Business & Economics Basics - Part I: Fundamentals of Business Dynamics

© 2012 by Theocharis Vagelis

Today I am introducing a new series of Hubs. These Hubs will be part of a new Hub-Group under the name “Business & Economics Basics”. I will be using my resources as an MBA Professor, and I really hope that I will be able to enlighten the reader and teach him the fundamentals of Business Economics, via a step-by-step approach.

I am commencing the series today with "Business & Economics Basics - Part I: Fundamentals of Business Dynamics"

Before, advancing into the core of the material, a one should first clarify some basic notions and answer some basic but at the same time very important questions:

• What is Business?
• Why study Business?

Let us try and answer each question, one by one.

• What is Business? - Business consists of profit-seeking activities that provide tangible goods (cars, computers, chocolate, etc) and services (insurance, rentals, leasing, music concerts, etc) necessary to an economic system.

According to my book “MBA Terms & Glossary”, Business is made of “Business Transactions”, economics events that affect the financial position of the business entity.

Why Study Business? Well, some answers for this question are trivial:

• It provides employment for most people.
• It provides the majority of products needed to survive and enjoy life.
• It will help you become a better informed consumer and member of society.

The business environment is extremely versatile and it changes constantly and rapidly. Some of the current influences on businesses are the following:

1. Technology

• Internet
• E-mail
• E-commerce
• ERP, WMS, EDI
• Robotics, etc

2. The actual way business is conducted: There is a shift from Transaction Management to Relationship Management.

3. Globalization.

Before advancing further, one must elaborate on the notions Transaction and Relationship Management:

• Transaction Management focuses upon buyer and seller exchanges that are characterized by limited communication and little ongoing relationship between the parties.

• Relationship Management focuses upon activities that build and maintain strong, tight, ongoing beneficial ties between the parties (Theocharis V, 2011).

Moreover, via Relationship Management, businesses try to create a) Strategic Alliances and b) value through quality and customer satisfaction. When one talks about the latter, has to know the definitions of the basic notions:

• Value: customer’s perception of the balance and the trade-off between the positive traits of a good and/or service and its price (perceived quality).

• Quality: Degree of excellence or superiority of a firm’s goods and/or service.

• Customer satisfaction: the ability of a good and/or service to match – if not to exceed – buyer’s expectations. (Theocharis V, 2011)

Businesses aim for the profit, that is the reward for the business people for the money and time risk that they are taking. Businesses undertake Profit Strategies; that is investment strategies at the business level whereby a company attempts to maximize the present returns from its previous investments. (Theocharis V, 2011) Profit is calculated as: Total Revenues minus Total Costs.

On the other hand, Nonprofit Organizations, are Business-like establishments, that their primary objective is other than seeking profits. Most Nonprofit Organizations place public service above profits. These establishments exist in both public and private sectors.

Businesses operate within an Economic System that rewards them based upon how well they match and counter the offerings of competitors in order to serve the needs and demands of customers.

Private Enterprises have certain basic rights (in Democratic societies):

• Private property
• Profit
• Freedom of choice, and
• Competition.

In a “Private Enterprise System” there are some basic types of resources used by Businesses. These are the following:

• Natural resources
• Human resources
• Capital (including technology, information, etc)
• Entrepreneurship.

As one understands, the role of the Entrepreneur in such a System is ofprotagonistic importance. Entrepreneurs are the individuals that are able to recognize market and economic opportunities and use their tangible (i.e. capital) and intangible resources (i.e. talent) pursue profit. Entrepreneurs are the risk takers of such an economic system. A true entrepreneur is seeking constant competitive differentiation, so that his or her business is set apart from competitors in the mind of consumers.

According to my book (2011), Microeconomics is the bottom-up view of the economy, focusing on individual households and firms; whereas Macroeconomics is the top-down view of the economy, focusing on aggregate characteristics.

Let us elaborate upon Microeconomics first. The basic concepts / notions of economics in general are the following:

• Demand (D),
• Supply (S), and
• Price (P).

According to “MBA Terms & Glossary” (Theocharis V, 2011), demand refers to the quantity of a good or service that a household or firm chooses to buy at a given price; whereas Supply refers to the will and ability of sellers to provide goods and/or services for sale at various prices (P). Price is the market price at which one can buy a good or servicer.

The following graph depicts the law of Supply and Demand. This is the law in economics that holds that, in equilibrium, prices are determined so that demand equals supply; changes in prices thus reflect shifts in the demand or supply curves. (Theocharis V, 2011). It is made of the demand curve (the amount of a good/service that buyers are willing to purchase at different prices), ad the supply curve (the relationship between different prices and quantities produced).

As defined above, is the top-down view of the economy, focusing on aggregate characteristics. It defines an economy by answering these questions:

• What goods and/or services and what quantity (Q) will satisfy the needs of the consumer?
• How will the goods and/or services be produced?
• Who will produce them and with what resources?
• How are the goods and/or services to be distributed?

There are 3 major economic systems:

• Capitalism
• Socialism
• Communism

These 3 economic systems have the following characteristics:

1. Capitalism:

• Right to ownership
• Entitled to all profits
• Right to choose jobs

2. Socialism:

• State owns basic industries
• Some private industries
• Profits only in private sector
• State influences job choice

3. Communism

• State own industries
• Profits not recognized
• State decides occupation.

These economic systems have been prevalent the last 100 years. The following list gives examples of where they occur:

• Capitalism:USA,Canada,Japan,UK, etc

• Socialism:Sweden,India,France (depending on era), etc

• Communism:North Korea,Cuba, etc.

The countries for which it is most difficult - nowadays - to appoint to a specific system are the ones that used to be the traditional pillars of Communism: Russia and China. I leave it to you.

Four Competitive Environments

There are four major Competitive Environments:

• Pure Competition: Many small businesses sell one standardized product.
• Monopolistic: Fewer businesses sell more or-less standardized products differences between the goods they sell are small.
• Oligopoly: Very few businesses sell a product; the product they sell can be similar or different.
• Monopoly: There is only one producer of a product in a given market. (Theocharis V, 2011)

Macroeconomics Issues

The major macroeconomics issues are the following:

• Inflation
• Business Cycle
• Employment
• Monetary policy
• Fiscal Policy

Business Cycle

A Business Cycle depicts the four possible situations/phases that an economy / society can experience: Prosperity, Recovery, Recession and Depression.During Prosperity phase, the economy experiences high employment and strong economic confidence. During Recovery phase, spending picks up and businesses seek workers. During Recession phase, GDP declines and people purchase the basics. Finally, during Depression phase, the economy experiences high unemployment, idle factories and despair.

It must be noted that some Economists do not use the above Cycle but the following:

• Economic expansion: the same as Prosperity above
• Economic Contraction: occurs when spending declines, may lead to a recession
• Recession: as above
• Depression: as above.

Inflation

Inflation is the rate of increase of the general level of prices (Theocharis V, 2011). There are 2 major types of inflation: a) Cost-push and b) Demand-pull inflation. Cost-push inflation occurs when prices rise due to increases in costs. Demand-pull inflation occurs when demand is larger than the supply.

Unemployment

Unemployment refers to the joblessness of people who are actively looking for work and is expressed as a percent of total work force. The most well-known types of unemployment are the following:

• Frictional
• Seasonal
• Cyclical, and
• Structural.

Even though unemployment is bad anyway, it must be noted that structural unemployment is the most severe unemployment type, as it refers to long-term unemployment that results from structural factors in the economy. (Theocharis V, 2011)

Monetary Policy: Control of money supply, reserve requirements, and discount rates.

Fiscal Policy: Government spending and revenues (taxes).

I hope you enjoyed Part I of “Business & Economics Basics” series.

In the next Hub (Part II) we shall deal with Social Responsibility and Business Ethics.

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