Chapter One

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

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

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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Productive Resources and Operating Costs

Figure 1.1

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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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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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Profit and Profitability

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

Profit
- the difference between sales revenues and operating costs

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Business as Commerce
Trade
- the exchange of products through the use of money

Barter
- the exchange of one product for another product

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Transaction Costs Related to Business

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

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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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The Business Model and Profitability

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

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

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

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