (MNE's)
Frims that have a home base in one country, but owns plants or other businesses in one or more foreign countires
Why MNE's invest abroad
-Acquiring essential raw material
-Maximizing production efficiency
-Expanding market share
-Minimizing compliance cost
-Pursuing a politically safe business environment
The Maquiladora program allowed factories to temporarily import supplies, parts, machinery, and equipment to produce goods in Mexico duty-free, as long as the output was exported back to the U.S
Mergers and Acquisitions
The process of identifying, valuing, and taking over a foreign firm to meet a company's growth objectives
Purchase of established firms abroad with the goal of utilizing the existing production, marketing, and distribution networks and of having instant access to foreign markets that fit the purchasing firm's global strategy
New facilities built and operated overseas by MNEs that require large investment of capital given the fact that these new establishments are tailored to the exact needs of the MNEs
Sole Proprietorships
Individually operated unincorporated businesses
Unincorporate businesses run by two or more individuals
Partnership Agreement
An agreement spelling out the organizational details of a partnership
General Agreement
Partners who run the partnership's business and who are liable for its actions
Limited Partners
Partners whose liabiltiy is limited to the amount of money they invested in the partnership and who generally aren't involved in running the business
Legal "persons" or entities, established for the purpose of doing business and distinct from their owners in terms of liability
Limited Liability
The principle that shareholders are not generally liable for the debts or actions of the corporation
Supravoting Shares
Shares of a corporation's stock that have superior voting rights
Pierce the Corporate Veil
The situation where creditors of a corporation are able to break down the legal wall separating the corporation and its shareholders and reach the assets of its shareholders
Board of Directors
The governing board of a corporation, which generally must have at least three members
Inside Directors
Corporate board of directors members employed full-time by the company, example, CEO
Independent Outside Directors
Outside directors who do not have any financial or other relationship with the corporation beyond their service as a director
Business Judgement Rule
The requirement that corporate directors and officers act in good faith and exercise at least an ordinary prudent person's judgement in making business decisions
Chief Executive Officer (CEO)
The top officer of a corporation, responsible for the firm's overall performance
Chief Financial Officer (CFO)
Responsible for accounting and general financial matters at the firm
Shareholder Model of Business Governance
The business governance model operating from the premise that the purpose of the business is to maximize financial returns to shareholders
Owners/Shareholders of a business
People working for the owners of the business
Seperation of Ownership and Control
The fact that the shareholders of major corporations generally do not have much respect to the corporation
Takeover Bid
An offer made by another company to acquire a company
Buy-and-Hold Investors
Investors looking at the long term profitability of a corporation
Asymmetry of Corporate Information
An imbalance among different people regarding information or what's going on at a corporation
Restricted Stock
Corporate stock that has some restrictions on it, such as when it can be sold
Shareholder Proposal Process
The process by which shareholders make proposals a number of months before a firm's annual meeting
Institutional Investors
Large, professionally managed sources of capital
Confidentiality Agreement
Agreements by the employees to keep confidential trade secrets or other sensitive information learned by working at a company
Covenants Not to Compete
Agreement by employees not to compete with their former employer
Golden Parachute Agreement
Severance payment agreements, often fairly lucrative, to be received by corporate executives if their corporation is acquired
Sarbanes-Oxley Act
Federal corporate governance legislation increasing the duties and the liabilities of corporate officers and direcotrs
Rule FD (Fair Rule Disclosure)
The federal fair disclosure rule prohibiting selective disclosure of corporate information to certain parties
Insider Trading
Stock trading based on material nonpublic information
Short-Swing Profits
Stock trading profits made by corporate insiders within a six month period
Stakeholder Model of Business Governance
The business governance model operation from the premise all groups with a meaningful stake in them
Foreign Corrupt Practices Act
The federal law prohibiting U.S. companies doing business overseas from making payments to foreign officials to influence their discretionary decisions
Business Codes of Ethics
Formal written documents adopted by businesses regarding ethical conduct standards
Small Business
A firm with fewer than 500 employees
A business with fewer than five employees
Creative Destruction
The competitive process where new small firms enter the marketplace to compete against existing larger firms and cause some to fail
Economies of Scale
The reduction in cost per unit output that occurs as a firm mass-produces a product or service
A person within a large corporation who takes the responsibility to develop a new product through innovation and risk taking
Home Business
A small business that is operated out of a household address, rather than out of a business office or factory
Ways Government Can Assist Small Businesses
-Reduction of regulations
-Simplification of tax rules
-Improved access to financial resources
-Providing essential info
Successful Entrepreneur Traits
-Desire for independence
-Risk taker
Visions/Mission Statement
A statement that illuminates the main goals of an enterprise
The aims that guide the future direction of a firm
More detailed descriptions of how a goal can be achieved
Key Components of a Business Plan
-Marketing Plan
-Management Plan
-Operating Plan
-Financial Plan
Venture Capitalists
Investors in small business firms seeking higher-risk and higher-return business opportunities by purchasing equity ownership positions
Venture capitalists who are wealthy individuals and who likely were previously successful small business people
Working Capital
Money needed to pay the short-run expenses of producing a product or service, including raw materials, variable production costs, and labor
Par Value
The initial value of stocks issued by a firm
Stock Price
The market value of a share of stock issued by a firm
Double Taxation of Earnings
The taxation of a corporation's profits plus the taxation of the dividends paid to shareholders from after-tax profits
Dilution of Ownership Control
The loss of ownership control that occurs as more shareholders own stock, thereby reducing the percentage ownership of each individual shareholder
S corporation
A hybrid form of corporation that has limited liability but is taxed as a partnership and therfore avoids double taxation of earnings
Limited Liability Company (LLC)
A type of corporation that combines the corporate advantages of limited liablity protection with the personal taxation of a partnership of S corporation
An authorization by a corporation to individuals that allows them to participate as an owner-manager of a branch entity of that corporate firm
Company Credo
A business philosophy that provies an ethical standard for firm, as well as its managers and employees
The purchase of one firm by another for a price that is paid to the purchased firm's owner/s
Initial Public Offering (IPO)
The first public sale by a firm of its common stock
Business Risks
Internal and external risks of losses that can severely cripple a business or even cause bankruptcy
Internal Business Risks
-Poor business plan
-Bad leadership
-Too much debt
-Inexperienced management
-Marketing problems
External Business Risks
-Competitor firms
-Changes in customer preference
-Economic downturn
-Catastrophic losses from property damage, personal liabilities, and legal problems
Relatively brief slowdowns, or contractions, in economic activity within a business cycle
Long, severe economic downturns that are particularly damaging to a business economy
Property Insurance
Protection purchased from an insurance company against property losses due to fire, water and wind damage, etc
Insurance Premiums
A payment to an insurance company on a monthly or periodic basis for insurance coverage
Liability Insurance
Insurance coverage of employees under worker compensation laws that require employers to pay health and disability costs to injured employees and liablity losses in court decisions against the firm
Health Insurance
Protection offered by insurance companies against the high costs of medical treatments
Disability Insurance
Protection offered by insurance companies against long term expenses due to chronic medical condition
Life Insurance
Protection offered by insurance companies intended to pay a death benefit for a beneficiary
Estate Plan
A plan that seeks to reduce taxes on the family level and provide for an orderly transfer of wealth and leadership within a firm

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