Ch.1 Basic Business Concepts(Contemporary Business World)

2 Business Essentials | Chapter 1: The U.S. Business Environment

Resources for This Chapter

Chapter 1

What’s New in ThisEdition?

• New chapter-openingvignette

• Removed Aftermath of9/11 section

• Updated examples andstatistics

• Updated figures andphotos

LIST OF IN-CLASSACTIVITIESSee page 1-1.

LIST OF HOMEWORKASSIGNMENTSSee page 1-2.

DETAILED LECTUREOUTLINESee page 1-3.

CHAPTER OUTLINESee page 1-7.

The following resources are available for this chapter:

In This Instructor’s Manual• List of In-Class Activities to Accompany This Chapter: See page 1-1.

• List of Homework Assignments to Accompany This Chapter: Seepage 1-2.

• Detailed Lecture Outline: See page 1-3.

• Chapter Outline: See page 1-7.

• Additional Handout: Business Accountability: When Smoke Getsin Your Eyes. See page 1-8.

• Additional Handout: Supplemental Case Study: Supply and Demandfor Pollution Permits. See page 1-9.

Additional Materials• PowerPoint Presentation: Available on the Instructor’s Resource CD (IRCD).

• Test Item File: Available on the Instructor’s Resource CD (IRCD).

• Video: Helping Businesses Do Business: U.S. Department ofCommerce. Available on VHS/DVD.

• Online Materials: See www.prenhall.com/ebert for online supple-ments to this chapter.

EBERMC01_0132287587.QXD 10/25/06 5:15 PM Page 2

Making the Transitionfrom Business, Eighth

Edition?

If you’re switching fromRicky Griffin and RonEbert’s hardcover eighth edi-tion of Business to this edi-tion of Business Essentials,you’ll find some of the extracontent you’re used to seeingin Business online atwww.prenhall.com/ebert.

Chapter 1: The U.S. Business Environment | Business Essentials 3

In this section, usePowerPoint 1-1, 1-2, 1-3.

Chapter Overview

Many students come to an introduction to business class not quite surewhat’s in it for them, but the course has something for everyone, fromthose who have been in the business world a while to those just gettingstarted. As this book unfolds, you’ll develop an understanding of thefoundations of business, and you’ll be able to apply what you alreadyknow (or what you are starting to learn) about business to many parts ofthe course.

This first chapter dives right into the world of business, explaining justwhat business is, what its main goals and functions are, and how the

external environments of business affect the success and failure of anyorganization. The chapter also describes global economic systemsaccording to the means by which they control the factors of production,shows how markets, demand, and supply affect resource distribution inthe United States, and discusses the elements of private enterprise andthe degrees of competition in the U.S. economic system. Finally, thechapter explains the importance of the economic environment to busi-ness and identifies the factors used to evaluate the performance of aneconomic system.



In-Class Activity: Ice-Breaker

What Do You Know About Business?

Activity Overview:This activity helps students assess their level of knowledge aboutbusiness and set their own learning goals for the class.

Time Limit:20 minutes

What to Do:1. Ask each student to take out a piece of paper and divide it into

two columns. In the first column, students should write the mostimportant four or five things they currently know about business,and in the second column, the four or five things they would liketo learn. Tell them if they are having difficulty coming up withitems to list, take a look at the table of contents of the text. Itwill give them some clues so that this task doesn’t frustratethem. (5 minutes)

2. Divide students into groups of three to five people and ask them toshare their lists with each other. As they listen, they can delete or addanything that seems relevant. (5 minutes)

3. Ask them to switch groups so that they are with all new people, andrepeat the process of sharing their lists. (5 minutes)

4. Ask students to switch to a third group of all new people. With thisgroup, the goal is to synthesize their lists into one big idea of whatthey know, and one big idea of what they want to learn. (5 minutes)

Don’t Forget:This activity allows students to get to know each other as well as setexpectations for the course. The underlying agenda is to get them talking toeach other, setting the stage for active participation throughout the class.

Wrap-Up:Wrap up the discussion by having each group report back to the class.You may want to record their responses and post them in the room forreference as you move through the course.



TEACHING TIPThough the definition ofbusiness includes profit as a motive, remind studentsthat most business principlesalso apply to not-for-profitorganizations.

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In this section,use PowerPoint 1-4,1-5, 1-6.



In this section, usePowerPoint 1-7through 1-13.

In-Class Activity: Small-Group Discussion

Scanning the Environment

Activity Overview:This activity asks students to consider how various parts of the externalenvironment affect businesses and industries.


What to Do:1. For larger groups, divide the class into four-member groups; for

smaller groups, divide the class into two-member groups.

2. Assign each group a specific industry (for example: automotive,airline, fast food, computer, apparel, restaurant).

3. Ask each group to consider what variables from the technological,political-legal, sociocultural, and economic environments affect theirassigned industry. (15 minutes)

4. Ask a spokesperson from each group to share their input. (10 minutes)

Don’t Forget:Remind students that external environmental elements can change dra-matically, affecting specific industries differently over time.

Wrap-Up:Wrap up the discussion by making sure that students understand that thenature of a specific business within an industry and the types and quanti-ties of products/services produced can influence the impact of externalenvironmental variables.



TEACHING TIPRemind students that inputsused to produce outputsare also called factors ofproduction; they includephysical resources, labor,capital, entrepreneurship,and information resources.

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What are the factors ofproduction used to producea quart of orange juice?




Entrepreneurship involvestremendous risk-takingand is a welcome ingredientin a free-market system.What characteristics ofour free-market systemencourage risk-taking?



TEACHING TIPRemind students that aneconomic system is definedby how it allocates factorsof production. In a plannedeconomy, the governmentowns and controls thesefactors; in a market econ-omy, producers/consumersbuy and sell what theychoose.

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Give an example of a coun-try with a planned economy.What makes this economyplanned? Give an exampleof a country with a marketeconomy. How is the eco-nomic system different inthis country?

In-Class Activity: Up for Debate

Don’t Forget:Remind students that a government’s level of control distinguishes capi-talism from socialism. If you have foreign students in your class, you maywant them to say a bit about the economic system in their native country.

Wrap-Up:Wrap up the discussion by reminding students that the U.S. economicsystem and a socialist system have many similarities and differences. Forexample, workers in socialist economies often work fewer hours, havelonger vacations, and receive more health, education, and child-carebenefits than do workers in capitalist economies. On the other hand, thefederal government does control some basic services in the United Statesas well as various aspects of the market through agencies such as theFood and Drug Administration and the Federal CommunicationCommission.

Comparing Economic Systems

Activity Overview:This activity gets students talking about how similar and different the U.S.economic system is to other systems.


What to Do:1. Divide the class into small groups. Ask groups to assume they have

just overheard a classmate say, “The United States is becoming moresocialist everyday—with all the government control.” Have eachgroup list reasons why the statement could be true and reasons whythe statement could be false. (15 minutes)

2. Reassemble the class and discuss each group’s thoughts. (15 minutes)



TEACHING TIPMake sure students under-stand that a mixed marketeconomy is characterized bygovernment ownership ofmajor industries workingalongside privately ownedindustries.

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In-Class Activity: Supplemental Case Study Discussion

In-Class Self-CheckAnswers:1. c

2. b

3. False

Supply and Demand for Pollution Permits(See page 1-9 of this Instructor’s Edition.)

Activity Overview:This activity asks students to apply chapter concepts to a case study.


What to Do:1. In advance, make copies of the Supplemental Case Study on page

1-9 of this Instructor’s Edition and distribute them to students.

2. Divide students into groups and ask them to read the case andanswer the questions in their small groups. (15 minutes)

(a) How does trading in pollution permits at BP demonstrate the lawsof demand and supply?

(b) What would influence the demand for pollution permits if theywere traded globally?

(c) Should companies be allowed to trade permits? Should countriesbe allowed to? Why or why not?



HOMEWORK: EXERCISING YOURETHICS: INDIVIDUALEXERCISEPrescribing a Dose ofCompetitive MedicineNow is a good time toassign the Exercising Your Ethics: IndividualExercise from the end-of-chapter materials (page 33) as homework.This assignment asks students to consider theethical dilemmas that arisethrough increased pricingwhen competition is low.

For the completeassignment instructions,see page 33.At-Home Completion Time:30 minutes

continued...

What is equilibrium price?What happens if incomesrise and demand increases?What happens if producershave a surplus and supplyincreases?

3. Once students have answered the questions, discuss their answersas a class. As students discuss their answers, make sure they touchon the following points: (15 minutes)

(a) Those who want to buy permits and those who want to sell themhave created a market where the price is set by the action ofsupply and demand.

(b) The strictness of government controls on emissions and the indi-vidual company’s ability to meet the quota, as well as the cost offailure and the price of the needed permit.

(c) Answers will vary, though there will be much debate about theethics involved in buying and selling permits.

Don’t Forget:Make sure that you keep students on the topic of supply and demand.

Wrap-Up:Wrap up the discussion by asking students for other examples of envi-ronmental issues affecting supply and demand.



TEACHING TIPRemind students thatperfect competition ischaracterized by (a) manybuyers, (b) many sellers,and (c) buyers and sellerswho accept a going price.

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TEACHING TIPRemind students thatmonopolistic competitionis characterized by (a) manybuyers, (b) many sellers,and (c) products that aredifferentiated.

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TEACHING TIPReinforce that oligopoly ischaracterized by (a) manybuyers, (b) few sellers,(c) products that are quitesimilar, and (d) a changein price by one seller oftenmeaning a change in priceby all sellers.

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TEACHING TIPRemind students that amonopoly is characterizedby (a) many buyers,(b) only one seller, and(c) prices being set by the one seller.

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Which level of competitionbest describes the marketin each of the followingscenarios?

• your local PizzaHut (monopolisticcompetition)

• a local farmer sellingapples for applesauce(perfect competition)

• cell phone service(oligopoly)

• Gap jeans (monopolisticcompetition)



In this section,use PowerPoint 1-27and on

Helping Businesses Do Business: U. S.Department of Commerce

Running Time:10:26Now is a good point to playthe video that accompaniesthe chapter as it demon-strates the role of factors ofproduction and supply anddemand within world eco-nomic systems.

For discussion questionsand answers, see page 35.

In-Class Self-Check

Answers:4. d

5. c

6. False



In-Class Activity: Up for Debate

economy and some situations in which competition is bad for the U.S.economy. Group members should try to be in agreement. (15 minutes)

3. Regroup the class and ask the groups to explain the rationale for theiranswers, asking for feedback from the class as the various situationsare discussed. On what parts of the discussion does the class agreeor disagree? (15 minutes)

4. Ask the class to come to a consensus: Is competition good or bad? (5minutes)

Don’t Forget:If the class cannot arrive at a consensus, they might consider voting.

Wrap-Up:Remind students that competition is an essential part of a free-enterprisesystem, as entrepreneurship invites competition in many industries. Not everyenterprise will succeed in the marketplace, but competition does hold pricesat market level and contributes to a high quality of goods and services.

Is Competition Good?

Activity Overview:This activity asks students to think about competition and the role that itplays in our economic system as they read the Entrepreneurship andNew Ventures feature on page 19 in the textbook.


What to Do:1. Ask students to think about competition as an essential ingredient

in a free-enterprise system as they read the Entrepreneurshipand New Ventures feature on page 19 in the textbook.(10 minutes)

2. Divide the class into small groups and ask them to discuss and makenotes on some situations in which competition is good for the U.S.

HOMEWORK:Let’s Go Shopping!Now is a good time toassign ApplicationExercise 9 from the end-of-chapter materials (page 31) as homework.This assignment asks students to visit a localshopping mall and deter-mine what degree of competition stores in themall face in their immedi-ate environment.

For the completeassignment instructions,see page 31.

At-Home Completion Time:1 to 1.5 hours



In-Class Activity: Business Accountability Handout Discussion

TEACHING TIPMake sure that studentsunderstand that grossdomestic product includesonly the value of productsproduced within a nation’sborders; the figure includesthe value of products pro-duced by both domestic andforeign companies withinthose borders.

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2. Divide students into three- or four-member groups and ask themto read the handout. Students should discuss within their groups thepros and cons of (a) outsourcing in order to keep prices down and(b) reducing dependence on outsourcing in order to better fulfill socialobligations toward stakeholders. (15 minutes)

3. Reassemble the class and discuss each group’s opinions. (15 minutes)

Don’t Forget:This is a case in which there is no simple answer!

Wrap-Up:Wrap up the activity by reminding students that some industries may relymore heavily on outsourcing than others; further, some industries gain higher-quality standards and expertise through outsourcing. Also remind students ofpositive trade relationships that evolve through dependence on outsourcing.

TEACHING TIPReinforce that grossnational product includesthe value of productsproduced by a countryregardless of where they areproduced; this figure doesnot include the value ofproducts produced withinthe country by a foreigncompany.

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The Geography of Jobs (See page 1-8 of this Instructor’s Edition.)

Activity Overview:This activity asks students to read a supplemental article and ponderwhether outsourcing is a detriment to social responsibility.


What to Do:1. In advance, make copies of the “Business Accountability” article on

page 1-8 of this Instructor’s Edition and distribute them to students.Make sure that students are familiar with outsourcing before youdivide them into groups.



How can economic growthbe measured throughaggregate output, standardof living, gross domesticproduct, and productivity?



In-Class Activity: Exercising Your Ethics: Team Exercise

TEACHING TIPMake sure students under-stand that inflation occurswhen overall price levels goup because too much moneyis floating around; as a result,purchasing power declines.

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Making the Right Decision (See page 34 of the textbook.)

Activity Overview:This activity asks students to examine the ethical issues that can arisewhen making business decisions.


What to Do:1. Divide students into four-member teams and ask them to turn to

page 34 in the textbook. Tell teams to read and follow the instructionsfor the Exercising Your Ethics: Team Exercise. Students should eachchoose one of the different roles in the exercise. (20 minutes)

2. Reassemble the class as a whole and discuss what disagreementscame up within their groups. How did the role they were assignedaffect their perspective? (15 minutes)

Don’t Forget:Remind students to stay within their assigned “roles.”

Wrap-Up:There is seldom a yes/no, right/wrong, black/white answer to ethicaldecisions in business. Remind students that a rule of thumb might be,in some instances, to make the decision that positively affects thegreatest number of people.



TEACHING TIPReinforce that the govern-ment regulates the moneysupply and interest ratesthrough monetary policy;the government influencesmoney supply via taxationand spending throughfiscal policy.

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In-Class Activity: Building Your Business Skills

Responding to Competition (See page 32 of the textbook.)

Activity Overview:This activity asks students to analyze the impact of price changes ondemand and ways to offset competition.


What to Do:1. Divide students into groups of four or five and ask them to turn to

page 32 in the textbook. Tell groups to follow the instructions forthe Building Your Business Skills exercise. (30 minutes)

2. Reassemble the class as a whole and discuss the Follow-UpQuestions. Each group should share input. See page 32 for potentialanswers to the Follow-Up Questions. (15 minutes)

Don’t Forget:This may also be completed as a homework assignment.

Wrap-Up:A number of variables can affect supply and demand, not just price, andthe lowest price is not always the best option to use in the marketplace.Remind students that different types of services and products, other thanthose mentioned in the exercise, would greatly alter their discussion.

HOMEWORK:Interview a ManagerNow is a good time toassign Application Exercise 10 from the end-of-chapter materials (page 31) as homework.This assignment asksstudents to interview abusiness owner or seniormanager and ask them howdemand and supply affecttheir business, what essen-tial factors of production aremost central to the firm’soperations, and how fluctua-tions in economic indicatorsaffect their business.

For the completeassignment instructions,see page 31.At-Home Completion Time:1–2 hours



TEACHING TIPOne great way to end thechapter discussion is to playa form of Jeopardy with theclass. Divide the class intoteams and ask teams quickquestions about the chaptermaterial. The winning teamcontinues to get the firstchance to answer until theylose to another team. You,the instructor, serve astimekeeper, scorer, andmoderator.

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In-Class Self-Check

Answers:7. b

8. c

9. False

In-Class Activity: Chapter Case Discussion

What Goes Up . . . Can Go Even Higher!/Hitting the Peak

Activity Overview:For a quick review, consider breaking your class into small groups toaddress the case discussion questions at the end of the chapter.


What to Do:1. Divide students into five groups and ask them to read the chapter

case. Assign each group one of the Questions for Discussion onpage 28. (10 minutes)

2. After the groups have completed their respective answers, reassem-ble the class and discuss each question. (10 minutes)

Don’t Forget:Remind students that the chapter case starts at the beginning of thechapter and concludes at the end.

Wrap-Up:Wrap up the discussion by reinforcing any chapter concepts you feelstudents still don’t understand.



Answers to Questions for Discussion

1. Capital, physical resources, labor, and, increasingly, informationresources and entrepreneurs are the factors of production in thepetroleum industry.

2. Historically, petroleum production has been an unregulated naturalmonopoly in which the supply curve can be vertical. A companystrives to maximize profits by producing at the level where marginalrevenue equals marginal cost. However, increasing demand hasspurred increased production and development of alternative forms ofenergy. When demand increases and production (supply) remains thesame, costs increase. When production is increased or new alterna-tives are brought to market, supply increases, and if demand remainsthe same, prices decrease. However, historically in the United States,demand has always maintained step with or outpaced supply, thusencouraging ever-increasing prices.

3. An increase in energy prices, for example, will result in decreasedspending power for both consumers and businesses. Widespreadenergy price increases will affect the cost of industrial productionand, thus, the prices of both business and consumer goods. If moremoney is being spent on energy than on products, the GNP may ulti-mately be affected. If prices of other commodities rise as a result, theunemployment rate could also be affected in the long run.

4. Answers will vary, but encourage students to explore how capitalismseeks to maximize profits through the most efficient use of givenproduction factors while adhering to the law of supply and demand.Sometimes companies go beyond the set rules to attain a maximumbenefit, thus encouraging more regulation.

5. Answers will vary, but encourage students to explore how supplyand demand will be affected with their proposed alternatives.



Answers to Questions and Exercises

Pokémon cards were selling for less than half price as stores attemptedto clear out their inventory. Any clearance sale illustrates the concept ofsurplus driving down prices. The classic example of a shortage isscalpers selling event tickets at inflated prices. In both cases, the mar-ket eventually determines a price at which all the supply can be sold.

7. Answers will vary, but all students should include prices paid for con-sumer goods and the availability of desirable jobs. Managers are affectedby inflation because it tends to drive up wages and by unemploymentbecause it affects their ability to find workers. Also, both inflation andunemployment affect consumer and industrial demand, which play a keyrole in management.

8. A nation’s economic growth can be measured through its aggregateoutput, resulting standard of living, GDP, and productivity. Economicstability, on the other hand, refers to the condition in which theamount of money available in an economic system and the quantityof goods and services produced in it are growing at the same rate.

Application Exercises9. Answers will vary, but students should focus on the criteria for

competition discussed in the chapter. For example, businesseswith direct competitors operate within monopolistic competition;products are often differentiated by style, color, quality levels, andbrand names. If only a few sellers of a product exist, as in an oli-gopoly, products will be quite similar, and a change in price by oneseller will mean a change in price by all sellers.

10. Answers will vary, but students should recognize that demand andsupply affect every business in some way. Typical factors of produc-tion cited in this answer include capital, labor, physical resources,information resources, and entrepreneurship. Economic indicatorsaffect businesses differently at different times, depending on whetherthey are manufacturers or retailers. Ultimately, price increases in anindustry will affect the buying power of consumers, which will affecthow much is produced and purchased.

Questions for Review1. The five factors of production are labor, capital, entrepreneurs, physi-

cal resources, and information resources. All five factors are crucial;however, their relative importance depends on the product and indus-try. In the software development business, for example, labor andinformation resources are especially important, but the businesscouldn’t survive without capital and physical resources (computers),and it wouldn’t have been launched without an entrepreneur.

2. The curve that describes the range of possible prices that a buyer willpay for a range of quantities demanded by a buyer is the demandcurve. The curve that describes the range of price that a seller cancharge for a range of quantities supplied by the seller is called thesupply curve. The point where the demand curve and the supplycurve intersect is the point at which the intentions of buyers andsellers coincide. The price at this point is the equilibrium price.

3. GDP measures the total value of all goods and services producedin a year by a nation’s economy through domestic factors of produc-tion. Real GDP is GDP adjusted for inflation. Both measure annualperformance of a given economy.

4. Inflation is both good and bad because it can lead to a spiral of risingwages chasing rising prices, which decreases the standard of living. It isgood because at moderate levels, it can signal the beginning of a periodof economic growth. Monetary policy, particularly the ability to adjustinterest rates, is government’s most powerful tool to control inflation.

Questions for Analysis5. The failure of communism has led to an increase in the number of

mixed and market economies. Answers will vary as to what wouldcause a resurgence of planned economies, but factors might includea failure of capitalism to effectively distribute society’s resources, oran unbearable level of crime and corruption.

6. Answers will vary; however, the Pokémon craze provides an exampleof a shortage followed by a surplus. A few years ago, Pokémon trad-ing cards were selling for 10 to 20 times their list price. Later,



Answers to Building Your Business Skills Follow-Up Questions

1. Suppliers who provide extras, such as e-mail, Web pages, chatrooms, instant messaging, news, weather, travel directions, shoppingnetworks, and so on will be able to pump up demand. In order to pro-vide these additional services, suppliers will need to invest in the nec-essary technology, equipment, and staff. They would do well to focustheir spending on those extras that would create loyalty, making itmore difficult for consumers to change services based on price alone.

2. No, not when competition is based on speed of delivery, quality ofgoods or services, wide selection, personalized service, premiumimage, or some other nonmonetary factor.

3. It may be difficult to speculate. Answers will vary; however, if ser-vices offered are differentiated in ways suggested, monopolisticcompetition will likely prevail.



Answers to Exercising Your Ethics: Individual Exercise Questions to Address

Looking for theBusiness Plan Project?

The business plan project forthis textbook falls at the endof each of the six main sec-tions of the book. However,if you’d like to assign thefirst part of the business planproject at this time, seeChapter 4, page 137, for the complete assignmentinstructions and information.

1. Since prescription drugs are essentially the same regardless of thesupplier, the market has determined an equilibrium price at whichsupply and demand are equal. Competition keeps the price in check.One of the pharmacies could raise its prices only if it offered addi-tional services that differentiated its products enough that consumerswere willing to pay extra. However, the owner of the competingpharmacy needs to keep in mind that if he raises prices too high,other suppliers will find a way into the market.

2. The success of our economic system is based on competition andchoice. By engaging in collusion, the pharmacy owners are inhibiting

the fair operation of the market. This is especially ugly, given that formany people prescription drugs are crucial to achieving or maintain-ing health. By colluding, the pharmacy owners would be forcing theweakest residents of the town to pay exorbitant prices, at least in theshort term.

3. Answers will vary, but students should at least acknowledge the ethi-cal issues. For example, engaging in collusion inhibits the fair opera-tion of the market. One competitor is dealing unfairly with another,and the innocent consumers are paying for it.



Answers to Video Case Discussion Questions

Video Running Time: Question Completion Time:

10:26 30 minutes

Answers to Discussion Questions1. When a U.S. company pays more for human resources and other

factors of production, its costs are higher than those of competitorsoperating outside the United States. In turn, higher costs generally leadto higher prices, which could put the U.S. company at a competitivedisadvantage in world markets, where non-U.S. companies with lowercosts may be able to sell their products for lower prices.

2. The equilibrium price is likely to differ from country to country,depending on the different market conditions affecting the amountdemanded and the amount supplied. Encourage students to discussthe demand and supply situation of a particular product in countrieswith which they are familiar.

3. A small U.S. company may have relatively easy access to capital fromvarious sources (including friends and family, venture capital firms,banks, and other sources). It may also have easy access to physicalresources, such as computers, facilities, and raw materials, dependingon the nature of its operations and the goods or services it produces.U.S. companies generally have access to information resources throughthe Internet and other information technology. Access to labor is usuallyfairly easy, although access to specialized labor may vary depending onthe company’s location and nature of its business. Finally, access toentrepreneurial talent is relatively easy, given the drive, creativity, and

imagination of many people who start or buy small businesses. Withregard to the company’s competitive position, cost savings is always afactor when resources are easily accessible. In addition, proximity toresources provides quicker production times and, thus, quicker deliveryto the market.

4. More competitors are likely to enter a market when demand exceedssupply. This is because the competitors will perceive opportunities tosatisfy a market need based on strong demand for a particular prod-uct. Prices are likely to be higher when demand exceeds supply,attracting more competitors to the market. On the other hand, if sup-ply exceeded demand, competitors would be competing for a portionof the smaller demand market.

5. Two arguments in favor of having the tax-supported U.S. Departmentof Commerce help U.S. companies do business abroad include:(1) companies that generate profits in other countries are likely to buysome inputs, such as physical resources, in the United States,thereby improving the U.S. economy and creating or keeping jobsin the United States; (2) companies that sell abroad help create orenlarge the market for certain products, raising demand and pavingthe way for other U.S. companies to enter those markets. Two oppos-ing arguments include (1) U.S. jobs may be lost if the companiesmove production and/or administrative offices to other countries;(2) the tax money should be used instead to encourage non-U.S.companies to do business in the United States, creating jobs andboosting the domestic economy.


1-1 Business Essentials | Chapter 1: The U.S. Business Environment

LIST OF IN-CLASS ACTIVITIES

AUTHOR’S CHOICE IN-CLASS ACTIVITIES

Instructor’sEdition Page

Activity Description Time Limit Reference

Ice-Breaker: What Do You Students assess their level of knowledge about business 25 min. 4Know About Business? and set their own learning goals for the class.

Small-Group Discussion: Students consider how parts of the external environment 25 min. 6Scanning the Environment affect businesses and industries.

Up for Debate: Comparing Teams of students discuss types of economic systems. 30 min. 11Economic Systems

Supplemental Case Study Students read a supplemental case study and discuss 30 min. 13, 1-9Discussion: Supply and how it applies to chapter concepts.Demand for Pollution Permits

Video Time: Helping Businesses Students watch and discuss the Video Running 18, 35Do Business: U.S. Department chapter video. Time: 10:26of Commerce Discussion

Time: 30 min.

Up for Debate: Is Teams of students discuss competition and the role it plays 45 min. 19Competition Good? in our economic system.

Business Accountability Students read an article about outsourcing and then 30 min. 20, 1-8Handout Discussion: discuss whether it is a detriment to social The Geography of Jobs responsibility.

Exercising Your Ethics Teams of students examine some of the ethical issues 35 min. 24, 34Team Exercise: Making that can surface when making business decisions.the Right Decision

Building Your Business Skills: Teams of students analyze the impact of price changes 45 min. 26, 32Responding to Competition on demand and ways to offset competition.

Chapter Case Small groups address the case discussion questions at 20 min. 27–28Discussion: What Goes the end of the chapter.Up . . . Can Go Even Higher!/Hitting the Peak

EBERMC01_0132287587.QXD 10/25/06 5:19 PM Page 1-2

Chapter 1: The U.S. Business Environment | Business Essentials 1-2

AUTHOR’S CHOICE HOMEWORK ASSIGNMENTS

At-Home Instructor’s Edition Activity Description Deliverable Completion Time Page Reference

Exercising Your Ethics: Students examine how Answers to the exercise 30 min. 14, 33Individual Exercise: ethical issues can arise Questions to Address Prescribing a Dose of from increased pricing whenCompetitive Medicine competition is low.

Application Exercise 9: Students visit a shopping mall A brief paper detailing their 1 to 1.5 hours 19, 31Let’s Go Shopping! and determine what degree responses to the activity

of competition stores face in their immediate environment.

Application Students interview a business A brief paper detailing the 1 to 2 hours 26, 31Exercise 10: Interview owner or senior manager, outcome of the interviewa Manager finding out how demand and

supply affect the business,what essential factors of production are most important,and the impact of economic indicators on the business.

LIST OF HOMEWORK ASSIGNMENTS


CHAPTER 1: THE U.S. BUSINESS ENVIRONMENT

I. The Concept of Business and the Concept of Profit (Use PowerPoint 1-4, 1-5, 1-6)A business is an organization that provides goods and services to earn profits.Profits are the difference between a business’ revenues and expenses.

A. Consumer Choice and DemandIn a capitalistic system like that of the United States, consumers have freedom ofchoice. In turn, businesses must take into account consumer demand in their pursuitof profits.

B. Opportunity and EnterpriseUnmet consumer demands provide promising opportunities for potential businesssuccess.

C. The Benefits of BusinessBusinesses produce most of the goods and services consumed, employ most workingpeople, create new innovations, and provide opportunities for new businesses toserve as suppliers. Further, businesses contribute to the quality of life and the stan-dard of living.

II. The External Environments of Business (Use PowerPoint 1-7 through 1-13)The external environment consists of everything outside an organization’s bound-aries that might affect it. There are six major dimensions of the external environment.

A. Domestic Business EnvironmentThe domestic business environment refers to the environment in which a firmconducts its operations and derives its revenues.

B. Global Business EnvironmentThe global business environment refers to the international forces that affect a busi-ness; various factors affect the global environment at both the general and immediatelevels.

C. Technological EnvironmentThe technological environment generally includes all the ways by which firmscreate value for their constituents; technology includes human knowledge, workmethods, physical equipment, electronics and telecommunications, and variousprocessing systems.

D. Political-Legal EnvironmentThe political-legal environment reflects the relationship between business andgovernment, usually in the form of government regulation of business.

E. Sociocultural EnvironmentThe sociocultural environment includes the customs, mores, values, anddemographic characteristics of the society in which an organization functions.

F. Economic EnvironmentThe economic environment refers to relevant conditions that exist in the economicsystem in which a company operates.

III. Economic Systems (Use PowerPoint 1-14 through 1-17)An economic system is a nation’s system for allocating its resources among itsindividual citizens and organizations.

A. Factors of ProductionA basic difference between economic systems is the way in which they manage theirresources, known as factors of production.1. Labor. The human resource element in businesses, labor includes the physical and

intellectual contributions people make while engaged in economic production.

2. Capital. The financial resources needed to operate an enterprise are known ascapital.

DETAILED LECTURE OUTLINE




3. Entrepreneurs. An entrepreneur is an individual who accepts the risks andopportunities entailed by creating and operating a new business.

4. Physical Resources. The tangible things that organizations use to conduct theirbusiness are physical resources.

5. Information Resources. Businesses rely on information resources, such asmarket forecasts, the specialized knowledge of people, and economic data.

B. Types of Economic SystemsEconomic systems vary, depending on how the factors of production are managed.

1. Planned Economies. These systems rely on partial or total government control of the factors of production. With communism—as currently operating in NorthKorea and the People’s Republic of China—all sources of production are ownedand operated by the government.

2. Market Economies. Producers and consumers control production and allocationdecisions through supply and demand. The political basis of a market economy iscapitalism, which allows the private ownership of the factors of production andencourages entrepreneurship by offering profits as incentives.

3. Mixed Market Economies. This type of economy features characteristics of bothplanned and market economies; many countries are moving from planned systemsto mixed market systems through privatization, which involves the transforma-tion of government-controlled businesses into privately owned enterprises. In thepartially planned system called socialism, the government owns and operatesselected major industries.

IV. The Economics of Market Systems (Use PowerPoint 1-18 through 1-26)Market systems allow businesses the flexibility to decide what to produce, how muchto produce, and what price to charge; customers are a driving force in market systemssince they decide what to buy and at what price. Demand and supply are the predom-inant forces that guide decisions about what to buy and what to sell.

A. Demand and Supply in a Market EconomyBillions of exchanges take place every day between businesses and individuals;between businesses; and among individuals, businesses, and governments.Exchanges conducted in one area often affect exchanges elsewhere.

1. The Laws of Demand and Supply. Demand is the willingness and ability of buyersto purchase a product; supply is the willingness and ability of producers to offer agood or service for sale. The law of demand states that buyers will purchase moreof a product as its price drops; the law of supply states that producers will offermore of a product for sale as its price increases.

a. The Demand and Supply Schedule. The demand and supply schedule indicateshow much of a product will be sold at various prices.

b. Demand and Supply Curves. A demand curve shows how many products willbe demanded at different prices; a supply curve shows how many products willbe supplied at various prices. The point at which the curves intersect is themarket price (or equilibrium price).

c. Surpluses and Shortages. With a surplus, the quantity supplied exceeds the quan-tity demanded; quantity demanded exceeds quantity supplied with a shortage.

B. Private Enterprise and Competition in a Market EconomyIndividuals pursue their own interests with minimal government restriction in aprivate enterprise system; such a system requires private property rights, freedomof choice, profits, and competition. Competition occurs when two or more busi-nesses vie for the same resources or customers.

1. Degrees of Competition. Economists have identified four degrees of competitionin a private enterprise system.


a. Perfect Competition. Many small firms exist in an industry; no single firm ispowerful enough to influence price.

b. Monopolistic Competition. Few sellers but many buyers exist, so buyers focus onnumerous differentiation strategies, such as brand names, design, and advertising.

c. Oligopoly. An industry has only a handful of sellers; market entry is difficultbecause large capital investment is needed.

d. Monopoly. An industry or market has only one producer; that producer enjoyscomplete control over price.

V. Economic Indicators (Use PowerPoint 1.27 and on)Economic indicators are statistics that show whether an economic system is strength-ening, weakening, or remaining stable.

A. Economic Growth, Aggregate Output, and Standard of LivingAggregate output is the total quantity of goods and services produced by an economicsystem during a given period. Simply put, an increase in aggregate output is growth.Standard of living refers to the total quantity and quality of goods and services thatcan be purchased with the currency used in an economic system; standard of livingincreases when the quantity of goods and services increases, and the economic systemprovides more of the goods and services people want.

1. Gross Domestic Product (GDP). The GDP is the total value of all goods andservices produced within a given period through domestic factors of production;GDP is a measurement of aggregate output. Gross national product (GNP)refers to the total value of all goods and services produced by a national economywithin a given period regardless of where the factors of production are located.

a. Real Growth Rate. Real growth depends on output increasing at a faster ratethan population; the real growth rate of the U.S. economic system seems quitehealthy and the U.S. standard of living should be increasing.

b. GDP per Capita. GDP per capita means GDP per person. GDP divided by totalpopulation = GDP per capita.

c. Real GDP. Real GDP means that GDP has been adjusted to account forchanges in currency values and price changes.

d. Purchasing Power Parity. Purchasing power parity is the principle thatexchange rates are set so that the prices of similar products in different coun-tries are about the same.

2. Productivity. Productivity compares how much a system produces with theresources needed to produce it; increases in productivity yield increases in thestandard of living.

a. Balance of Trade. A country’s balance of trade is the economic value of allthe products that it exports minus the economic value of its imported products.A positive balance results when the value of a country’s exports is greater thanits imports; that is, more money is flowing into the country as a result of export-ing. A negative balance results when a country imports more than it exports.

b. National Debt. A country’s national debt is the amount of money that is owedto creditors.

B. Economic StabilityStability results when the amount of money available in an economic system and thequantity of goods and services produced in it are growing at about the same rate.

1. Inflation. Inflation occurs when widespread price increases plague an economicsystem; the amount of money in the economic system exceeds the amount ofactual output. Inflation can be measured by the consumer price index (CPI),which weighs prices of typical products purchased by consumers living in urbanareas. Inflation rate = Change in price index/Initial price index � 100.



2. Unemployment. Unemployment is the level of joblessness among people activelyseeking work in an economic system; when unemployment is high, a surplus ofavailable workers exists. Unemployment is sometimes a symptom of a recession,when aggregate output declines, or of a depression, a prolonged and deep recession.

C. Managing the U.S. EconomyThe government manages the U.S. economic system through both fiscal and mone-tary policies. Fiscal policies manage the collection and spending of revenues; taxincreases can function as fiscal policies. Monetary policies focus on controlling thesize of the nation’s money supply; the government can influence banks to lendmoney and can influence the supply of money by manipulating interest rates.Stabilization policy is made up of both fiscal and monetary policies; the goal is tosmooth out fluctuations in output and unemployment and to stabilize prices.



CHAPTER 1: THE U.S. BUSINESS ENVIRONMENT

Opening Case: What Goes Up . . . Can Go EvenHigher!/Hitting the Peak

I. The Concept of Business and the Concept of ProfitA. Consumer Choice and Demand

B. Opportunity and Enterprise

C. The Benefits of Business

II. The External Environments of BusinessA. Domestic Business Environment

B. Global Business Environment

C. Technological Environment

D. Political-Legal Environment

E. Sociocultural Environment

F. Economic Environment

III. Economic SystemsA. Factors of Production

1. Labor

2. Capital

3. Entrepreneurs

4. Physical Resources

5. Information Resources

B. Types of Economic Systems

1. Planned Economies

2. Market Economies

3. Mixed Market Economies

CHAPTER OUTLINE


IV. The Economics of Market SystemsA. Demand and Supply in a Market Economy

1. The Laws of Demand and Supply

a. The Demand and Supply Schedule

b. Demand and Supply Curves

c. Surpluses and Shortages

B. Private Enterprise and Competition in a Market Economy

1. Degrees of Competition

a. Perfect Competition

b. Monopolistic Competition

c. Oligopoly

d. Monopoly

V. Economic IndicatorsA. Economic Growth, Aggregate Output, and Standard

of Living

1. Gross Domestic Product (GDP)

a. Real Growth Rate

b. GDP per Capita

c. Real GDF

d. Purchasing Power Parity

2. Productivity

a. Balance of Trade

b. National Debt

B. Economic Stability

1. Inflation

2. Unemployment

C. Managing the U.S. Economy



THE GEOGRAPHY OF JOBSBusinesses are accountable to numerous external constituents.Also, managers sometimes have to optimize their decisionmaking when dealing with conflicting interests. Nowhere isthis more visible than in the current debate over the continuedoutsourcing of jobs to foreign employees.

Outsourcing is not a recent phenomenon. For yearsmanufacturers have subcontracted their labor to low-costfactories in developing nations. Nike and Reebok, forinstance, outsource the production of all their athletic shoesto factories in Southeast Asia. And many other companieshave similar practices. In general, the jobs that have beenoutsourced have been relatively low-skill in nature. Whilelabor and other observers have long been aware of this prac-tice, business leaders have been able to argue with some con-viction that this practice would lead to more high-qualityjobs in the United States.

In recent years, a major change in outsourcing hasoccurred as more companies have started to outsource skilledand/or white-collar jobs to other countries. Companies likeMicrosoft find that highly skilled software programmers inplaces like India can perform as well as their U.S. counterpartsfor about a quarter of the salary costs. Boeing is now havingsome of its engineering work done abroad. And some expertsare beginning to visualize how many other basic services,ranging from income tax preparation to financial analysis tomedical records interpretation, can also be exported.

HANDOUT: BUSINESS ACCOUNTABILITYHow big is the problem? Experts project that 3.3 million

jobs will be exported from the United States by 2015, and thatanother 14 million jobs have been identified as being “at risk.”Many experts also agree that while outsourcing may be badfor various specific individuals, in the long term it will begood for the country as a whole. And besides, as one CEOargues, “If your competitor is sending jobs overseas, you’realmost forced to do the same.”

That sentiment sums up the debate nicely. On the onehand, if businesses are accountable to their shareholders, theyare obligated to keep their costs as low as possible and toremain competitive in their respective marketplaces. Fromthis perspective, then, they should outsource whenever andwherever feasible. On the other hand, to the extent that busi-nesses have a social obligation and an obligation to their cur-rent workers, they must take into account the social andhuman cost of displacing U.S. workers. So which side isright? This is a case in which there is no simple answer, andwhat is right or wrong is in the eye of the beholder.

Discussion Questions

(a) What are the pros and cons of outsourcing in order tokeep prices down?

(b) What are the pros and cons of reducing dependence onoutsourcing in order to better fulfill social obligationstoward stakeholders?



SUPPLY AND DEMAND FOR POLLUTION PERMITSWhen Julie Hardwick, a manager for a division of BP AmocoPLC, checks her computer every day, she’s not looking forinformation about her company’s stock. She’s finding outwhether other divisions of BP are looking to trade their per-mits to emit pollutants that cause global warming. Units thathave leftover permits after meeting their emission-reductionquotas are allowed to sell them to other units that need them tocover shortfalls in their own efforts to meet their goals. Thecompany reports that it is saving millions of dollars throughcreative reductions in fuel consumption, prompted by the useof permits. Other firms in the developed countries are usingpermits as well, hoping to reduce pollution before theirgovernments make it mandatory.

Some believe that trading permits between companies oracross national borders will prove difficult because of the widevariety of sources of pollution and the problem of maintainingfairness in the use of the permits. For instance, should heavypolluters be made to clean up pollution instead of being ableto trade for permits to continue to pollute? Some corporationsalready use an alternative called offset rights, which are posi-tive steps that offset the pollution a company can’t easily

control. Some typical offsets include the use of clean energy,such as solar or wind power, and the planting or protecting offorests and fields that absorb carbon dioxide, a major pollu-tant. The Nature Conservancy has used several offset deals tofund rain forest preservation projects, for example.

Others believe that trading can succeed, and that measur-ing each country’s use of fossil fuels will provide a usablegauge of how many permits it should be allowed. Once rulesfor trading have been established, the cost of complying withpollution controls will drop, and opportunities to come upwith creative new sources of energy will proliferate.

Source: Janet Ginsberg, “Letting the Free Market Clear the Air,”Business Week, November 6, 2000, 200, 204.

Discussion Questions

(a) How does trading in pollution permits at BP demon-strate the laws of demand and supply?

(b) What would influence the demand for pollution permitsif they were traded globally?

(c) Should companies be allowed to trade permits? Shouldcountries be allowed to? Why or why not?

HANDOUT: SUPPLEMENTAL CASE STUDY


Notes:


Ch.1 Basic Business Concepts(Contemporary Business World)

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