BUSA 1105 Chapter 1

Monopolistic Competition

Market in which many sellers supply differentiated products Now, however, they don't sell identical products. Instead, they sell differentiated products—products that differ somewhat, or are perceived to differ, even though they serve a similar purpose. Products can be differentiated in a number of ways, including quality, style, convenience, location, and brand name. Some people prefer Coke over Pepsi, even though the two products are quite similar. But what if there was a substantial price difference between the two? In that case, buyers could be persuaded to switch from one to the other. Thus, if Coke has a big promotional sale at a supermarket chain, some Pepsi drinkers might switch (at least temporarily). How is product differentiation accomplished? Sometimes, it's simply geographical; you probably buy gasoline at the station closest to your home regardless of the brand. At other times, perceived differences between products are promoted by advertising designed to convince consumers that one product is different from another—and better than it. Regardless of customer loyalty to a product, however, if its price goes too high, the seller will lose business to a competitor. Under monopolistic competition, therefore, companies have only limited control over price.

Monopoly

Market in which there is only one seller supplying products at regulated prices

Consumer Confidence Index

Measure of optimism that consumers that express about the economy as they go about their everyday lives. based on results of a monthly survey of five thousand U.S. households. The survey gathers consumers' opinions on the health of the economy and their plans for future purchases. It's often a good indicator of consumers' future buying intent. Consumer confidence rose to its highest level in nine years in November 2016, a sign that consumers are optimistic about the economy's future and that spending will increase.

legal monopoly

Monopoly in which one seller supplies a product or technology to which it holds a patent arises when a company receives a patent giving it exclusive use of an invented product or process. Patents are issued for a limited time, generally twenty years. During this period, other companies can't use the invented product or process without permission from the patent holder. Patents allow companies a certain period to recover the heavy costs of researching and developing products and technologies. Patents have been available since 1790 and holding them does not always turn out positive. As an example, Orville and Wilbur Wright obtained a patent in 1906 on their "flying machine." The brothers made their first aircraft by applying what they learned from manufacturing bicycles. The patent should have given them exclusive ownership of their aircraft technology, but this ownership was constantly challenged and often ignored by aircraft enthusiasts in Europe. As a result, the brothers spent much of their time fighting patent wars. Their obsession with legal issues robbed them of valuable time that could have been used instead to improve their aircraft. Unfortunately, by 1910, prior to the expiration of their patent, their aircraft was inferior to those produced in Europe. They eventually won the patent wars but lost their place as the premier aircraft builder.

natural monopoly

Monopoly in which, because of the industry's importance to society, one seller is permitted to supply products without competition include public utilities, such as electricity and gas suppliers. Such enterprises require huge investments, and it would be inefficient to duplicate the products that they provide. They inhibit competition, but they're legal because they're important to society. In exchange for the right to conduct business without competition, they're regulated. For instance, they can't charge whatever prices they want, but they must adhere to government-controlled prices. As a rule, they're required to serve all customers, even if doing so isn't cost efficient.

For-profit social enterprise

Other organizations, labeled for-profit social enterprises, lie somewhere between a "for-profit business" and a "not-for-profit business. is a business that, beyond the profit motive, has a social mission built into its business model. Making the world a better place is a significant part of what they do." For example, after visiting Argentina and discovering first-hand that many children got sick or were injured because they didn't have any shoes, Blake Mycoskie decided to form a company to help these and other children throughout the world. His company, TOMS, generates a profit by manufacturing and selling shoes. It fulfills its mission to help others by donating a pair of shoes to a needy person for every pair sold. Since 2006, the company has donated more than a million pairs of shoes.

unemployment rate

Percentage of the total labor force that's currently unemployed and actively seeking work. the percentage of the labor force that's unemployed and actively seeking work. The unemployment rate, which was 4.7 percent in January 2017, is an important measure of economic health. It goes up during recessionary periods because companies are reluctant to hire workers when demand for goods and services is low. Conversely, it goes down when the economy is expanding and there is high demand for products and workers to supply them. Figure 1.13 traces the U.S. unemployment rate between 1980 and 2016. Note that the unemployment rate as of the end of 2017 is at a fifteen-year low.

Privatization

Process of converting government-owned businesses to private ownership

Demand

Quantity of a product that buyers are willing to purchase at various prices

Mixed Market Economy

Relies on both markets and the government to allocate resources. We've already seen that this is what happens in socialist economies in which the government controls selected major industries, such as transportation and health care, while allowing individual ownership of other industries. Even previously communist economies, such as those of Eastern Europe and China, are becoming more mixed as they adopt capitalistic characteristics and convert businesses previously owned by the government to private ownership through a process called privatization

Inflation

Rise in the overall price level

Depression

Severe, long-lasting recession. If, however, a recession lasts a long time (perhaps a decade or so), while unemployment remains very high and production is severely curtailed, the economy would be in a depression. Though not impossible, it's unlikely that the United States will experience another severe depression like that of the 1930s. The federal government has a number of economic tools (some of which we'll discuss shortly) with which to fight any threat of a depression.

Economic Indicator

Statistic that provides information about trends in the economy. is a statistic that provides valuable information about the economy. There's no shortage of economic indicators, and trying to follow them all would be an overwhelming task. Thus, economists and businesspeople track only a select few, including those that we'll now discuss.

Lagging Economic Indicators

Statistical data that measure economic trends after the overall economy has changed. Statistics that report the status of the economy a few months in the past One such indicator is average length of unemployment. If unemployed workers have remained out of work for a long time, we may infer that the economy has been slow Average Length Of Unemployment

Economics

Study of how scarce resources are used to produce outputs—goods and services—that are distributed among people. study of the production, distribution, and consumption of goods and services.

Micro Economics

Study of the economic choices made by the individual consumers or businesses considers such decisions as the price you're willing to pay to go to college. explains the price that teenagers are willing to pay for concert tickets.

Macroeconomics

Study of the economy as a whole examines the economy-wide effect of inflation investigates overall trends in imports and exports

Economics Systems

The answers to these economic questions depends on a country's

Free Market System

The economic system in which most businesses are owned and operated by individuals is the As we will see next, in a free market, competition dictates how goods and services will be allocated. Business is conducted with only limited government involvement. The economies of the United States and other countries, such as Japan, are based on capitalism.

Gross Domestic Product (GDP)

The measure of the market value of all goods and services produced by a nation's economy in a given year. DP is defined as the market value of all goods and services produced by the economy in a given year. In the United States, it's calculated by the Department of Commerce. GDP includes only those goods and services produced domestically; goods produced outside the country are excluded. GDP also includes only those goods and services that are produced for the final user; intermediate products are excluded. For example, the silicon chip that goes into a computer is an intermediate product and would not count, even though the finished computer would. By itself, GDP doesn't necessarily tell us much about the state of the economy. But change in GDP does. If GDP (after adjusting for inflation) goes up, the economy is growing. If it goes down, the economy is contracting.

Business Cycle

The pattern of expansion and contraction in an economy

Operations Manager

The person who designs and oversees the transformation of resources into goods or services is called an? This individual is also responsible for ensuring that products are of high quality.

National Debt

Total Amount of money owed by the federal government. The US government owes more than 20 trillion

Equilibrium Price

We can now see how the market mechanism works under perfect competition. We do this by plotting both the supply curve and the demand curve on one graph, as we've done in Figure 1.10. The point at which the two curves intersect is the

The questions Economists ask

What goods and services should be produced to meet consumers' needs? In what quantity? When should they be produced? How should goods and services be produced? Who should produce them, and what resources, including technology, should be combined to produce them? Who should receive the goods and services produced? How should they be allocated among consumers?

Not for profit (Non-profit organizations)

are established to provide social or educational services. They frequently receive funding from private foundations, individuals, and governmental agencies. Such not-for-profit (or nonprofit) organizations include Doctors without Borders, the Sierra Club, Teach for America, and the American Red Cross.

Resources

are the inputs used to produce outputs. Resources may include any or all of the following: Land and other natural resources Labor (physical and mental) Capital, including buildings and equipment Entrepreneurship Resources are combined to produce goods and services. Land and natural resources provide the needed raw materials. Labor transforms raw materials into goods and services. Capital (equipment, buildings, vehicles, cash, and so forth) are needed for the production process. Entrepreneurship provides the skill and creativity needed to bring the other resources together to produce a good or service to be sold to the marketplace.

Operations

All companies must convert resources (labor, materials, money, information, and so forth) into goods or services. Some companies, such as Apple, convert resources into tangible products—Macs, iPhones, iPods, iPads, etc. Others, such as hospitals, convert resources into intangible products—health care.

Finance

involves planning for, obtaining, and managing a company's funds. Finance managers address such questions as the following: How much money does the company need? How and where will it get the necessary money? How and when will it pay the money back? What should it do with its funds? What investments should be made in plant and equipment? How much should be spent on research and development? How should excess funds be invested? Good financial management is particularly important when a company is first formed, because new business owners usually need to borrow money to get started.

profit-making business

is any activity that provides goods or services to consumers for the purpose of making a profit.

Marketing

is the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large. Marketers develop the benefits and features of products, including price and quality. They also decide on the best method of delivering products and the best means of promoting them to attract and keep customers. They manage relationships with customers and make them aware of the organization's desire and ability to satisfy their needs.

Supply

is the quantity of a product that sellers are willing to sell at various prices. The quantity of a product that a business is willing to sell depends on its price. Businesses are more willing to sell a product when the price rises and less willing to sell it when prices fall. Again, this fact makes sense: businesses are set up to make profits, and there are larger profits to be made when prices are high.

activites needed to operate a business

management, operations, marketing, accounting, and finance.

Financial Accountants

prepare financial statements to help users, both inside and outside the organization, assess the financial strength of the company.

managerical accountants

prepare information, such as reports on the cost of materials used in the production process, for internal use only.

External Forces that Influence Business Activities

Apple and other businesses don't operate in a vacuum: they're influenced by a number of external factors. These include the economy, government, consumer trends, and public pressure to act as good corporate citizens. Figure 1.4 sums up the relationship among the participants in a business, its functional areas, and the external forces that influence its activities. One industry that's clearly affected by all these factors is the fast-food industry. A strong economy means people have more money to eat out at places where food standards are monitored by a government agency, the Food and Drug Administration. Preferences for certain types of foods are influenced by consumer trends (eating fried foods might be OK one year and out the next). Finally, a number of decisions made by the industry result from its desire to be a good corporate citizen. For example, McDonald's funds 365 Ronald McDonald Houses in 42 countries. These houses provide a "home-away-from-home" so families can stay close to a hospitalized child at little or no cost. As you move through this text, you'll learn more about these external influences on business. (Chapter 1, Section 4 "What Is Economics?" will introduce in detail one of these external factors—the economy.)

Factors of Production

Because a business uses resources to produce things, we also call these resources- The factors of production used to produce a shirt would include the following: The land that the shirt factory sits on, the electricity used to run the plant, and the raw cotton from which the shirts are made The laborers who make the shirts The factory and equipment used in the manufacturing process, as well as the money needed to operate the factory The entrepreneurship skill used to coordinate the other resources to initiate the production process and the distribution of the goods or services to the marketplace

Prosperity

the economy expands, unemployment is low, incomes rise, and consumers buy more products. Businesses respond by increasing production and offering new and better products.

laissez-faire

the government should leave business activities to function according to the laws of economics

Economic Systems is

the means by which a society (households, businesses, and government) makes decisions about allocating resources to produce products and about distributing those products. The degree to which individuals and business owners, as opposed to the government, enjoy freedom in making these decisions varies according to the type of economic system. Generally speaking, economic systems can be divided into two systems: planned systems and free market systems.

full employment

Condition under which about 95 percent of those who want to work are employed. To keep the economy going strong, people must spend money on goods and services. A reduction in personal expenditures for things like food, clothing, appliances, automobiles, housing, and medical care could severely reduce GDP and weaken the economy. Because most people earn their spending money by working, an important goal of all economies is making jobs available to everyone who wants one. As of May 2017, the United States was at full employment.

price stability

Conditions under which the prices for products remain fairly constant. Price stability occurs when the average of the prices for goods and services either doesn't change or changes very little. Rising prices are troublesome for both individuals and businesses. For individuals, rising prices mean consumers have to pay more for goods and services. For businesses, rising prices mean higher costs, and, at least in the short run, businesses might have trouble passing on higher costs to consumers.

Deflation

Decrease in overall price level

Profit

Difference between the revenue that a company brings in from selling goods and services and the costs of generating this revenue.

Recession

Economic slowdown measured by a decline in gross domestic productivity. Eventually, however, things slow down. GDP decreases, unemployment rises, and because people have less money to spend, business revenues decline. Economists often say that we're entering a recession when GDP goes down for two consecutive quarters.

Socialism

Economic system falling between communism and capitalism in terms of government control over allocation and distribution industries that provide essential services, such as utilities, banking, and health care, may be government owned. Other businesses are owned privately. Central planning allocates the goods and services produced by government-run industries and tries to ensure that the resulting wealth is distributed equally. In contrast, privately owned companies are operated for the purpose of making a profit for their owners. In general, workers in socialist economies work fewer hours, have longer vacations, and receive more health care, education, and child-care benefits than do workers in capitalist economies. To offset the high cost of public services, taxes are generally steep. Examples of socialist countries include Sweden and France

Capitalism

Economic system featuring the lowest level of government control over allocation and distribution

Monetary Policy

Efforts exerted by the federal reserve system (The Fed) to regulate the nations money supply. Monetary policy is exercised by the Federal Reserve System ("the Fed"), which is empowered to take various actions that decrease or increase the money supply and raise or lower short-term interest rates, making it harder or easier to borrow money. When the Fed believes that inflation is a problem, it will use contractionary policy to decrease the money supply and raise interest rates. When rates are higher, borrowers have to pay more for the money they borrow, and banks are more selective in making loans. Because money is "tighter"—more expensive to borrow—demand for goods and services will go down, and so will prices. In any case, that's the theory. To counter a recession, the Fed uses expansionary policy to increase the money supply and reduce interest rates. With lower interest rates, it's cheaper to borrow money, and banks are more willing to lend it. We then say that money is "easy." Attractive interest rates encourage businesses to borrow money to expand production and encourage consumers to buy more goods and services. In theory, both sets of actions will help the economy escape or come out of a recession.

Participants

Every business must have one or more owners whose primary role is to invest money in the business. When a business is being started, it's generally the owners who polish the business idea and bring together the resources (money and people) needed to turn the idea into a business. The owners also hire employees to work for the company and help it reach its goals. Owners and employees depend on a third group of participants—customers. Ultimately, the goal of any business is to satisfy the needs of its customers in order to generate a profit for the owners.

Recovery

Generally, a recession is followed by a recovery in which the economy starts growing again.

Fiscal policy

Governmental use of taxation and spending to influence economic conditions. It uses its power to tax and to spend Fiscal policy relies on the government's powers of spending and taxation. Both taxation and government spending can be used to reduce or increase the total supply of money in the economy—the total amount, in other words, that businesses and consumers have to spend. When the country is in a recession, the appropriate policy is to increase spending, reduce taxes, or both. Such expansionary actions will put more money in the hands of businesses and consumers, encouraging businesses to expand and consumers to buy more goods and services. When the economy is experiencing inflation, the opposite policy is adopted: the government will decrease spending or increase taxes, or both. Because such contractionary measures reduce spending by businesses and consumers, prices come down and inflation eases.

Demand Curve

Graph showing the quantity of a product that will be bought at certain prices. hat shows the quantity of a product that will be demanded at different prices. Let's assume that the diagram in Figure 1.8 represents the daily price and quantity of apples sold by farmers at a local market. Note that as the price of apples goes down, buyers' demand goes up. Thus, if a pound of apples sells for $0.80, buyers will be willing to purchase only fifteen hundred pounds per day. But if apples cost only $0.60 a pound, buyers will be willing to purchase two thousand pounds. At $0.40 a pound, buyers will be willing to purchase twenty-five hundred pounds.

Supply Curve

Graph showing the quantity of a product that will be offered for sale at certain prices that shows the quantity of apples that farmers would be willing to sell at different prices, regardless of demand. As you can see in Figure 1.9, the supply curve goes in the opposite direction from the demand curve: as prices rise, the quantity of apples that farmers are willing to sell also goes up. The supply curve shows that farmers are willing to sell only a thousand pounds of apples when the price is $0.40 a pound, two thousand pounds when the price is $0.60, and three thousand pounds when the price is $0.80.

Budget Surplus

If, in any given year, the government takes in more money (through taxes) than it spends on goods and services (for things such as defense, transportation, and social services), the result is a

Budget Deficit

If, on the other hand, the government spends more than it takes in. which the government pays off by borrowing through the issuance of Treasury bonds). Historically, deficits have occurred much more often than surpluses; typically, the government spends more than it takes in.

Planned Systems

In a planned system, the government exerts control over the allocation and distribution of all or some goods and services. The system with the highest level of government control is Communism- Economic system featuring the highest level of government control over allocation and distribution In theory, a communist economy is one in which the government owns all or most enterprises. Central planning by the government dictates which goods or services are produced, how they are produced, and who will receive them. In practice, pure communism is practically nonexistent today, and only a few countries (notably North Korea and Cuba) operate under rigid, centrally planned economic systems.

Consumer Price Index

Index that measures inflation by measuring the prices of goods purchased by a typical consumer which is reported monthly by the Bureau of Labor Statistics. The CPI, which stood at 1.7 percent in December 2016, measures the rate of inflation by determining price changes of a hypothetical basket of goods—food, housing, clothing, medical care, appliances, automobiles, and so forth—bought by a typical household.

leading economic indicators

Indicators that predict the status of the economy three to twelve months in the future are called Statistical data that predicts the status of the economy three to twelve months in the future. If such an indicator rises, the economy is likely to expand in the coming year. If it falls, the economy is likely to contract. New Unemployment Claims, Average Weekly Manufacturing Hours, Building Permits

The U.S Economic System

Like most countries, the United States features a mixed market system: though the U.S. economic system is primarily a free market system, the federal government controls some basic services, such as the postal service and air traffic control. The U.S. economy also has some characteristics of a socialist system, such as providing social security retirement benefits to retired workers.

Management

Managers are responsible for the work performance of other people. involves planning for, organizing, staffing, directing, and controlling a company's resources so that it can achieve its goals. Managers plan by setting goals and developing strategies for achieving them. They organize activities and resources to ensure that company goals are met. They staff the organization with qualified employees and direct them to accomplish organizational goals. Finally, managers design controls for assessing the success of plans and decisions and take corrective action when needed.

Accounting

Managers need accurate, relevant, timely financial information, and accountants provide it. Financial advisor responsible for measuring, summarizing, and communicating financial and managerial information

Inputs and Outputs Markets

Many of the factors of production (or resources) are provided to businesses by households. For example, households provide businesses with labor (as workers), land and buildings (as landlords), and capital (as investors). In turn, businesses pay households for these resources by providing them with income, such as wages, rent, and interest. The resources obtained from households are then used by businesses to produce goods and services, which are sold to the same households that provide businesses with revenue. The revenue obtained by businesses is then used to buy additional resources, and the cycle continues. This circular flow is described in Figure 1.5, which illustrates the dual roles of households and businesses: Households not only provide factors of production (or resources) but also consume goods and services. Businesses not only buy resources but also produce and sell both goods and services.

Oligopoly

Market in which a few sellers supply a large portion of all the products sold in the marketplace In an oligopolistic market, each seller supplies a large portion of all the products sold in the marketplace. In addition, because the cost of starting a business in an oligopolistic industry is usually high, the number of firms entering it is low. Companies in oligopolistic industries include such large-scale enterprises as automobile companies and airlines. As large firms supplying a sizable portion of a market, these companies have some control over the prices they charge. But there's a catch: because products are fairly similar, when one company lowers prices, others are often forced to follow suit to remain competitive. You see this practice all the time in the airline industry. When American Airlines announces a fare decrease, United Airlines, and others do likewise. When one automaker offers a special deal, its competitors usually come up with similar promotions.

Perfect Competition

Market in which many consumers buy standardized products from numerous small businesses. Because no seller is big enough or influential enough to affect price, sellers and buyers accept the going price. For example, when a commercial fishery brings its fish to the local market, it has little control over the price it gets and must accept the going market price.