Week 1 · Chapter

Chapter 1 — The Idea and Its Environment

Introduction to Business Free sample edition

The module's primary reading · ~30–40 minutes · Objective 1 (describe what a business is — profit, risk, and the not-for-profit contrast — its stakeholders, the factors of production, and the forces in its external environment, and explain how economic systems, supply and demand, market structures, and the economy's health indicators shape business decisions) · Read it first this week; the lecture, the slides, the tutorial, and the quiz all build on it.

In plain language

This week is about what a business is and about the world around it. A business (any organization that sells goods or services and aims to take in more money than it spends) keeps track of two sides: revenue (the money coming in) and expenses (the money going out). The people who care how a business does are its stakeholders (everyone who can affect it or is affected by it), and there are far more of them than its owners. You will also learn to scan the forces outside a business that it cannot control. Then you will build a SWOT (a grid that sorts what helps and hurts a business, inside it and outside it) for the coffee cart this course follows all term.

Why you already care about this

Think about the last thing you bought. Maybe it was a breakfast burrito from a food stand, a used textbook from a classmate, or a monthly phone plan. Each time, someone on the other side of that sale was running a business. They had bills to pay before your money ever arrived, and they were betting that enough people like you would show up.

You have also been on the inside. If you have worked a part-time job, you have seen a business from behind the counter. You noticed when a supplier was late, when the boss worried about a new shop down the street, or when the city changed a rule about signs or hours. None of those things showed up on the menu board. All of them shaped what the business could do.

This chapter gives you the first tools of the business way of looking: who has a stake in a decision, what an organization runs on, and which changes outside it could help or hurt. We will also meet the running venture, a mobile coffee cart with no named owner. The cart is an illustrative example built for this course, not a real business, and you will follow it from this first idea to a decision about growing beyond its home market.

By the end of this chapter you will be able to:

explain what a business is and tell revenue from profit;
explain how a not-for-profit organization differs from a business and how it is the same;
map the stakeholders of a small organization by group;
name the factors of production in a real workplace;
scan an organization's external environment with a PESTEL checklist;
build a SWOT that keeps strengths and weaknesses inside and opportunities and threats outside.

Carry this line with you: inside is what you control; outside is what you watch.

Where we are

This week: what a business is, the not-for-profit contrast, stakeholders, the factors of production, the external environment, and the coffee cart's first SWOT.
How they connect: this chapter is the foundation, so there is no earlier week to lean on; every later week uses the stakeholder map, the inside-versus-outside habit, and the coffee cart you meet here.
Where we're going next: Week 2, The Market It Sells Into: Economics for Business, studies the market forces this week's scan only names, starting with supply and demand.

This is the first week of the course, so nothing earlier is assumed. You need no business background and no math beyond adding and subtracting. What you do need is the habit of asking two questions about anything that touches a business: is it inside or outside, and does it help or hurt? Next week leans on the economic forces in Section 5, so read that section with care.

1. Define a business: revenue, expenses, profit, and risk

Picture a ride-share driver at the end of a week. The app shows the fares riders paid. That number looks good. But the driver also bought fuel, paid for insurance, and had the brakes fixed. The fares are not what the driver gets to keep.

That gap is the whole idea of a business in one picture.

A business is any organization that sells goods or services with the aim of taking in more money than it spends.

Two words name the two sides of that aim:

Revenue is the money that comes in from selling goods or services, before anything is paid out.
Expenses are the money that goes out to run a business, such as supplies, wages, fuel, and insurance.

The difference between them has its own name.

Profit is what is left when expenses are subtracted from revenue; when expenses are larger than revenue, the difference is a loss instead.

Written as a one-line formula, that is profit = revenue − expenses. This week we say it in words and never compute it from a statement. Statements come much later in the course.

A business never knows in advance which way its year will go. The driver might have a slow month, or fuel might cost more than planned. That uncertainty has a name too.

Risk is the chance that a business's expenses end up larger than its revenue, so that it takes a loss.

Worked example — the driver's week, in words. The ride-share driver's week is illustrative, not real data.

What came in? The fares riders paid. That is revenue.
What went out? Fuel, insurance, and the brake repair. Those are expenses.
What is left? Whatever remains after the expenses are subtracted from the fares. That is profit.
What could go wrong? A week with fewer rides, or a costly repair, could push expenses above fares. That chance is risk.

In words: the fares tell you how busy the driver was, but only the amount left after expenses tells you whether the driving paid off.

Misconception check. Students often think revenue and profit are the same thing, because both are "money the business made." It is a tempting swap, since revenue is the bigger, easier number to see. But revenue is every dollar that comes in, and profit is only what remains after the bills are paid. A business can have large revenue and still take a loss.

Pause and try this. Choose one: (a) think of a business you have bought from and list two expenses it must pay before it earns any profit; or (b) think of a job you have held and name one thing that made the business's expenses rise.

Memory hook: revenue is what comes in; profit is what stays.

2. Compare the not-for-profit: same tools, different purpose

Now picture a community food bank. It collects donations and grants, and some food banks also sell services, such as delivering meals for a fee. All of that money coming in is revenue. The food bank also pays expenses: rent on a warehouse, fuel for its trucks, and wages for a small staff.

So far it sounds like a business. The difference is where any extra money goes.

A not-for-profit organization brings in revenue and pays expenses as a business does but puts any surplus back into its mission instead of paying it out to owners.

A surplus is the not-for-profit's word for revenue left over after expenses. If the food bank ends a year with a surplus, it might buy a second truck or open on more days. It does not hand that money to owners, because it has none in the business sense.

Worked example — following the food bank's surplus. The food bank is illustrative.

Does it bring in revenue? Yes: donations, grants, and delivery fees.
Does it pay expenses? Yes: warehouse rent, truck fuel, and wages.
Can it end the year with more coming in than going out? Yes. That is a surplus.
Where does the surplus go? Back into the mission, such as a second truck. Not to owners.

In words: a not-for-profit tracks revenue and expenses as a business does, but the leftover money serves its mission instead of its owners.

Misconception check. Students often think a not-for-profit "cannot make money." The name makes that easy to believe. But a not-for-profit can run a surplus, and a well-run one often does, to keep a cushion for a hard year. The rule is about distribution, not about earning: the surplus is not paid out to owners.

Memory hook: a not-for-profit can earn a surplus; it cannot pay it out to owners.

3. Map the stakeholders: everyone with something at risk

Picture a neighborhood bike-repair shop. The owner opened it with personal savings. Two mechanics work there. Riders bring in flat tires and bent wheels. A parts distributor ships tubes and chains. A bank lent money for the repair stands. Neighbors live above and beside the shop. The city licenses the business and inspects the building.

Each of them has something riding on how the shop does, and each can change what the shop can do.

A stakeholder is anyone who can affect a business or is affected by it: its owners, employees, customers, suppliers, lenders, the community, and government.

Worked example — the bike shop's stakeholder map. The shop is illustrative. Sort each person or group into one of the seven stakeholder groups, and say in a few words what each has at stake.

Stakeholder map for an illustrative bike-repair shop: seven stakeholder groups, who fills each one, and what each has at stake
Stakeholder group	Who it is at the bike shop	What it has at stake
Owners	the owner who put in savings	the savings, and any profit
Employees	the two mechanics	their pay, hours, and safety
Customers	riders who bring in bikes	good repairs at a fair price
Suppliers	the parts distributor	steady orders and payment on time
Lenders	the bank that lent for the repair stands	being paid back
The community	neighbors on the block	noise, traffic, and a useful shop nearby
Government	the city that licenses and inspects	safe buildings and rules followed

In words: one small shop touches seven different groups, and a decision that pleases one group can cost another.

That last sentence matters. If the owner opens earlier in the morning, riders may be happy, while the neighbors may hear the air compressor at dawn. A stakeholder map does not settle which group should win. It makes sure no group is forgotten before the decision is made.

Misconception check. Students often think "stakeholder" means "shareholder," the person who owns a piece of a company. The words sound alike, so the swap is easy. But owners are only one of the seven groups. Employees, customers, suppliers, lenders, the community, and government all have a stake too, even though none of them owns the business.

Pause and try this. Choose one: (a) pick a place you have worked and name one stakeholder outside the owners who was affected by a decision there; or (b) pick a place you shop and name one stakeholder group you had never thought of before this section.

Memory hook: stakeholders are everyone with something at risk, not only the owners.

4. Name the factors of production: what a business runs on

Picture a family farm in late spring. There are fields and a well. The family works the rows, and a few seasonal workers join at harvest. A tractor sits in the barn. Someone in the family decided this year to plant a new crop and take the chance that it sells.

Those four things are the raw ingredients every business mixes. Economics gives them a name.

The factors of production are the resources used to make goods and services, which economics conventionally names as four: natural resources, labor, capital, and entrepreneurship.

Natural resources are the land, water, minerals, and other gifts of nature that go into making goods and services; economics also calls this factor land.
Labor is the human time and effort that go into making goods and services, paid for with wages.
Capital is the tools, machines, equipment, and buildings that are made to help produce other goods and services.
Entrepreneurship is the work of spotting a chance to sell something, combining the other resources to do it, and carrying the risk that it fails.

Worked example — the farm's four factors. The farm is illustrative.

Natural resources: the fields and the well water.
Labor: the family's work and the seasonal workers at harvest.
Capital: the tractor and the barn.
Entrepreneurship: the decision to plant a new crop and carry the risk that it does not sell.

In words: the farm turns land, work, equipment, and a bet on a new crop into food it can sell.

A caveat about the count. Some courses add knowledge or information as a fifth factor. Conventions differ, so this course teaches the four and never asks you to recall a count. What matters is that you can spot each kind of resource in a real workplace.

Misconception check. Students often think there is one correct number of factors of production, and that a list with five factors must be wrong. It is tempting to treat any list as a rule. But the count is a convention, and different courses group the same resources in different ways. Learn what each factor is, not how many there are.

A second trap hides inside the word capital. In everyday speech it can mean money. In the factors of production it means things made to help produce other things, such as the tractor. The money that buys the tractor is not the tractor.

Memory hook: land, work, tools, and the bet that ties them together.

5. Scan the external environment with PESTEL

Picture a campus bookstore. Its manager decides what to stock, how many people to schedule, and when to hold a sale. Those choices are inside the store. But many forces that shape the store are not.

A business lives inside a larger world it cannot control. That world is its environment.

The external environment is the forces outside a business that it cannot control but must respond to, such as the economy, new technology, and the law.

A checklist helps you scan it without missing a whole category.

PESTEL is a checklist for scanning the external environment for political, economic, social, technological, environmental, and legal forces; other versions use other letters, such as PEST or PESTLE.

Each letter is one question to ask. Competitors and the global setting are not letters of their own, but a careful scan considers them alongside.

Worked example — a PESTEL scan of the campus bookstore. Every force below is an illustrative example, not a report on any real store.

PESTEL scan of an illustrative campus bookstore: one example force for each of the six letters, and whether it could help or hurt
Force	One illustrative example	Could it help or hurt?
Political	a state budget decision about college funding	either, depending on the decision
Economic	prices rising across the economy, so students have less to spend	hurt
Social	more students taking classes online and visiting campus less	hurt
Technological	course materials moving to digital access codes	either
Environmental	a campus push to cut plastic bags and packaging	either
Legal	consumer-protection rules about returns and refunds	neither, but they must be followed

Alongside the six letters, the scan adds two more lines. Competitors: online sellers who ship to students' doors. The global setting: printing and shipping that cross borders. In words: the scan shows that the store's biggest pressures come from outside its walls, so its plans must start from them.

Notice the technology line. This week technology is one force to watch, named in one row. How a business keeps its own information safe is a separate topic for later in the course.

Honesty note: PESTEL is a checklist, not a law of nature. Some forces fit two letters at once, and that is fine. The goal is to see every force, not to file each one perfectly.

Misconception check. Students often think the letters themselves are the lesson, so they worry whether the "right" version is PEST, PESTLE, or PESTEL. The versions differ only in how they group the same forces. The skill is noticing the forces outside the business, and no grade in this course depends on the letters.

Memory hook: scan outside before you plan inside.

6. Build the coffee cart's first SWOT: inside versus outside

Now meet the running venture. Picture a mobile coffee cart on a busy sidewalk. It sells drinks from a cart it can move. It is a business, because it aims to take in more money than it spends. Its profit is whatever is left after its expenses are subtracted from its revenue. Its risk is the chance that its expenses end up larger than its revenue. The cart has no named owner, and it is illustrative, built for this course and not a real business.

Before anyone writes a plan, it helps to take stock. What does the cart have going for it, and what is happening around it? A SWOT answers both.

A SWOT is a planning tool that sorts a situation into strengths and weaknesses, which sit inside the organization, and opportunities and threats, which sit outside it.

A strength is something inside the business that helps it, such as a skill, an asset, or a cost advantage.
A weakness is something inside the business that hurts it or holds it back, such as a missing resource or a lack of staff.
An opportunity is something outside the business that could help it if the business acts on it, such as a new group of nearby customers.
A threat is something outside the business that could hurt it, such as a new competitor or a rise in what its supplies cost.

The SWOT is a classroom model. It is a simplification you can hold in one hand, not a full picture of any real firm. Who invented it is disputed, so this course names no inventor.

Worked example — the coffee cart SWOT. Every entry is illustrative. Sort each one with two questions: is it inside or outside the cart, and does it help or hurt?

Strengths (inside, helps): low fixed costs, meaning few bills that arrive whether or not a single drink sells; and it can move to where the customers are.
Weaknesses (inside, hurts): one espresso machine; and one person at the counter.
Opportunities (outside, helps): an office building opening two blocks away; and a weekend farmers' market looking for vendors.
Threats (outside, hurts): a chain café opening nearby; and rising bean prices.

The coffee cart SWOT for the illustrative running venture: the two entries in each of the four boxes
	Helps	Hurts
Inside the cart	Strengths: low fixed costs; can move to where the customers are	Weaknesses: one espresso machine; one person at the counter
Outside the cart	Opportunities: an office building opening two blocks away; a weekend farmers' market looking for vendors	Threats: a chain café opening nearby; rising bean prices

Now tally the grid, one step at a time.

Inside entries: 2 strengths + 2 weaknesses = 4.
Outside entries: 2 opportunities + 2 threats = 4.
All entries: 4 + 4 = 8.

In words: the coffee cart SWOT shows that the cart's flexibility is its advantage and its single machine and single worker are its limits, while the market and the neighborhood around it bring two chances and two dangers it cannot control.

The SWOT also connects back to Section 5. Rising bean prices are an economic force from the PESTEL scan, showing up here as a threat. The chain café is a competitor, one of the lines a scan considers alongside the six letters. A PESTEL scan feeds the outside half of a SWOT.

Misconception check — good news is not always a strength. Students often file the new office building as a strength, because it is good news for the cart. That is the most common SWOT mistake. The test is not "is it good?" but "does the cart own or control it?" The cart does not control the office building, so it is an opportunity, not a strength. Strengths and weaknesses are inside; opportunities and threats are outside.

In practice (your tools). You can lay out a SWOT in any free spreadsheet, such as Google Sheets. Type "Helps" in cell B1 and "Hurts" in cell C1. Type "Inside" in cell A2 and "Outside" in cell A3. Then put each entry in the box where it belongs: strengths in B2, weaknesses in C2, opportunities in B3, and threats in C3. A grid keeps the inside row and the outside row apart, which is the whole discipline of the tool.

Pause and try this. Choose one: (a) add one more opportunity for the cart from the world outside it and say why the cart cannot control it; or (b) add one more weakness inside the cart and say why it belongs inside.

Memory hook: inside versus outside first; good versus bad second.

Key terms

business — Any organization that sells goods or services with the aim of taking in more money than it spends. (first used: 1. Define a business: revenue, expenses, profit, and risk)
revenue — The money that comes in from selling goods or services, before anything is paid out. (first used: 1. Define a business: revenue, expenses, profit, and risk)
expenses — The money that goes out to run a business, such as supplies, wages, fuel, and insurance. (first used: 1. Define a business: revenue, expenses, profit, and risk)
profit — What is left when expenses are subtracted from revenue; when expenses are larger than revenue, the difference is a loss instead. (first used: 1. Define a business: revenue, expenses, profit, and risk)
risk — The chance that a business's expenses end up larger than its revenue, so that it takes a loss. (first used: 1. Define a business: revenue, expenses, profit, and risk)
not-for-profit organization — An organization that brings in revenue and pays expenses as a business does but puts any surplus back into its mission instead of paying it out to owners. (first used: 2. Compare the not-for-profit: same tools, different purpose)
stakeholder — Anyone who can affect a business or is affected by it: its owners, employees, customers, suppliers, lenders, the community, and government. (first used: 3. Map the stakeholders: everyone with something at risk)
factors of production — The resources used to make goods and services, which economics conventionally names as four: natural resources, labor, capital, and entrepreneurship. (first used: 4. Name the factors of production: what a business runs on)
natural resources — The land, water, minerals, and other gifts of nature that go into making goods and services; economics also calls this factor land. (first used: 4. Name the factors of production: what a business runs on)
labor — The human time and effort that go into making goods and services, paid for with wages. (first used: 4. Name the factors of production: what a business runs on)
capital — The tools, machines, equipment, and buildings that are made to help produce other goods and services. (first used: 4. Name the factors of production: what a business runs on)
entrepreneurship — The work of spotting a chance to sell something, combining the other resources to do it, and carrying the risk that it fails. (first used: 4. Name the factors of production: what a business runs on)
external environment — The forces outside a business that it cannot control but must respond to, such as the economy, new technology, and the law. (first used: 5. Scan the external environment with PESTEL)
PESTEL — A checklist for scanning the external environment for political, economic, social, technological, environmental, and legal forces; other versions use other letters, such as PEST or PESTLE. (first used: 5. Scan the external environment with PESTEL)
SWOT — A planning tool that sorts a situation into strengths and weaknesses, which sit inside the organization, and opportunities and threats, which sit outside it. (first used: 6. Build the coffee cart's first SWOT: inside versus outside)
strength — In a SWOT, something inside the business that helps it, such as a skill, an asset, or a cost advantage. (first used: 6. Build the coffee cart's first SWOT: inside versus outside)
weakness — In a SWOT, something inside the business that hurts it or holds it back, such as a missing resource or a lack of staff. (first used: 6. Build the coffee cart's first SWOT: inside versus outside)
opportunity — In a SWOT, something outside the business that could help it if the business acts on it, such as a new group of nearby customers. (first used: 6. Build the coffee cart's first SWOT: inside versus outside)
threat — In a SWOT, something outside the business that could hurt it, such as a new competitor or a rise in what its supplies cost. (first used: 6. Build the coffee cart's first SWOT: inside versus outside)

Summary

A business sells goods or services and aims to take in more money than it spends.
Revenue is what comes in; profit is what is left after expenses; risk is the chance of a loss.
A not-for-profit can run a surplus, but it puts the surplus back into its mission.
Stakeholders are owners, employees, customers, suppliers, lenders, the community, and government.
The four factors of production are natural resources, labor, capital, and entrepreneurship; some courses count five.
A PESTEL scan checks political, economic, social, technological, environmental, and legal forces, with competitors alongside.
In a SWOT, strengths and weaknesses are inside the business; opportunities and threats are outside it.

Check your understanding

Work these before looking at the answers — they are ungraded, and the answers (with reasoning) are at the bottom of the page.

A food truck's owner says, "We sold more tacos this month than ever, so we had our most profitable month." This is an illustrative example. What is missing from that claim, and which two words does it mix up?
An animal shelter run as a not-for-profit ends the year with more donations and adoption fees than it spent (an illustrative example). A volunteer says the shelter "broke the rules by making money." Is the volunteer right? Explain.
A neighborhood laundromat (an illustrative example) lists four facts: its washers are all new; a large apartment building is going up across the street; it has only one employee who can fix a machine; and detergent prices are rising across the economy. Sort each fact into strength, weakness, opportunity, or threat, and name the PESTEL letter that fits the detergent prices.
A hair salon (an illustrative example) uses water for every shampoo, three stylists, a row of chairs and dryers, and an owner who decided to open a second location. Match each to one of the four factors of production.

Answers (worked reasoning — read after attempting)

The claim leaves out expenses. Selling more tacos raises revenue, the money coming in. Profit is what is left after expenses such as ingredients, fuel, and wages are subtracted. If those expenses rose even faster, the month could have been less profitable, or a loss. The claim mixes up revenue and profit.
The volunteer is not right. A not-for-profit can bring in more than it spends; that leftover is a surplus. The rule is that the shelter puts the surplus back into its mission, such as more kennels or vet care, instead of paying it out to owners. Earning a surplus breaks no rule.
The new washers are inside and help, so they are a strength. The new apartment building is outside and could help, so it is an opportunity. Having one employee who can fix a machine is inside and hurts, so it is a weakness. The rising detergent prices are outside and hurt, so they are a threat, and they fit the E for economic in PESTEL, since prices across the economy are an economic force. Notice the trap: the apartment building is good news, but the laundromat does not control it, so it is not a strength.
The water is a natural resource, a gift of nature the salon uses up. The stylists are labor, the human time and effort, paid with wages. The chairs and dryers are capital, equipment made to help produce a service. The owner's decision to open a second location, carrying the risk that it fails, is entrepreneurship. Notice that the money the owner might borrow for new chairs is not itself capital in this sense; the chairs are.

Next up in this module: the Readings & Resources page, the lecture tutorial, the practice set, and the quiz — and next week the supply-and-demand model shows how the market forces this week's scan only names set a price.

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