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Lecture 1 - Chapter 1

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McMaster University
Rita Cossa

Lecture 1 – Chapter 1 General Defintions • A business is any activity that seeks to provide goods and services to others while operating at a profit (revenues minus expenses) • Profit is the amount of money a business earns above and beyond what it spends for salaries and other expenses. o Since not all businesses make a profit, starting a business can be risky • Business principles are also used in government agencies and non-profit organizations, which oftentimes have goals other than making a personal profit for their owners or organizers Risk Reward Trade-Offs • Starting a business involves risk • Risk is the chance an entrepreneur takes of losing time and money on a business that may not prove profitable • Different people have different tolerances for risk • To decide which is the best choice for you, you have to calculate the risks and the potential rewards of each decision Two ways to succeed in business are to: 1. Work your way to the top within a company • The advantage of working for others is that somebody else assumes the entrepreneurial risk and provides you with benefits 2. Start your own business • When you consider Canada’s wealthiest citizens, you will find that they arrived at their wealth as a result of this entrepreneurial spirit (or they were born into a wealthy family) Two Markets • Consumer Market (Business to Consumer / B2C) o products (goods or services) that are purchased for personal use o Business Market / Industrial Market (Business to Business / B2B) o product are purchased for resale OR o for use in the manufacture of other products OR o for daily operations o A business can sell to both types of markets Stakeholders o defined as all the people who stand to gain or lose by the policies and activities of a business • Customers want value • Employees want security • Investors want a strong ROI (return on investment) • Suppliers want to be paid • Dealers want support • Financial institutions want returns • Surrounding communities want “equity” • Governments want compliance • Environmentalists want change • Future employers want skilled graduates Creating Economic Wealth • If you were to analyze countries to see what causes the differences in the levels of wealth, you’d have to look at the factors of production in each country • Five Factors of Production 1. Land (natural resources) 2. Labour (workers) 3. Capital Goods (physical assets not money) 4. Entrepreneurship 5. Knowledge (most important factor) • What makes countries rich today is a combination of entrepreneurship and the effective use of knowledge • Entrepreneurs use what they’ve learned (knowledge) to grow their businesses and increase wealth • Economic and political freedom also matter Standard of Living and Quality of Life • A country’s businesses are part of an economic system that contributes to the standard of living and quality of life for everyone in the country (and, potentially, the world) • The term standard of living refers to the amount of goods and services people can buy with the money they have • The term quality of life refers to the general well-being of a society in terms of its political freedom, natural environment, education, health care, safety, amount of leisure, and rewards that add to the satisfaction and joy that other products provide • Maintaining a high quality of life requires the combined efforts of businesses, non-profit organizations, and government agencies • The more money businesses create, the more is potentially available to improve the quality of life for everyone • It’s important to be careful, however. Working to build a higher standard of living may lower the quality of life if it means less time with family or more stress The Business Environment The business environment consists of the surrounding factors that either help or hinder the development of businesses. • Businesses that create wealth and jobs grow and prosper in a healthy environment • Thus, creating the right business environment is the foundation for social benefits of all kinds including good schools, clear air and water, good health care, and low rates of crime • Businesses normally cannot control their environment, but they need to monitor it carefully and do what they can to adapt as it changes Legal and Regulatory Environment • Governments can do a lot to lessen the risk of starting and running a business through laws o Freedom of ownership o Contract laws o Elimination of corruption o People are willing to start new businesses if they believe that the risk of losing their money isn’t too great. o Part of that decision is affected by how governments work with businesses The Economic Environment • One looks at income, expenditures, and resources that affect the cost of running a business and a household. • Businesses review
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