CHAPTER 1

Understanding
The Business System

Presented by: Anna Riana Putriya

The Concept Of Business and
The Concept Of Profit

• Business is an organization
that provides goods or services to
earn profits

• Profits represent the difference

between a business’
business’s revenues
and its expenses

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What Are Factors of Production?

Resources used in the

production of goods and
services—
services—labor, capital,
entrepreneurs, physical
resources and information
resources

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Factors of Production

1. Labor/
Labor/Human resources /
Intelectual Capital are the
physical and mental
capabilities of people as they
contribute to economic
production
2. Capital are the funds needed to
create and operate a business
enterprise

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3. Entrepreneur is an individual who accepts the
risks and opportunities involved in creating and
operating a new business venture

4. Physical resources are tangible things

organizations use in the conduct of their
business

5. Information resources are data and other

information used by business

Can you name any others ?

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Economic Systems Around the World

An economic system is a nation’

nation’s system for
allocating its resources among its citizens.

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Types of Economic Systems

Planned
Economies

Communism Socialism
(Mixed Market)

Capitalism vs. Market

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1. Planned Economy

Relies on a centralized
government to control all or
most factors of production and
to make all or most production
and allocation decisions. The
Kremlin is shown above.

What Is Communism?
Planned economy in which the government owns and
operates all factors of production

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2. Market Economy

Relies on individuals to control production and

allocation decisions through supply and
demand

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What is Market?
Mechanism for exchange between the buyers and
sellers of a particular good or service

What Is Capitalism?
Market economy that provides for private ownership of
production and encourages entrepreneurship by offering
profits as an incentive

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Circular Flow in a Market Economy

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3. Mixed Market Economy

Features characteristics of both planned and market

economies

• Privatization is the process of converting

government enterprises into privately
owned companies

• Socialism is a partially planned system

in which the government owns and
operates selected major industries

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Demand and Supply in a Market Economy

• Demand is the willingness

and ability of buyers to
purchase a good or service

• Supply is the willingness

and ability of producers to
offer a good or service for sale

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The Laws of Supply and Demand

The law of demand:

Buyers will purchase (demand) more
of a product as its price drops and less
as its price increases.

The law of supply:

Producers will offer (supply) more of
a product for sale as its price rises
and less as its price drops.

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What Is the Market Price (or Equilibrium Price)?

Profit-
Profit-maximizing price at which the quantity of goods
demanded and the quantity of goods supplied are equal

High
2500 Surplus
D S
2000
Pizza Price

1500

1000 Market Equilibrium

500

0 Shortage
2 4 6 8 10 12 14 16 18 20
Low
Quantity High
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Private Enterprise and Competition in a
Market Economy

Private enterprise is an economic system that allows

individuals to pursue their own interests without
undue governmental restriction.
Four elements:
– Private Property Rights
– Freedom of Choice
– Profits
– Competition

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Degrees of Competition

Monopolistic
Oligopoly Competition

One Many

Monopoly Perfect
Competition

Sellers

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Degrees of Competition

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Evolution in Business

Production Era Marketing Era

Laissez-
Laissez-Faire & Global Era
Entrepreneurship Era

Industrial Revolution Information &

Internet Era

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