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Introduction to Business NotesDavid Aaron White9/5/12 There are varied definitions of business. The commercial definition of business only arose in the early 1700s. Daniel Defoe, author of The Complete English Tradesman (the first business book), calls business the “pride of the nation.” Wealth should be striven for, according to Defoe, and it is mundane and good for the world.  The Bourgeois Virtues: - Prudence to buy low and sell high. − Temperance to save and accumulate− Justice to insist on private property honestly acquired− Courage for new business ventures.  Theodore Levitt of Harvard University defined the purpose of business: TO CREATE AND KEEP A CUSTOMER. You have to deliver goods at feasible prices, make a profit, attract investors, clarify your strategy, and have a system of rewards and controls to ensure that the business meets its goals. Business activities take place within a capital system. There is an extraction of wealth from the activities of society.  Why make money? We generate wealth to generate more wealth. This is the nature of capitalist society. Wealth only inhabits a place temporarily before more of it must be made. Of course, in the business world, there are winners and losers.  We go into business to seek wealth. Professor explained that education is used as a stepping stone on our path to seeking wealth. People need material objects to survive.  The Theory of the Leisure Class (1899): Humans need wealth in the relative sense of owning more than their neighbors. We accumulate wealth to put ourselves above the people around us. This is an emulative predatory impulse that drives us to want to be seen and distinguished in society.  But not everyone can gain wealth, meaning that the vast majority of us settle for consumerism. With consumerism, we can make people notice us—notice our fashion choices, our car choices—and take the place of greatness.  Yet, we are put off by people who flaunt their wealth, such as the 16 year-olds who get a new BMW the day they pass their driver's license test.  It is the nature of men to desire prestige and distinction. Wealth commands power—the power to be noticed, the power to control others, and the power to live comfortably. In the Western world, for the accumulation of wealth to exist, the means of production are privately owned.  As the Feudal Period ended, businesses could grow free from political and religious control. While this meant that people were free to enjoy the successes of profitable endeavors, it also meant that people were free to feel the negative effects of their failed endeavors. As this process continued, business owners turned to innovation to beat their competition. The market ultimately decides which businesses thrive and which fail. Yet, the losers can come back to the market and try again because it is an autonomous business sphere. You can innovate again and again and try to make a profit. Short-term business is usually a zero-sum game. If I earn a customer at business A, it means that business B, my competitor, has not earned a customer.  Adam Smith: Where there is great property, there is great inequality.  Andrew Carnegie (Gospel of Wealth): The wealthy should be philanthropic. Rich men such as Bill Gates and Warren Buffet have decided to donate considerate amounts of money to charity out of a philanthropic need to do good in the world with the wealth they have acquired. 9/7/12Economic BackgroundReminder: The readings and books are not on the exam, though quizzes are given at random. Quiz questions are simple and random, such as “Who is this person?” These quizzes are 10% of your grade, and if you don't show up, you get a 0. The Lecture Slides are your textbook and will be referred to in these notes. The exams are really a series of three midterms. The third midterm has the last third of class material from the lecture, but has ALL of the section material. The first third of the class is about the context of our business civilization. All businesses operate within a context.  Economics divides into macro and micro—this is a new distinction. They are both ultimately about people, the choices they make, why they make the choices that they do, and the impact of these choices on individuals, businesses, and, overall, the national economy. See “Example 1” slide.  Variable costs: Costs that change with output, with production.  Contribution margin – fixed costs = Operating Profit. Advertising is considered a fixed cost because it can change, but doesn't change with output.  The answer as to which company to pick depends on your tolerance for risk. There is a trade-off between perceived risk and perceived reward.  Economy of scale: As output goes up, fixed cost decreases per unit, therefore total cost decreases. Examples are electricity, automobiles.  Dis-economy of scale: When volume increases but total costs don't decrease.  In 1910, we had a physician who had a choice to make between a cheap car, expensive car, and a horse. The horse was the cheapest, but had the highest operating cost. See Example 2. A math major would graph all of this data to figure out when the operating costs would catch up to the initial investment. In 1910, doctors made housecalls, so they would travel a lot. You need to figure out how many patients you would see in a day, which is called an opportunity cost. It's what you give up to do what you're doing now. Empty seats are an opportunity cost to airlines. Healthcare is filled with opportunity costs. Image is also at play here: How fine do I want to look?  Diane Coyle: Economics is not merely a social science, but it is also a unique way of thinking. Economics is about reasoned and rational decision making as people seek their own best interest. It is a method for analyzing the status quo and changes to the status quo.  According to Coyle, there are 10 Rules for Economic Thinking (see slide, 10 Rules forEconomic Thinking). People recognize that everything has a cost, people see supply and demand at work, there is no easy profit, etc... Gwartney and Stroup also list 7 principles of economics.  The Poverty Lab (reading) was about using economics to make poor people make better decisions and help the overall economy in a poor country.  Hal Varian (Google) claims that economics boils down to the optimization principle and the equilibrium principle.  See slide

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Johns Hopkins EN 660 105 - Introduction to Business Notes

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