CHAPTER 10 Resource Manager CHAPTER 10 Resource...

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ECONOMICS

Reading for the StudentDowd, Merle E. Money, Banking, and Credit Made Simple.

Garden City, NY: Doubleday and Company, 1994.

Multimedia MaterialEconomics in a Changing World: Production. Churchill

Media. VHS videocassette, 24 min. Uses location footageand interviews to explore the basic concepts of the produc-tion process.

Additional Resources

Spanish Economic Concepts Transparency 3

Spanish Vocabulary Activity 10

Spanish Reteaching Activity 10

Spanish Section Quizzes for Chapter 10

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Technology and Multimedia

Assessment and Evaluation


PROCEDURE

1. Organize the class into pairs of students. Tell students to suppose that they each have $10,000 to invest in theirown “stock portfolios.” Then give them copies of the earliest NASDAQ quotations in your set of four. Explainthat the letters on each line stand for a company’s name. The figures under Vol. (volume) are the amounts ofshares in the company that were bought and sold on that day. The figures under Close are the prices of thestocks at the end of the day. Those are the amounts they will pay for shares. (To change the fractional amountsto a decimal, divide the numerator by the denominator and write the answer as a decimal.) The figures underChg. are the amounts that the stock prices went up (+) or down (-) since the beginning of the trading day. Havestudents choose companies that look promising and decide how many shares of each to buy for their portfolios.

2. Have students keep a journal of their stock transactions. Tell them to copy the date from the NASDAQ quotationat the start of their entry. Then have them record the name of each stock that they bought, the number ofshares, the price per share, the reasons they chose the stock, and how much of their $10,000 they spent. Foreach company they invest in, remind them to deduct $40 in fees. However, if they buy more than 100 shares ina company’s stock, they get a discount and pay only $30 in fees for that trade. Also, ask each student to set agoal, such as a 1% profit at the end of the four “trading sessions.”

3. Distribute the second set of NASDAQ quotations. Have students check the progress of the stocks they boughtand decide whether to sell all, some, or none their shares. If they have money left to invest, encourage them tobuy more shares of stocks. Remind them to record the details of their transactions, including their gains or lossesafter selling stock.

4. Repeat the process for the last two sets of NASDAQ quotations. Then have students figure out their gains orlosses over the four “trading sessions” and add this information to their last journal entry.

Assessment

1. Have students assess their own performance, including the percent of change in the value of their portfolios.Remember, percent of change = amount of change divided by the initial investment. Then have students listwhat actions they would repeat when selling and buying stocks and how they would improve their trading in thefuture.

2. Instruct students to write newspaper articles relating their experiences with the pleasures and perils of trading inthe stock market.

▼ BACKGROUND

The largest volume of over-the-counter stocktransactions takes place through the NationalAssociation of Securities Dealers AutomatedQuotations (NASDAQ) system.

▼ MATERIALS

Copies of a portion of the NASDAQ for fourconsecutive days, or four consecutive Fridays;calculators

▼ OBJECTIVES

After completing this activity, students will beable to• Read the stock market listings in their local

newspaper.• Calculate potential gains and losses in stock

transactions.

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T HE STOCK MARKET

Name Date Class

RUBRICSjournal,self-assessment,newspaper article

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Performance Assessment Activity 17

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10, A

14. The more inventory a business has,

a. the better quality its goods will be. b. the less product it has to sell.c. the more sales it can expect. d. the less capital it has for other activities.

15. The kind of financing a company uses to finance a major expansion, such as building a new plant, iscalled

a. leveraging. b. short-term financing.c. intermediate-term financing. d. long-term financing.

CRITICAL THINKING QUESTIONS

Directions: Answer each of the following sets of questions on a separate sheet of paper.

16. Making Comparisons What are some of the advantages of short-term financing over long-term financing?

17. Making Generalizations How has technology changed production in the United States over the past century?

APPLYING SKILLS

Understanding Interest Rates

18. How much interest would Company A pay per year to borrow $100,000 from First National Bank?

19. Why might First National Bank charge Company B a higher rate of interest than Company A?

20. How much more would Second National Bank charge Company B on a $100,000 loan than First National Bankwould?

Company First National Bank Second National Bank

Company A 7.5% 7.9%

Company B 8.5% 9.0%

Chapter 10 Test Form A

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10, A

F INANCING AND PRODUCING GOODS

RECALLING FACTS AND IDEAS

Multiple Choice: In the blank at the left, write the letter of the choice that best completesthe statement or answers the question.

11. Borrowing money to finance a business is known as

a. cost-benefit analysis. b. bond financing.c. debt financing. d. stock financing.

12. Long-term financing includes

a. trade credit. b. stocks and bonds.c. loans and credit lines. d. leasing.

13. The assembly line was developed early in the twentieth century by

a. General Motors. b. General Electric.c. U.S. Steel. d. Ford Motor Company.

A1. profit

2. cost-benefit analysis

3. automation

4. division of labor

5. long-term financing

6. assembly line

7. production

8. revenues

9. robotics

10. consumer goods

USING KEY TERMS

Matching: Match each item in Column A with the items in Column B. Write the correctletters in the blanks.

Ba. money borrowed for a business for a period of more than

10 years

b. total income from sales of output

c. goods produced for individuals and sold directly to the public

d. revenues minus costs

e. process of changing resources into goods that satisfy theneeds and wants of individuals and businesses

f. production system in which the good being produced moves on a conveyor belt past workers who perform individual tasks

g. sophisticated computer controlled machinery that operates anassembly line

h. breaking down of a job into small tasks performed by differ-ent workers

i. process in which a business estimates the cost of action andcompares it with the benefits of that action

j. production process in which machines do the work and people oversee them

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14. The money that businesses borrow to finance their operations comes from

a. Treasury bills and notes. b. mutual funds.c. individuals’ deposits in financial institutions. d. stocks and bonds.

15. The owners of which of the following instruments have the right to vote at shareholder meetings?

a. bonds b. preferred stockc. common stock d. equity

CRITICAL THINKING QUESTIONS

Directions: Answer each of the following sets of questions on a separate sheet of paper.

16. Making Predictions What are some of the options a company that needs long-term financing faces?

17. Drawing Inferences and Conclusions How would a businessperson use cost-benefit analysis to decidewhich of the following three alternative investments to finance: expanding a factory, increasing the advertisingbudget, or hiring two new employees.

APPLYING SKILLS

Understanding Interest Rates

18. How much interest would Company B pay per year on a $500,000 loan from First National Bank?

19. What might account for the fact that both banks charge a higher rate of interest on loans to Company B than toCompany A?

20. How much would Company B save a year on a $250,000 loan by borrowing from First National Bank rather thanSecond National Bank?

Company First National Bank Second National Bank

Company A 7.5% 7.9%

Company B 8.5% 9.0%

Chapter 10 Test Form B

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10, B


RECALLING FACTS AND IDEAS

Multiple Choice: In the blank at the left, write the letter of the choice that best completesthe statement or answers the question.

11. According to cost-benefit analysis, management should expand a company if expected profits will

a. more than cover the cost of financing the expansion.b. exceed expected moving costs by more than 30 percent.c. anticipate the increase in labor and equipment costs.d. cover at least 50 percent of the expected financing costs.

12. Which of the following is not a form of long-term financing?

a. drawing on a line of credit b. issuing common stockc. issuing preferred stock d. issuing bonds

13. The process of checking products to make sure they meet a company’s standards is known as

a. inventory control. b. product control.c. quality control. d. equity financing.

A1. cost-benefit analysis

2. short-term financing

3. robotics

4. production

5. automation


7. assembly line

8. profits

9. consumer goods

10. revenues

USING KEY TERMS

Matching: Match each item in Column A with the items in Column B. Write the correctletters in the blanks.

Ba. production process in which machines do the work and peo-

ple oversee them

b. process in which a business estimates the cost of action andcompares it with the benefits of that action

c. production system in which the good being produced moveson a conveyor belt past workers who perform individualstasks

d. sophisticated computer controlled machinery that operates anassembly line

e. money borrowed by a business for less than a year

f. revenues minus costs

g. total income from sales of output

h. breaking down a job into small tasks performed by differentworkers

i. process of changing resources into goods that satisfy theneeds and wants of individuals and businesses

j. goods produced for individuals and sold directly to the public

262B

■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■

Resource ManagerCHAPTER 10Application and Enrichment


THE COST OF MONEY

Several years ago, Mr. Morris decided to enter the tree business. He was not deterred by the factthat it takes ten years to grow a tree. At $40.00 a tree, he plans to bring 65 trees to market.

Directions: Follow the steps below to evaluate Mr. Morris’s choice.

1. Mr. Morris starts out with $100 of his own and is sure that he can meet the costs associated with years 2through 10 from his own future savings. Luckily, he has an aunt who agrees to lend him the additional $600needed for the first year at the interest rate of 5 percent compounded annually. Use this information to completethe table.

2. What is the actual profit that Mr. Morris will earn?

3. Why are costs higher in years 1 and 10 than in the other years?

4. An economically savvy friend calculated that Mr. Morris actually lost money on the venture. Explain the friend’sreasoning. (Hint: think of opportunity cost and what else Mr. Morris could have done with the money.)

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Sales Amount Interest ActualYear Revenue Costs Financed Paid Profit

1 $0 700 $600.00 $30.00 $�730.00

2 $0 66 $630.00 $31.50 $�92.50

3 $0 66 $661.50 $33.08 $�99.08

4 $0 66

5 $0 66

6 $0 66

7 $0 66

8 $0 66

9 $0 66

10 300

Total 1528

Enrichment Activity 10

Teaching Transparency

Application and Enrichment

Review and Reinforcement

C HAPTER 10 FINANCING AND PRODUCING GOODSDirections: Read each statement below, and then write the letter of the correct answer.

1. Estimating the cost of an action compared to its benefits is known as .

a. an action potentialb. factoring the benefit

c. a cost-benefit analysis

2. A seller’s letting a buyer take home a product with the promise to pay for it later is .

a. a loanb. trade credit

c. debt financing

3. The maximum amount of money a company can borrow from a bank in one year is its .

a. short-term financingb. trade credit potential

c. line of credit

4. Raising money for a business by borrowing is called .

a. debt financingb. trade credit

c. cost-benefit analysis

5. Borrowing money for 1 to 10 years is called .

a. short-term financingb. intermediate-term financing

c. long-term financing

6. In financing, part ownership of the company is being sold.

a. equityb. stock

c. long-term

7. Goods that are produced for individuals are called .

a. consumer goodsb. custom products

c. specialty lines

8. Goods that are produced for manufacturers for making other goods are called .

a. producer goodsb. market products

c. market lines

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Economic VocabularyActivity 10

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AKING GENERALIZATIONSGeneralizations are judgments that are usually true, based on the facts at hand. To make avalid generalization, first, identify the subject matter. Next, gather related facts and examplesand identify similarities among these facts. Finally, use the similarities to form some generalideas about the subject.

Directions: Study the information below and answer the questions that follow.

Rate of Unemployment in Selected Countries (1999)

Read each generalization below. If it is valid based on the information in the chart, write V; if it is invalid write I.

1. Unemployment is high throughout Europe.

2. Unemployment in English-speaking countries is lower than in other countries.

3. Latin American countries are less concerned with unemployment than some other countries.

4. Relative to most other countries, the United States has a low rate of unemployment.

5. All South American countries have high unemployment rates.

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Country Percentage of Unemployment

Argentina 12.0

Belgium 8.4

Bolivia 11.4

Brazil 8.5

Ecuador 12.0

France 11.6

Germany 9.1

Liechtenstein 1.6

Luxembourg 3.0

Spain 17.8

Switzerland 3.6

United States 4.3

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F INANCIAL INVESTMENTS: WHAT’S THE IDEA?Finding the main idea helps you to organize information and assess the most important concepts to remember.

Directions: Read the following passage. Then answer the questions below.

The Risk-Return Relationship

One of the most important relationships in the market is the relationship between risk and return. Risk is a situation in which the outcome is not certain, but the probabilities of different outcomes can be estimated. Investorsrealize that financial assets are risky. Assets such as stocks and bonds may go up and down in price, or the agencythat issued the asset may even fail to redeem it, leaving the lender with a loss. As a result, investors demand a higherreturn to compensate for higher risk. . . . [and] riskier assets offer higher returns to attract investors.

As an investor, your first consideration should be the level of risk that you can tolerate. For example, if someoneoffers you a risky deal that doubles your money, it may be better to focus on the chances of getting your money backrather than on the size of the return. If you are uncomfortable with high levels of risk, then consider another invest-ment instead.

from Economics: Principles and Practices

1. What is the general purpose of this passage?

2. Sum up in a sentence the main idea, or most important concept, in the reading.

3. List at least five details from the passage that support the main idea.

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F INANCING AND PRODUCING GOODSPresident Calvin Coolidge said, “The business of America is business.” Management decisionsdetermine the success or failure of any business.

Directions: The table below shows the production process for blue jeans. The labels in the left-hand columnare missing. Fill them in from the list below. Then answer the questions that follow.

Production Process • Inventory Control • Purchasing • Planning • Product Design • Quality Control

6. What factor that underlies quantity demanded has influenced the kinds of jeans that are manufactured?

7. Why do you think a jeans manufacturer might not test every pair of jeans produced?

1010

1. Style: Basic style for jeans has remained relatively constant; any changes have been in response to changes in consumertastes and preferences, and to establish fashion trends such as stone-washed jeans.

2. Location: Original Levi Strauss and Company (1853) was founded in San Francisco, where there was a high demand fordurable pants, especially among prospectors; company remains in San Francisco, where modern transportation methods pro-vide channels for input and distribution.Scheduling: Mechanization permits mass production.

3. Raw materials: Denim is purchased from manufacturers across the South and Southeast.Capital: Textile mills and jeans producers like Levi Strauss are capital intensive: that is, they rely on machines and mechaniza-tion. Regular maintenance and capital improvement are required to enable such companies to remain competitive.

4. Raw materials: Textile mill buys and stores sufficient cotton for year-round production.Semi-finished materials: Producer buys and stores denim for production later.Finished goods: Producer ships finished products to its distribution centers for warehousing and eventual distribution to retail outlets.

5. Testing: Denim is tested at textile mill for color, defects, weight; producer checks denim before processing, tests the produc-tion line with a test run, and spot checks during production.

Critical Thinking Activity 17 Reteaching Activity 10

Reinforcing Economic Skills 14

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B ULL AND BEAR MARKETSA bull market occurs when stock prices keep rising. A bear market occurs when stock prices fall15% or more. People who invest in bonds and gold futures fare better in bear markets becausethey are usually accompanied by rising interest rates. People who invest in stocks, or equities,fare better when interest rates are low. Then companies can borrow more money to expandtheir businesses, which then make more profits to distribute to their stockholders.

In September 1998, Aaron, Bonnie, Diego, and Kayla each invested $10,000. Aaron put his money in a foreign stockfund. Bonnie bought utility stocks. Both reinvested the dividends they made during the year. Diego invested in a 30-year bond, and Kayla purchased gold futures. In September 1999, the four compared investments. Aaron had26% more money than last year. Bonnie had 7.5% more. Diego, however, had 8.4% less, and Kayla had lost 11.6%.

Directions: Use the information above to complete the following exercises.

1. Calculate the amount of each investment in September 1999, and show it on the bar graph below.

2. What kind of market—bull or bear—probably dominated between September 1998 and September 1999?Explain.

3. The value of the dollar decreases when the price of gold increases. So the price of gold is a good inflation indicator. Was inflation most likely high or low between September 1998 and September 1999? Explain.

4. In September 1999, should someone who was planning to buy a house have put money in a savings account for purchase at a later time or should they have bought then, getting a larger mortgage? Explain.

0 1 2 3 4 5 6 7 8 9 10 11 12 13

Initial Investment(each person)

Foreign Stock Fund (Aaron)

Utility Stocks (Bonnie)

30-year Bond (Diego)

Gold (Kayla)

Results of Investing $10,000 for One Year in Four Investments

Thousands of Dollars

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C ERTIFICATES OF DEPOSIT OR MUTUAL FUNDS?Banks offer certificates of deposit (CDs) to their customers as a way of earning greater intereston their investments than in regular savings accounts, but with the same security of being fed-erally insured. This means that when you invest in a 1-year CD the bank promises to return toyou your full principal plus the interest you have earned.

The stock market is another way to invest your savings. The easiest way to invest in stocks is byjoining a mutual fund, where professional stock analysts pick the stocks that will be shared bytheir investors. Earnings in stocks (and good mutual funds), over a long period of time, havehistorically been better than bank accounts, but they are riskier. That means that on any oneday, an investment may have a greater yield than a similar investment in stocks, but on mostdays, the stock investment will provide the greater yield.

Directions: Compute the value of each account in the tables below. Then answer the questions. To find the value of an account this year, take the value from last year and multiply by this year’s interest rate. This is the interest for the year. Then add this onto last year’s account value. Round your answers to thenearest dollar.

1. Find the value of a $1,000 investment in two 5-year CDs. For example, to find the account value in 1990, find$1,000 × 0.075 + $1,000.

2. Find the value of a $1,000 investment in a typical stock mutual fund for 10 years.

3. In which years was the money invested in a CD worth more?

4. In which years was the money invested in a mutual fund worth more?

5. If you want to use your savings in 6 months to buy a car, why would a CD be a better place for you to put yoursavings?

6. If you want to save your money for the next 40 years until you retire, why would the stock market be a betterplace to put your savings?

Year 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999Rate 9% –2% 3% 16% 18% 20% 19% 29% 14% 39%Acc’t $1,000value

Year 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999Rate 7.5% 7.5% 7.5% 7.5% 7.5% 5% 5% 5% 5% 5%Acc’t $1,000value

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Economic Concepts 3

P RODUCTIVITYThis photograph shows people who are actively involved in producing a product to be sold in the market.

33

The Image Bank © Peter Gruman

Economic Concepts Transparency 3

Consumer ApplicationsActivity 17

Free Enterprise Activity 17

A NALYZING INVESTMENT TRENDS

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Trends in economic development can be determined by studying statistical information over aperiod of time. Unforeseen factors and events do come into play and may affect trends thatpast data suggest. Nevertheless, trends remain important as a planning tool for business-people and government officials.

Try tracking trends in direct investment: foreign investment in the United States and the United States’ investmentabroad. The table below provides data about the share of foreign ownership of American industries.

Directions: Indicate the percent of increase in foreign investment in the United States between 1991 and1996. (Divide the difference by the 1991 figure). Answer the questions below the table and then make aprediction for 2001.

[Source: World Almanac 1994, 1999]

(9) Which country showed the greatest change in total dollars?

(10) Which country showed the greatest percent change?

Now do the same using the following data about United States’ direct investment abroad.

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17

Canada $37,301 $53,845 (1)

Finland $1,305 $2,818 (2)

Germany $28,618 $62,242 (3)

Ireland $1,823 $9,776 (4)

Japan $92,896 $118,116 (5)

Kuwait $1,891 $2,572 (6)

Taiwan $1,142 $2,298 (7)

U.K. $100,386 $142,607 (8)

1991 1996 percentCountry (millions) (millions) change Prediction for 2001

[Source: World Almanac 1994, 1999]

(16) In which country does the United States invest the most?

(17) The least?

(18) In which country did the United States increase its investment the most?

(19) In which country did the percentage of investments increase the least?

(20) Which country experienced the least change in total dollars?

Australia $15,795 $28,769 (11)

Brazil $14,882 $26,116 (12)

Canada $68,853 $91,587 (13)

Japan $24,938 $39,593 (14)

U.K. $78,072 $142,560 (15)

1991 1996 percentCountry (millions) (millions) change Prediction for 2001

EXAMINING THE CARTOON

Multiple Choice

1. What becomes of the man shining shoes in the first panel?

a. He turns to day trading. b. He becomes wealthy.c. He loses his money in the stock market crash. d. It is impossible to tell.

2. What does the cartoon imply will happen to the man in the second panel?

a. He will become a professional broker. b. He will lose his money.c. He will invest in Internet stocks. d. It is impossible to tell.

Critical Thinking

3. Analyzing the Cartoon What is significant about “1929”?

4. Expressing Your Opinion Do you think day trading should be legal? Explain.

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AY TRADING—BIG WINNINGS, BIG LOSSESUsing high-speed Internet connections, day traders, for a fee, can buy and sell stocks on amoment’s notice. A sophisticated trader can make a great deal of money by taking advantageof small variations in stock prices. The danger is that most day traders are not so sophisticatedand lose a great deal of money.

Directions: Study the cartoon below. Then answer the questions that follow.

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D

Jeff MacNelly

“That’s why I think it’s a better idea to have your ownportfolio,” Johnson said.

Rich Stevens, a principal at fund giant VanguardGroup, acknowledged most of the industry has made per-formance the top priority regardless of the taximplications. Vanguard has made cost control a priority.

“The problem is a lot of mutual funds totally disre-gard the tax consequences,” Stevens said.

But Stevens argued that a private account isn’t neces-sarily a better alternative than a tax-efficient, cost-sensitivefund. He doesn’t see any reason why a person couldn’t putas much as $1 million in a single Vanguard stock fund.

Vanguard’s fees are about 0.28 percent a year, com-pared with about 1 percent for a private account, Stevenssaid.

Adriane Berg, editor of the investing newsletterWealthbuilder, said people with $100,000 or less might

want to look at mutual funds instead of stocks to makesure they get enough diversification in their portfolios. Butif they have more than that, she thinks stocks make themost sense.

Trading costs have come down so much that it isn’tnearly as expensive as it used to be, Berg said. And pick-ing winning stocks isn’t a mystery, either.

Wealthbuilder has a recommended stock portfoliothat began in 1996 with $250,000 that is now worth$506,719, an increase of 102.7 percent. The portfolioincludes 44 names, such as Microsoft (MSFT), Coca-Cola(KO), Starbucks (SBUX), and American Express (AXP).

“We’re very bullish with the average investor beingable to handle their own stock portfolio,” Berg said. “Youdon’t have to be a genius.”

Costello, Martine. “Stocks vs. Mutual Funds.” CNNfn, gw.cnnfn.com,September 16, 1999.

34 Primary and Secondary Source Readings

ANALYZING THE READING

1. What factors do investors need to think about before investing?

2. What are some of the advantages and disadvantages of mutual funds?

3. What are some of the benefits to hiring an account manager?

4. Why does Adriane Berg believe that people with more money should choose stocks over mutual funds?

5. Based on the information in the article what would you choose to invest in—stocks, mutual funds, or both?Explain.

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Cooperative Learning Simulations and Problems 17

Primary and Secondary Source Reading 17

Math Practice for Economics Activity 17

Economic Cartoons Activity 17

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F INANCING BUSINESS

GROUP PROJECT

A cost-benefit analysis is a simple and efficient way for a business to determine the costs and benefits of expanding. If the expected benefits or profits of the expansion are greaterthan the estimated financing costs, then the proposed expansion is probably a good move for the business. In the following activity, you will work with your group to do a cost-benefit analysis for a small hot dog stand wishing to expand its menu. Then you will work in pairsto complete a cost-benefit analysis for a bicycle repair shop.

Sample Cost-Benefit Analysis

Step 1: Estimate Costs: $ weekly for hamburger buns, meat, and cheese � 50 weeks �$ .

Step 2: Estimate Revenues: at least 100 hamburgers or cheeseburgers weekly at $ each �50 weeks � $ .

Step 3: Estimate Profits: revenues $ � costs $ � profits $ .Step 4: Calculate Borrowing Costs: $250 � .05 � $ .Step 5: Compare Cost of Loan with Profits: $ (including interest) vs. $ (profits)

1. Group Work Stage 1: Students work in groups offour or more. Your group will represent a businesswith plans for expansion. You own a small but profitable hot dog stand on a busy corner. Businesshas been great, but customer interest has convincedyou that there is demand in the neighborhood foran expanded menu that includes hamburgers andcheeseburgers. However, this means you will have to budget more money to cover the cost ofthe burgers. An adult friend loans you $250 at 5 percent interest. Discuss how you can find out the weekly cost of buying buns, meat, and cheesefor 100 burgers. Have several group membersobtain realistic figures you can use in your analysis.Decide on what you will charge per burger. Thenfollow the steps above to complete a cost-benefitanalysis to determine if you should expand yourbusiness.

2. Paired Work Stage 2: Students work in pairs.Suppose that you want to open a bicycle repairshop in a vacant building in town. Pairs from thegroup work together to complete a cost-benefitanalysis for the shop. Interview local bike shopowners or other businesspeople to gather

information to use in your analysis. Estimated costsmay include rent, utilities, wages, advertising, officesupplies, and start-up costs (parts and tools). Whencalculating the cost of borrowing, base your estimate on what you will need to cover yourexpenses for a year and assume that you willreceive a loan from a local bank at 10 percent interest. Complete the analysis using the basic steps outlined above and decide if you should open a shop.

3. Group Work/Analysis Stage 3: Students return to original groups. Pairs take turns presenting theirdecision and cost-benefit analysis to the group.Each pair maps out its analysis on the chalkboardas the group follows along. Group members mayoffer feedback and suggestions at any point.

Group Process QuestionsDid group members understand the task?

Did members work well together?

Did members listen carefully to each other’s contributions and give helpful feedback?

What is the most important thing you learned?

COOPERATIVE GROUP PROCESS:

Name Date Class

17

■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■

Resource ManagerCHAPTER 10

our mutual-fund portfolio earns a measly 20 percent ayear while the hottest stocks on Wall Street quadruple ina few months.

To make matters worse, you get stuck with a fat taxbill while your friends get rich on Microsoft and Yahoo!.

Meanwhile, five million people are buying stocks online,and even the most traditional brokerage houses like MerrillLynch are getting into the electronic trading business.

Paper or plastic? Aisle or window seat? Stocks ormutual funds?

“We get that question all the time,” said MarkBalasa, a certified financial planner with Balasa & Hoffmanin Schaumberg, IL. “They see 10 stocks in the S&P 500doing so well, and they ask, ‘Why don’t I own them?’”

One of the great financial debates at the close of the20th century is whether investors should own stocks orfunds. But don’t hold your breath for an easy answer.

“No one strategy is right for all investors,” saidDeborah Frazier, vice president and senior financial con-sultant at Merrill Lynch.

Frazier said people first need to set their investinggoals and decide how much risk they can tolerate. Theyalso need to examine their “temperament,” or thepatience to allow their portfolios to grow over time. Youneed at least 18 months for stocks and three years forfunds, she said.

Frazier said mutual funds are great because theyallow people with less money easy diversification. Fundsalso allow people to reap huge gains from dollar-costaveraging, or small, regular contributions over time.

“Mutual funds are one of the best inventions of thiscentury,” Frazier said. “They were designed for individualsto invest in the market the way millionaires do.”

But perhaps the biggest disadvantage of funds is youhave no control over your tax bill, experts said. If you ownmutual funds in a taxable investment portfolio, you’ll geta bill every year.

So if your manager makes a lot of trades in a year—or if he sells a stock that has appreciated in value—it could

mean a big capital gains bill, as much as 20 percent onassets held longer than a year.

“The tax implication is the Achilles heel,” Balasa said.As a result, Balasa recommends index funds that are moretax-efficient. He would recommend mutual funds—evenfor somebody with $2 million to invest.

Besides offering diversification,

mutual funds free people from a lot

of paperwork and offer the

expertise of a professional money

manager.

“You could have a multi-million-dollar portfolio andstill have a strong argument to have some funds,” Balasasaid. Besides offering diversification, mutual funds freepeople from a lot of paperwork and offer the expertise ofa professional money manager.

For those lucky people with many millions to invest,they can hire managers to run private accounts in themajor asset classes such as large caps and internationalstocks, Balasa said.

Hugh Johnson, chief investment officer at the broker-age First Albany Corp., said a private account managerwill pick stocks that not only deliver the best returns butlimit the tax pinch. He has a $1 million minimum on suchaccounts and manages a total of $550 million in assets.

“They come to me because they want special treat-ment,” Johnson said. “There is nothing that irritatessubstantial investors more than paying taxes.”

Johnson said even though diversification in funds willprotect you in a downturn, it will also give you what hecalls “dispersion” that will keep you from big gains. That’swhy he owns only 38 names.

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Primary and Secondary Source Readings 33

Name Date Class

S TOCKS VS. MUTUAL FUNDSInvesting your money can be a very lucrative business. However, there is always risk, and theaverage person may feel uncertain about how it all works. In the following article, MartineCostello, a staff writer for CNN, discusses the pros and cons of investing in stocks and mutualfunds. As you read, consider the advantages and disadvantages of both, and where you wouldinvest your money. Then answer the questions that follow.

17

Y

Stock andBonds

http://ett.glencoe.com

Block Schedule

Charles ClevelandBelen Jesuit Preparatory

SchoolMiami, Florida

The Stock Market Game™

Have students participate in The Stock Market Game™

(Internet version). Students simulate actual stock transac-tions for a 12-week period. Working in small groups, stu-dents create an investment company name and invest$100,000. Stocks and values are monitored. At the end ofthe 12-week period, students report the strategies theyused and their results.

ACTIVITYFrom the Classroom ofACTIVITYFrom the Classroom of

Activities that are particularly suited to use within the blockscheduling framework are identified throughout this chapterby the following designation: BLOCK SCHEDULING

Block Schedule

Use Glencoe’s Presentation Plus!,a Microsoft PowerPoint® application, to teach Financing and ProducingGoods. With this multimedia teacher

tool, you can customize ready-made presentations. At yourfingertips are interactive transparencies, on-screen lecturenotes, audiovisual presentations, and links to the Internetand to other Glencoe multimedia.

Interactive Lesson PlannerPlanning has never been easier! Organize your week, month, semester, or year with all the lesson helps you need to make teaching

creative, timely, and relevant—the way it is meant to be. TheInteractive Lesson Planner opens Glencoe’s Chapter 10resources, helps you build your schedule, and tracks yourprogress.

■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■


Teaching strategies have been coded for varying learning styles and abilities.L1 BASIC activities for all studentsL2 AVERAGE activities for average to above-average

studentsL3 CHALLENGING activities for above-average students

ENGLISH LANGUAGE LEARNER activitiesELL

Key to Ability Levels

Voluntary Standards Emphasized in Chapter 10Content Standard 10 Students will understand thatinstitutions evolve in market economies to help individualsand groups accomplish their goals. Banks, labor unions,corporations, legal systems, and not-for-profit organizationsare examples of important institutions. A different kind ofinstitution, clearly defined and well enforced propertyrights, is essential to a market economy.

Content Standard 15 Students will understand thatinvestment in factories, machinery, new technology, and thehealth, education, and training of people can raise futurestandards of living.

Resources Available from NCEE• Capstone: The Nation’s High School Economics Course• Focus: High School Economics• Learning from the Market: Integrating The Stock Market

Game™ Across the Curriculum• MCG—Economics and Entrepreneurship

To order these materials, or to contact your StateCouncil on Economic Education about workshops andprograms, call 1-800-338-1192 or visit the NCEE Web siteat http://www.nationalcouncil.org

Easy Planning and Preparation!

262D

■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■


262C

Blackline Master

Transparency

Software

CD-ROMVideodisc

Audiocassette

Videocassette

Reading Objectives Reproducible Resources Technology/Multimedia Resources

Section 1Investing in the Free Enterprise System• How does a business decide whether

to expand or not?• Why are people willing to finance

business investment? • How does competition for financing

determine how resources are allocatedin a market economy?

Section 2Types of Financing for BusinessOrganizations• What are three general kinds of debt

financing?• What four factors should companies

consider in choosing the rightfinancing?

Section 3The Production Process• What are the four major steps in

production operations?• How has technology changed

production methods since the early1800s?

Reproducible Lesson Plan 10-1Daily Lecture Notes 10-1Guided Reading Activity 10-1Reading Essentials and Study Guide 10-1Daily Focus Activity 46Section Quiz 10-1*Reinforcing Economic Skills 14

Reproducible Lesson Plan 10-2Daily Lecture Notes 10-2Guided Reading Activity 10-2Reading Essentials and Study Guide 10-2Daily Focus Activity 47Section Quiz 10-2*

Reproducible Lesson Plan 10-3Daily Lecture Notes 10-3Guided Reading Activity 10-3Reading Essentials and Study Guide 10-3Daily Focus Activity 48Section Quiz 10-3*

Daily Focus Transparency 46Vocabulary PuzzleMakerInteractive Tutor Self-Assessment SoftwareMindJogger Videoquiz

NBR's Economics & You*Presentation Plus!


Daily Focus Transparency 47Vocabulary PuzzleMakerInteractive Tutor Self-Assessment SoftwareMindJogger VideoquizInteractive Economics! Presentation Plus!


Daily Focus Transparency 48

Economic Concepts Transparency 3Vocabulary PuzzleMakerInteractive Tutor Self-Assessment SoftwareMindJogger VideoquizPresentation Plus!


*Also available in Spanish

Section Resources

http://www.nationalcouncil.org

263

263Financing and Producing Goods

Terms to Know• financing• cost-benefit analysis• revenues• profits

Reading Objectives1. How does a business

decide whether to expandor not?

2. Why are people willing to finance business investment?

3. How does competition forfinancing determine howresources are allocated in a market economy?

READER’S GUIDE

1

financing: obtaining funds ormoney capital for businessexpansion

THE CHICAGO TRIBUNE, MAY 26, 1999

Finding money for your smallbusiness is often as deflating aslooking for a job. It can be anarduous process of networking,mailing people informationabout yourself and then callingto see what they think.

A Chicago company is usingthe Internet to try to stream-line the money-hunting processfor entrepreneurs by connecting

them with venture capitalists. Venture CapitalOnline has signed up more than 80 venture capi-tal firms nationwide representing $15 billion incapital. It has 200 possible deals in the pipeline. . . .

If you were an entrepreneur, you would face many hurdles onyour road to success. One hurdle would be finding sufficientfinancing to pay for your company’s current needs—such as

parts and tools—and its long-term needs—such as growth.Financing is the obtaining of funds, or money capital. As youread this section, you’ll learn that both the short-term and long-term needs of businesses can be financed in a variety of ways.

CHAPTER 10SECTION 1, Pages 263–268


Reproducible MastersReproducible Lesson Plan 10–1Reading Essentials and Study Guide 10–1Guided Reading Activity 10–1Section Quiz 10–1Daily Focus Activity 46Daily Lecture Notes 10–1

MultimediaDaily Focus Transparency 46Vocabulary PuzzleMakerInteractive Tutor Self-Assessment Software

ExamView® Pro TestmakerMindJogger Videoquiz

NBR’s Economics & YouPresentation Plus!

SECTION 1 RESOURCE MANAGER

OverviewSection 1 explains or describes

how savings are used as investmentfunds to finance business startupand growth, how companies usecost-benefit analyses, and how bidding for funds affects the alloca-tion of resources in a free marketeconomy.

Answers to the Reading Objectivesquestions are on page 268.

Preteaching VocabularyHave students read the

Glossary definition of the termcost-benefit analysis. Then havethem draw a rough cost-benefitanalysis outlining the costs andbenefits of buying a car.

Vocabulary PuzzleMaker

READER’S GUIDE

262

Why It’s ImportantHow do shoe manufacturers getstarted? How could you get started if you wanted to open a business? This chapter will explain how companies obtain the financing needed to open for business, and how they try to work efficiently to make profits.

To learn more about factors thataffect efficiency and profitability,view the Economics & YouChapter 19 video lesson:Financing and Producing Goods

Chapter Overview Visit the Economics Today and Tomorrow Web site at ett.glencoe.com and click on Chapter 10—Chapter Overviewsto preview chapter information.

IntroducingCHAPTER10

262

Chapter OverviewChapter 10 explains or describes

the sources and allocation of fundsfor business investment, how busi-nesses make financing decisions,different production methods, andthe impact of technology on thesemethods.

CHAPTER LAUNCH ACTIVITY

IntroducingCHAPTER10

Use MindJoggerVideoquiz VHS to previewChapter 10 content.

Introduce students to chaptercontent and key terms by havingthem access Chapter 10—ChapterOverviews at ett.glencoe.com

Organize students into several small groups. Tell groups to imagine that they are theowners of a small business that makes advertising posters. The company has justreceived a huge order—10,000 posters—that must be delivered in a week. Ask groupsto draw up an outline of the production process the company might follow to fill thisorder. Call on group representatives to share their outlines with the rest of the class.Then tell students that in this chapter they will learn that all companies develop a pro-duction process to produce goods and services.

ECONOMICS & YOU

Financing and ProducingGoods

!8Ä$3" Chapter 19 Disc 1, Side 2

ASK: What should a companylook for when borrowingmoney? When debt financing,companies need to find the bestrepayment schedule at the lowestinterest rate.

Also available in VHS.Project Daily FocusTransparency 46 and have students answer the questions.

This activity is also availableas a blackline master.

Daily Focus Transparencies

I NVESTING IN FINANCIAL ASSETS

1. What are the three components of any bond?

2. What are three types of government bonds?

4646

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BONDS

Components

Coupon

Maturity

Par value

Ratings

Published byStandard & Poor'sand by Moody's

Based onfinancial health ofthe issuer, ability to

make the futurecoupon and principalpayments, and issuer's

past credit history

Types

Private

corporatebonds

junkbonds

Government

municipalbonds

savingsbonds

Treasurybonds

BELLRINGERMotivational Activity



265


cost-benefit analysis: a finan-cial process in which a businessestimates the cost of any actionand compares it with the benefitsof that action

revenues: total income fromsales of output

profits: the money earned aftera business subtracts its costsfrom its revenues

Turning Savings Into Investments

Financing business operations andgrowth is an integral part of our free enter-prise system. It all begins with people whosave by depositing their funds in one of sev-eral types of financial institutions, whichyou learned about in Chapter 6. The finan-cial institutions, in turn, make thesedeposits available to businesses to financegrowth and expansion. Figure 10.1 illus-trates how people’s savings become aresource available to finance businessexpansion in the United States.

Before You PursueFinancing

Let’s assume that you own an electronicsrepair company that you have incorporated.You now have the opportunity to open addi-tional repair shops in other locations, butyou do not have enough extra cash to investin the expansion. You can obtain this financ-ing in one of many ways. These include dig-ging into your own personal savings, askingyour friends and parents to loan funds to thecompany, borrowing from a financial institu-tion, or selling more shares of stock. Even if you are able to financethe expansion, however, one important question remains. Shouldyou expand?

Businesses usually answer this question by making a standardcost-benefit analysis. This analysis requires that you estimatethe cost of any action and compare it with the benefits of thataction. Developing a cost-benefit analysis involves five steps:(1) Estimate the costs of expansion.(2) Calculate expected revenues, or total income from sales.(3) Calculate expected profits, or revenues minus costs.(4) Calculate how much it will cost you to borrow funds to

finance your proposed business expansion.(5) If expected profits more than cover the cost of financing

the expansion, then the expansion may be warranted. SeeFigure 10.2 on page 266.

In 1602, when the Dutch East India Company wasfounded to expand and control trade in Asia, it raisedfinancial capital by selling shares of its expected futureprofits to investors. The investors thus became theowners of the company, and their ownership shareseventually became known as “shares of stock.”

The company also issued notes of indebtedness,which involved borrowing money in return for intereston the funds, plus eventual repayment of the principalamount borrowed. Today we call these notes of indebt-edness “bonds.”

As the company prospered, some of its revenueswere used to pay lenders the interest and principalowed them. Of the profits that remained, some werepaid to shareholders and some were reinvested in thecompany. The methods of financing used by the DutchEast India Company nearly 400 years ago—stocks,bonds, and reinvestment—are still the main methodsof financing for today’s corporations. ■

It Started With the Dutch



IndependentPracticeL1 Hypothesizing Have studentshypothesize what the Americaneconomy would be like if financingwere allocated to businesses by lot-tery instead of through a competitivesystem. Ask students to write theirideas in a brief essay. Call on volun-teers to read their essays to the class.



People deposit savingsto get interest

Financial institutions loansavings $ to businesses

Businesses use savings $ to expand and improve

Businesses pay interestto financial institutions

Interest is returnedto saver/depositor

Businesses

Bank Savings & Loan

EquipmentTrucks Plant Computers

Credit Union Mutual Funds Retirement

Financing Business Expansion Businesses are able to obtain financingbecause you and other income earners do not spend all that you earn during ayear. Through saving, you and others who save make resources available to financebusiness expansion in the United States.

CHAPTER 10

FIGURE 10.1FIGURE 10.1

264

264

Guided PracticeL1 Illustrating Ideas Review thetext under the subheading “BeforeYou Pursue Financing” on pages265–266. Then have students createa flowchart illustrating the stepsbusinesses must take before obtain-ing financing for business startup orexpansion. Direct students to accom-pany each step on the flowchart withan appropriate title and illustration.Call on volunteers to present anddiscuss their flowcharts. ELL

After students have reviewedFigure 10.1, ask: How might thesame individual be both a lenderand a borrower in the process offinancing business expansion?The owner of a business might aska bank for a loan, while personallyhaving funds on deposit at the bankin the form of savings accounts orCDs.

L ECTURE LAUNCHERLIn 1936, Congress passed the U.S. Flood Control Act, which stated that the benefits of allflood-control projects must outweigh the cost of the projects themselves. This was the firsttime that the government used the process of cost-benefit analysis, which had been devel-oped by A. J. E. J. Dupuit, a French engineer, in 1844. What might be the costs associatedwith a flood-control project? What might be the benefits? Why is it important to include thecost of loans when doing a cost-benefit analysis?

I. Turning Savings Into Investments

A. Financing business operations and growth is an important part of the free-enterprisesystem.

B. People deposit funds into financial institutions, which makes these funds available tobusinesses.

C. The movement of these funds creates economic growth and expansion.

• Discussion Question

Explain how people depositing money contributes to overall economic growth.(People provide the initial capital into financial institutions which in turn use this capital toprovide loans and other services to businesses. The flow of money is important to economicgrowth because the more money businesses can receive, the better it is for the economy as awhole.)

10-1

PAGE 265

Daily Lecture Notes 10–1

Limited English Proficiency Students with limited English proficiency may have difficultyunderstanding how bidding for funds in a free market affects the allocation of resources.Ask these students to imagine that they have $10,000 to invest and that five business own-ers have asked to borrow the money to finance expansion. Point out that, as investors, theywould probably decide to give funds to the most creditworthy business owner whose com-pany has the best performance record. In conclusion, mention that by making such a deci-sion they have helped to determine the allocation of scarce financial resources.

Refer to Inclusion for the Social Studies Classroom Strategies and Activities.

Meeting Special Needs

Name Date Class

For use with the textbook pages 263–268

I NVESTING IN THE FREE ENTERPRISE SYSTEM

RECALLING THE FACTS

Directions: Use the information in your textbook to answer the questions.

1. What is financing?

2. What do financial institutions do with money that depositors invest?

3. How does a cost-benefit analysis work?

4. How do profit and revenue differ?

5. What are examples of people intentionally and unintentionally financing investments?

Intentional:

Unintentional:

10-1

Guided Reading Activity 10–1

ECONOMICS & YOU



ASK: What should a companylook for when borrowingmoney? When debt financing,companies need to find the bestrepayment schedule at the lowestinterest rate.

Also available in VHS.

Organize students into several small groups. Direct each group to locate and interviewa small business owner in the community. Suggest that groups focus their interviews onhow the business was started, including how finances were obtained and what help, if any,was obtained from organizations such as the Small Business Administration (SBA). Also,encourage groups to ask questions on future expansion plans. Ask groups to present theirfindings in a report titled “Starting and Building a Small Business.” BLOCK SCHEDULING

Cooperative Learning

267

unintentionally—are also seeking rewards. Savers unintentionallyfinance business growth when they deposit funds in a savingsaccount or certificate of deposit (CD). Their reward is the interestearned on the savings account or CD. For those who intention-ally finance investment, the reward is the interest on a corporatebond that they purchase, or dividends from the stock that theybuy in an expanding company.

Pursuing Investment FinancingIn a free enterprise system, resources normally go where they

generate the highest expected value. Financing investment oftendirects the allocation of these resources. When one business suc-ceeds at obtaining financing, it uses funds that might have helpedanother business. In a market economy, each business competesfor scarce financial resources. If the cost to finance businessexpansion is relatively high, only those businesses that believethey have the most profitable expansion projects will be willing to

Step 4 Calculate how much theloan plus interest will costyou monthly.

Step 5 Your expectedprofits shouldoutweighyour costs ofexpansion.

267

$ 1

,00

0s

MonthsRevenuesProfits

Expected Profits

Step 3 Calculate your expected profits.



Meeting LessonObjectives

Assign Section 1 Assessment ashomework or an in-class activity.

Use Interactive Tutor Self-Assessment Software to review Section 1.


CHAPTER 10SECTION 1, Pages 263–268 The steps below show an example of cost-benefit analysis.

Here is a simple numerical example: Suppose that you can bor-row $1 million to finance your business expansion. Your bankwill charge 10 percent per year for the loan. That equals $100,000per year. If your expansion could generate profits of $200,000 peryear, then borrowing $1 million would certainly be worthwhile.

Remember the rule that always applies: Undertake an activity upto the point at which the additional benefit equals the additional cost. Inthis case the activity is financing an expansion. The additional bene-fit is higher profits, and the additional cost is the cost of borrowing.

Why People Are Willing toFinance Investment

Businesses are interested in obtaining financing so that theycan expand and make higher profits in the future. The peoplewho finance such business investments—whether intentionally or

$1

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Months

Expected Revenues

Step 2

Step 1

Five Steps of Cost-Benefit AnalysisFIGURE 10.2FIGURE 10.2

266 CHAPTER 10

Costs you may face if you expandyour business include:• renting new stores• training new workers• additional bookkeeping• opportunity cost of your time

to check on new shops

• electricity and other utilities• additional insurance• possible new taxes• meeting government regulations• additional inventory

Calculate your expected revenues.

266

L2 Researching Ask students tocontact the nearest office of the U.S.Small Business Administration (SBA)to discover the kinds of services itoffers to people who want to start orto expand a small business. Askthem to present their findings in abrief oral report.

L3 Interviewing Have studentswork in small groups to interviewofficials at local financial institutionsto discover how they decide whetheror not to extend loans to financebusiness startups or expansion.Have groups combine their findingsto create a “checklist” for makingloans.

The U.S. Small BusinessAdministration (SBA) operates 57 small business developmentcenters across the nation. Theseoffices combine resources fromthe private sector, the educationalcommunity, and federal, state, and local governments to provideinformation and assistance onsmall business startup, expansion,and management.

Organize students into several small groups, and have groups decide on an indepen-dent business—a baby-sitting service or lawn care service, for example—that they wouldlike to start. Ask groups to conduct a cost-benefit analysis to determine the likelihood ofsuccess for their businesses. Suggest that groups investigate the cost of supplies, labor,and workspace needed for their businesses. Also, have them research to find the kinds ofprofits they might make. Call on group representatives to present their analyses to theclass.

Free Enterprise ActivityShadow Prices and Discounting Economists often use cost-benefit analysis to evalu-ate the cost-effectiveness of government programs. Sometimes it may be difficult to calcu-late the dollar value of a particular cost of a program—the environmental cost of building ahighway, for example. In such cases, economists assign a shadow price, or an estimateddollar value, for the cost. Also, some benefits may not accrue until a future date. Econo-mists assume that people would rather consume goods and services in the present ratherthan the future and, therefore, give present benefits greater value than future benefits.This process is called discounting.

Relevant Issues in Economics

ReteachOrganize students into groups of

three. Have groups outline the mainpoints discussed in the section,with each group member takingone of the three main subheadings.

I NVESTING IN THE FREE ENTERPRISE SYSTEM

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Section Quiz 31

Multiple Choice: In the blank at the left, write the letter of the choice that best completes the statement or answers the question. (10 points each)

6. Renting new stores and training new workers are some of the

a. costs of expansion. b. expected revenues.c. expected profits. d. sources of financing.

7. A potential benefit of financing an expansion is

a. cost of borrowing. b. higher profits.c. new taxes. d. additional bookkeeping.

8. What is the reward for people who unintentionally finance business growth by depositing funds in a sav-ings account or CD?

a. shares in the business b. interest earned on savingsc. higher profits d. corporate bonds

9. In a market economy, resources go where

a. they generate the highest expected value. b. they are needed most.c. the benefits of expansion are uncertain. d. costs are greatest.

10. To determine whether or not to expand, a business owner would

a. make a cost-benefit analysis. b. sell corporate bonds.c. offer stock at an attractive price. d. ask friends for money.

SCORE

A1. financing

2. cost-benefit analysis

3. revenues

4. profits

5. stock

Ba. shares of a business

b. the money earned after you subtract costs from revenues

c. comparing the estimated cost of an action with thebenefits of that action

d. obtaining funds or money capital for businessexpansion

e. total income from sales of output

Matching: Place a letter from Column B in the blank in Column A (10 points each)

Name Date Class

10, 1

Section Quiz 10–1

Critical

Thinking Skills

269


Generalizations are judgments that are usually true, based on the facts at hand. If you say, “We have agreat soccer team,” you are making a generalization. If you also say that your team is undefeated, youare providing evidence to support your generalization.

Critical Thinking Skills

Practicing the Skill

Read the excerpt below, then identify whether eachgeneralization that follows is valid or invalid. Explainyour answers.

“At the Lintumespsan Middle School, six miles outsideof Helsinki, kids as young as 10 are showing up withmobile phones. They’re supposed to turn them off duringclass hours, but some of them always forget. What’s worse,the children have their phones rigged to ring with a fewbars from songs by Guns N’ Roses and the LeningradCowboys. . . . Some 58% of all Finns own a mobile phone—the highest penetration in the world. . . . Mobile-phonesubscribers can request their bank balances, weatherupdates, traffic reports, even the latest headlines fromCable News Network, through short-message services.”—Business Week, May 3, 1999

1. All Finns own mobile phones.2. Many Finnish school children own mobile phones.3. In Finland, mobile phones are used for more than

just talking to friends.4. Mobile-phone sales are increasing in Finland.

Application Activity

Read at least three editorials in your local newspa-per. Then make a generalization about each editorial.

Making Generalizations

• Identify the subject matter.

• Collect factual informationand examples relevant tothe topic.

• Identify similarities amongthese facts.

• Use these similarities toform some general ideasabout the subject.

Practice and assesskey skills with

Skillbuilder InteractiveWorkbook, Level 2.

Learning the Skill

To learn how to make a valid generalization, followthe steps listed on the left.

Making GeneralizationsHave students review the

Expected Profits bar graph on page267. Ask them what the graphshows about the relationshipbetween revenues and profits. Asrevenues increase, profits increase.Tell students that they have justmade a generalization about thisrelationship. Then point out thatthe ability to make generalizationsis useful in seeing patterns in largeamounts of information.

Next, work through thePracticing the Skill questions withstudents. Conclude by assigningthe Application Activity.

Glencoe SkillbuilderInteractive Workbook,Level 2

This interactive CD-ROM rein-forces student mastery of essen-tial social studies skills.

Answers to Practicing the Skill

1. Invalid; the excerpt states that 58 percent of Finns own mobile phones.2. Invalid; the excerpt states that children as young as 10 are turning up at one school

with mobile phones—it does not mention ownership. Perhaps a better generalizationwould be: Some Finnish schoolchildren use mobile phones.

3. Valid: the excerpt lists the various services that can be used by owners of mobilephones.

4. Invalid; the excerpt does not address phone sales.

Application Activity Have students exchange and discuss their clippings and generalizations.

AKING GENERALIZATIONSGeneralizations are judgments that are usually true, based on the facts at hand. To make avalid generalization, first, identify the subject matter. Next, gather related facts and examplesand identify similarities among these facts. Finally, use the similarities to form some generalideas about the subject.

Directions: Study the information below and answer the questions that follow.

Rate of Unemployment in Selected Countries (1999)

Read each generalization below If it is valid based on the information in the chart write V; if it is invalid write I

Name Date Class

14

M

Country Percentage of Unemployment

Argentina 12.0

Belgium 8.4

Bolivia 11.4

Brazil 8.5

Ecuador 12.0

France 11.6

Germany 9.1

Liechtenstein 1.6

Luxembourg 3.0

Spain 17.8

Switzerland 3.6

United States 4.3

Reinforcing Economic Skills 14



268 CHAPTER 10

Understanding Key Terms1. Define financing, cost-benefit analysis,

revenues, profits.

Reviewing Objectives2. Graphic Organizer Use a diagram like the

one below to summarize the five steps in cost-benefit analysis.

3. Why are people willing to finance businessinvestment?

4. How does competition for financing determinehow resources are allocated in our marketeconomy?

Applying Economic Concepts5. Economic Institutions Use your own specific

saving habits to create a chart similar to Figure10.1 on page 264. Include arrows showing inwhat type of financial institution your savings aredeposited, where those savings go (hypotheti-cally), and what your reward for saving is.

Critical Thinking Activity

1

6. Synthesizing Information Imagine thatyou own a company. Use the following datato construct a bar graph showing your profitsfor a period of 6 months.

Revenues Costs Profits?(1) $4,560 $3,990(2) $3,320 $3,000(3) $4,420 $2,250(4) $4,870 $2,250(5) $5,010 $2,880(6) $4,770 $3,120

Cost-Benefit Analysis

pay the high cost of financing. If the cost offinancing is relatively low, more companieswill decide that they, too, can profitablyengage in additional business investment.In either instance, the lending institutionmakes the final decision in regard to lend-ing the business the money to expand.

Methods of Financing There are several methods of financing businessexpansion. As you learned in Chapter 6,corporations offer stock and may sell

bonds to finance investment. Businesses, just like individuals,can also borrow from banks, finance companies, or other institu-tions. Today businesses can even use the Internet to obtainfinancing. In Section 2, you’ll learnmore about the types of financingfor business operations.

Student Web Activity Visit the Economics Today and Tomorrow Web site at ett.glencoe.comand click on Chapter 10—Student WebActivities to learn how businesses can obtainfinancing from the Internet.



268

1. All definitions can be found in the Glossary.2. Graphic organizers should include the following

steps: 1. Estimate the costs of an action. 2.Calculate expected revenues. 3. Calculateexpected profits. 4. Calculate the cost of bor-rowing. 5. If expected profits are greater thanthe costs, then the action may be warranted.

3. because they are seeking rewards—the inter-est on their investment

4. Resources go to the businesses that are mostlikely to succeed.

5. Charts will vary. Encourage students to displaytheir charts around the classroom.

6. Profits to be shown on the bar graph are as follows: (1) $570; (2) $320; (3) $2,170;(4) $2,620; (5) $2,130; (6) $1,650.

Have students write a brief para-graph explaining the importance ofinvestment funds to the economy.

See the Web Activity LessonPlan at ett.glencoe.com for anintroduction, lesson description,and answers to the Student WebActivity for this chapter.

84 Study Guide

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Name Date Class

financing The obtaining of funds, or money capital, for business expansion (page 263)

cost-benefit analysis The process in which a business estimates the cost of an action and compares itwith the benefits of that action (page 265)

revenues Total money received from the sale of output (page 265)

profits The money remaining after a business subtracts its costs from its revenues (page 265)

KEY TERMS

For use with textbook pages 263-268

IT NVESTING IN THE FREE ENTERPRISE SYSTEM

DRAWING FROM EXPERIENCE

Imagine that you have a job delivering pizzas. Sometimes a delivery is late because you have trouble finding the address. When this happens, the customer gets the pizza free and its cost isdeducted from your pay. If you had a cell phone, you could call for directions when you cannotfind a customer’s location. However, you would have to buy the phone and pay the monthly service charge. How do you find out if this idea will help or hurt you financially?

This section focuses on the financial considerations involved when a business successfully improves orexpands its operations.

ORGANIZING YOUR THOUGHTS

Use the diagram below to help you take notes as you read the summaries that follow. Thinkabout how the cost of financing affects business expansion.

READ TO LEARN

• Introduction (page 263)

Financing is obtaining funds, or money capital. Business use other people’s savings and invest-ments to finance expansion.

• Turning Savings Into Investments (page 265)

Being able to raise the money to start a new business or expand an existing one is an importantpart of the free enterprise system. One source of financing—that is, money capital—is a financial

more businesses will seek financingIf the cost of financing is__________.

fewer businesses will seek financingIf the cost of financing is__________.

10, 1

Reading Essentials and Study Guide 10–1


271

271

Three Kinds of FinancingRaising money for a business through borrowing, or debt

financing, can be divided into three categories: short-term, intermediate-term, and long-term financing.

Short-Term Financing When a business borrows money forany period of time less than a year, it has obtained short-termfinancing. Figure 10.3 describes several types of short-term

debt financing: raising moneyfor a business through borrowing

short-term financing: moneyborrowed by a business for anyperiod of time less than a year

Short-Term FinancingFIGURE 10.3FIGURE 10.3

Trade credit is extended by one firmto another business buying thefirm’s goods. It allows the buyer totake possession of goods immedi-ately and pay for them at somefuture date—usually 30 to 90 dayslater.

Businesses often receive a dis-count—2 percent, for example—ifthey pay their bill within 10 days. Ifa business does not repay the bill inthat amount of time, it is, in effect,paying 2 percent interest for the useof the trade credit.

Trade Credit

Unsecured LoansMost short-term bank credit forbusinesses is in the form of unse-cured bank loans. These are loansnot guaranteed by anything otherthan the promise to repay them.

The borrower must sign a promis-sory note to repay the money in fullby a specified time and with a spec-ified rate of interest. The usualrepayment period is one year.

Secured LoansSecured loans are backed by collat-eral—something of value that bor-rowers will lose if they do not repaya loan. Businesses offer as collateral

property such as machinery, inven-tories, or accounts receivable—money owed to a business by itscustomers.

Line of CreditA line of credit is a maximumamount of money a company canborrow from a bank during aperiod of time, usually one year.

Rather than apply each time for aloan, a company may automaticallyborrow up to the amount of the lineof credit—$100,000, for example.



Guided PracticeL1 Categorizing Ideas On theboard, draw a four-column tablewith “Type of Financing,” “Period ofBorrowing,” “Examples,” and “WhyUsed?” as column headings. Orga-nize students into four groups, andassign one of the columns to eachgroup. Have group members consultand then send a representative to theboard to enter information into theirassigned column. Have studentscopy the completed table into theirnotebooks. Suggest that they retainthe chart for review purposes.




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Interactive Economics!Presentation Plus!


270 CHAPTER 10

Terms to Know• debt financing• short-term financing• intermediate-term financing• long-term financing

Reading Objectives1. What are three general

kinds of debt financing?

2. What four factors shouldcompanies consider in choosing the right financing?

READER’S GUIDE

Businesses, like individuals, must undergo a certain processwhen borrowing funds. A business that wants to borrowmust show creditworthiness by undergoing a credit check.

A credit rating of good, average, or poor is then assigned to thebusiness. Like an individual who borrows money, a businessmust pay interest on its loan and repay it within a stated periodof time. As you read this section, you’ll learn about the financingoptions from which businesses may choose.

2

FORBES MAGAZINE, JULY 8, 1998

When a company sells stock to the public for the firsttime, it is called an initial public offering, or IPO. Thishas proved an especiallyprofitable method of raisingcapital for Internet compa-nies. In the first sixmonths of 1998, forexample, 10 Internet com-panies floated IPOs, rais-ing $514 million. Thiswas more than twice theamount raised byInternet IPOs in thesame period in 1997.

270

OverviewSection 2 describes the types of

short-term, intermediate-term, andlong-term financing available tobusinesses, and outlines four fac-tors businesses consider before bor-rowing funds.


Preteaching VocabularyHave students study the Terms

to Know. Then ask students towrite questions for which eachterm is an answer.


READER’S GUIDE

Direct students to the TradeCredit section of Figure 10.3.Point out that trade creditaccounts for more than half of allbusiness-to-business transactionsinvolving goods. Buyers do nothave to tie up money capital ininventory, while sellers increasetheir sales.

L ECTURE LAUNCHERLSmall businesses provide 67% of workers with their first jobs and initial on the job training inbasic skills. Since 1953, the U.S. Small Business Administration (SBA) has provided financial,technical and management assistance to help Americans start and grow their businesses.With a portfolio of business loans, loan guarantees, and disaster loans worth more than $45billion, the SBA is the nation’s largest single financial backer of small business. What kinds offinancing are available to businesses?

I. Three Kinds of Financing

A. Short-Term Financing is when the term of loan is less than one year; used for short-term needs.

B. Intermediate-Term Financing is when the term of the loan is 1 to 10 years; used whena company wants to expand through land, buildings or equipment.

C. Long-Term Financing is when the term of loan is longer than 10 years; used for majorexpansion.


Suppose you own a printing shop. For what types of expenses would you be likelyto take out short-term loans? Explain your reasoning. (Answers may vary, but studentsshould suggest items that are paid for and used up quickly. They should also explain how theshop will be able repay the loan quickly.)

10-2

PAGES 271–274


Reading Disability Students with reading or organizational problems may have troubleclassifying the different types of financing. Have students draw cartoons or other visuals toillustrate the different forms of financing. For example, for line of credit, students mightdraw several people waiting in line at a window labeled “Credit.” Remind students to givea title to each of their visuals. Also, suggest that they use different colored paper for short-term, intermediate-term, and long-term financing. The combination of symbols, words, andcolors will help students distinguish and group the various forms of financing.

Refer to Inclusion for the Social Studies Classroom Strategies and Activities.

ELL


Project Daily FocusTransparency 47 and have students answer the questions.



B USINESS FINANCE OPTIONS

1. What type of financing would a corporation planning a majorexpansion use?

2. Why are interest rates on loans so important to business decisions?

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273

273

Long-Term Financing

Long-Term Financing Borrowing for longer than 10 years iscalled long-term financing. Long-term financing is used for majorexpansion, such as building a new plant or buying expensive,long-lasting machines to replace outdated ones. For financingdebts lasting 10 to 15 years or more, corporations either issuestock or sell bonds. Figure 10.5 describes bonds and stocks as

long-term financing: moneyborrowed by a business for aperiod of more than 10 years

BondsBonds promise to pay a stated rate of interest over a stated period of time, and to repay the fullamount borrowed at the end of that time.

StocksSelling stock is called equity financing, because part of the ownership, or equity, of the companyis being sold. Corporations may sell either preferred or common stock. The differences betweenthese types of stock are explained below.

Common Stock

1. Common stock is issued by all public cor-porations; it is the stock most oftenbought and sold.

2. Holders of common stock have votingrights in a corporation. As a group, theyelect the board of directors.

3. Common stock may pay dividends basedon a corporation’s performance. If thecompany does well, dividends may behigh; if it does poorly, the dividends maybe low or zero.

4. The value of common stock rises and fallsin relation to the corporation’s perform-ance and what investors expect it to do inthe future.

5. If a corporation fails, holders of commonstock are the last to be paid with whatevermoney is left after paying all creditors.


Preferred Stock

1. Many corporations do not issue preferredstock.

2. Holders of preferred stock generally haveno voting rights.

3. Preferred stock pays a fixed dividend. Thisamount must be paid before holders ofcommon stock receive any dividends. If acompany is unable to pay a fixed dividendon time, it must usually make up themissed payment at a later date.

4. The value of preferred stock changes inrelation to how well the company isdoing.

5. If a corporation fails, holders of preferredstock must be paid before any holders ofcommon stock are paid, but bondholdersare paid before any stockholders.





272 CHAPTER 10

intermediate-term financing:money borrowed by a businessfor 1 to 10 years

financing. A business may seek short-term financing for many reasons. A company may have excellent business during the month but not be paid until the beginning of the following month. In the meantime, the company needs funds topay salaries and its bills. During a growing season, a farmer mayhave to borrow to buy seed, repair equipment, and pay workers.

Intermediate-Term Financing Borrowing money for 1 to 10years is considered intermediate-term financing. When a com-pany wants to expand its business by buying more land, build-ings, or equipment, short-term financing generally is notadequate. For example, if you decided to expand your electronicsrepair business by opening another shop, you would not applyfor a 90-day loan. In 90 days, you would not be able to doenough repair jobs to earn the additional revenue to repay theloan. Instead, you would look for intermediate-term financingsuch as described in Figure 10.4.


Intermediate-term loans haverepayment periods of from 1 to 10years and generally require collat-eral such as stocks, bonds, equip-ment, or machinery. The loan isconsidered a mortgage if it is

secured by property such as thebuilding in which the business islocated. Sometimes large, finan-cially sound companies may be ableto get unsecured intermediate-termloans.

Loans

Leasing

Leasing means renting rather thanbuying—whether it is a building,machinery, or the like. One advan-tage of leasing is that the leasingcompany will often service themachinery at low cost. Another

advantage is that the business maydeduct a part of the money spenton a lease before figuring incometaxes. A disadvantage is that a leaseoften costs more than borrowing tobuy the same equipment.

Intermediate-TermFinancing

272

IndependentPracticeL3 Writing a Report Have studentsresearch and write a report on thetrends in corporate financing fromthe early 1980s to today. Suggestthat, when writing their reports, stu-dents take into consideration theimpact of the general state of theeconomy on these trends. Call onvolunteers to read their reports anddiscuss their findings.

Have students read the informa-tion in Figure 10.4. Then mentionthat in recent years many compa-nies have begun to lease, ratherthan buy, computers and relatedequipment. Computing technologyis developing so rapidly that amachine may be outdated within ayear or two. Therefore, a short-term lease, rather than a loan topurchase equipment, may be morecost-effective.

Have students review the infor-mation in Figure 10.5. Then pointout that long-term financing usu-ally is used when the useful life ofthe building or equipment beingpurchased matches or exceeds thelength of the debt. For example, acompany would purchase a shipwith long-term financing becausethe useful life of the ship willmatch the length of the long-termdebt.


T YPES OF FINANCING FOR BUSINESS OPERATIONS

OUTLINING

Directions: Locate the heading in your textbook. Then use the information under the heading to help youwrite each answer.

I. Three Kinds of Financing

A. Introduction—What are the three categories of debt-financing?

B. Short-term Financing

1. What is short-term financing?

2. Why do companies seek short-term financing?

C. Intermediate-Term Financing

1. How long is the borrowing period for intermediate-term financing?

2. What is a disadvantage of taking a long-term lease instead of a loan?

D. Long-Term Financing

1 How do companies finance debt that lasts from 10 to 15 years?

Name Date Class

10-2


Organize students into several groups, and have groups review recent copies of busi-ness periodicals, such as Business Week, Forbes, and Fortune, and the business sectionsof newspapers to find articles about companies’ plans to expand. Ask groups to write syn-opses of these articles, paying close attention to how the companies plan to financeexpansion. Direct groups to create bulletin-board displays with their articles and synopses.


LESSON 10: PERSONAL FINANCE

Have students study the Lesson10 “Tutorial,” which focuses onstocks, stock markets, and mutualfunds. Students will see how corpo-rations and the stock market work.After students read the “Tutorial,”have them complete the “EconomicsLab” dealing with terms related topersonal finance.

Supplied in both CD-ROM anddisk formats.

Applying Ideas Ask students to suggesthow the following situations might affect acompany’s debt financing decisions.1. Interest rates are high. The company

may be reluctant to borrow at high inter-est rates. It may also be reluctant toissue bonds, since it will have to offerhigh interest rates to attract investors.

2. Interest rates start to fall. The companywill be willing to borrow at lower interestrates. Also, it will be willing to issuebonds, since it will not have to offer highinterest rates to attract investors.


275275


may prefer the fixed rate of return ofbonds or preferred stock to the unknownreturn on common stock.

Control of the Company Bonds do not have voting rightsattached to them. Most preferred stocks also do not give votingrights to shareholders. The owners of common stocks, however,do have the right to vote in company elections. When debatingissues of financing, financial managers may have to gain approvalfrom the owners of common stocks before taking action.

Understanding Key Terms1. Define debt financing, short-term financing,

intermediate-term financing, long-term financing.

Reviewing Objectives2. What are three general kinds of debt

financing?

3. Graphic Organizer Use a diagram like theone in the next column to describe the four factors that affect a company’s decision eitherto obtain financing in the form of loans or to sell bonds or issue stock.

Applying Economic Concepts4. Economic Institutions If you were starting

a T-shirt business with limited funds, what typeof short-term financing would you pursue first? Why?

5. Making Comparisons Write a paragraphdescribing the difference between securedand unsecured loans.




2

Market Climate Business managersmust keep an eye on the market climatebefore obtaining financing. High interestrates combined with a slow economy couldspell disaster for a business interested inexpanding.

10.610.6

Factors AffectingLoan Choices



ReteachHave students write a paragraph

comparing the three kinds of debtfinancing available to companies.

1. All definitions can be found in the Glossary.2. short-term, intermediate-term, and long-term

financing3. Four factors that affect a company’s financing

plans are interest costs, financial conditions ofthe company, market climate, and control ofthe company.

4. Answers may vary. Many students will suggesttrade credit, since they have limited funds tospend on inventory.

5. Paragraphs should cover the following points:An unsecured loan is not guaranteed by any-thing but the promise to repay. The borrowermust sign a promissory note to repay themoney in full by a specified time and with aspecified rate of interest. Secured loans arebacked by collateral. Businesses offer propertysuch as machinery, inventories, or accountsreceivable as collateral. If a secured loan is notrepaid, the lender may claim the collateral.

Have students create postersillustrating the four factors thatinfluence companies’ debt financ-ing decisions.



274 CHAPTER 10

methods of long-term financing. Usually only large corporationsfinance long-term debt by selling bonds. Unlike smaller compa-nies, large corporations with huge assets appear to be better risksto investors who are interested in buying bonds.

Choosing the Right FinancingFinancial managers try to obtain capital at a minimum cost to

the company. To do so, they try to choose the best mix of financ-ing. The length of a loan that a company takes out or a corpora-tion’s decision regarding whether to sell bonds or issue stockdepends on four factors. These factors are the costs of interest, thefinancial condition of the company, the overall economic climate,and the opinions of the company’s owners.

Interest Costs When interest rates in gen-eral are high, a business may be reluctant totake out a loan. A company may delay itsexpansion until it can borrow at better interestrates. Or it may take out a series of short-termloans at high rates, hoping that interest rateswill drop. When that happens, the companywill then take out a long-term loan.

Interest rates also affect the decision toissue bonds. When rates are high, corpora-tions must offer high rates of interest on theirbonds to attract investors. When interestrates drop overall, corporations can offerlower rates of return on their bonds.

Financial Condition of the CompanyA company or corporation whose sales andprofits are stable or are expected to increasecan safely take on more debt—if its currentdebt is not too large. Financial managers usecost-benefit analysis to determine if thepotential profits will cover the cost offinancing expansion.

Market Climate As shown in Figure 10.6, financial man-agers need to be aware of the market climate when determiningwhether to sell bonds or issue stock to raise financing. If eco-nomic growth in the overall market appears to be slow, investors

Job Description■ Prepare finan-

cial reports

■ Assess the risk

of transactions,

raise capital,and analyzeinvestments

■ Communicatewith investors

Qualifications■ Master’s

degree in businessadministration,

economics,finance, or risk

management

—Occupational Outlook Handbook, 1998–99

Median Salary: $40,700

Job Outlook: Average

CAREERS

Financial Manager

274




Graphic Organizer Have students use agraphic organizer similar to the one here todescribe the three kinds of debt financingavailable to companies. Direct them to place“Types of Financing” in the central oval, thethree types of financing in the intermediateovals, and examples of these types in theouter ovals.

32 Section Quiz

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10, 2



6. The kind of long-term financing in which stock is sold is called

a. trade credit. b. equity financing.c. leasing. d. line of credit.

7. Which of the following describes preferred stock?

a. issued by all corporations b. pays a fixed dividendc. holders of this stock have voting rights d. stock most often bought and sold

8. A business would seek short-term financing to

a. buy more equipment. b. finance debts of more than 10 years.c. build a new plant. d. pay bills until it gets paid.

9. When a corporation sells bonds, it is engaging in

a. short-term financing. b. intermediate-term financing.c. long-term financing. d. trade credit.

10. Which of the following would favor a company’s plans to finance expansion?

a. low interest rates b. high interest ratesc. high debt load d. slow economic growth in the overall market

SCORE

A1. trade credit

2. promissory note

3. debt financing

4. line of credit

5. leasing

Ba. renting rather than buying

b. written agreement to repay a loan at a specifiedtime with a specified rate of interest

c. maximum amount of money a company can borrowfrom a bank during a period of time

d. short-term financing extended by one firm to another business buying the firm’s goods

e. raising money for a business through borrowing

Matching: Place a letter from Column B in the blank in Column A. (10 points each)

Section Quiz 10–2

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Name Date Class

debt financing Raising money for a business through borrowing (page 271)

short-term financing Money borrowed by a business for any period of time less than a year (page 271)

intermediate-term financing Money borrowed by a business for 1 to 10 years (page 272)

long-term financing Money borrowed by a business for a period of more than 10 years (page 273)

KEY TERMS

For use with textbook pages 270–275



One of your classmates is starting a lawn care business. However, she needs money to purchase apower mower, riding mower, power trimmer, and leaf blower. If you will give her the money toget started, she will give you a one-third share of the profits in return. Or, you can lend her themoney at a fixed interest rate. Which way of financing her business would be best for you?

This section focuses on how businesses decide on financing.

ORGANIZING YOUR THOUGHTS

Use the diagram below to help you take notes as you read the summaries that follow. Thinkabout examples of each type of debt financing.

READ TO LEARN

• Three Kinds of Financing (page 271)

There are three categories of debt financing, or borrowing, that a company may use to obtainmoney for expansion:

Types ofLong-Term Financing

1.

2.

Types of Intermediate-Term Financing

1.

2.

3.

Types ofShort-Term Financing

1.

2.

3.

4.

Types of Debt Financing

10, 2


277


Terms to Know• production• consumer goods• mechanization• assembly line• division of labor• automation• robotics

Reading Objectives1. What are the four major

steps in production operations?

2. How has technologychanged production meth-ods since the early 1800s?

READER’S GUIDE

A fter businesses obtain the necessary financing, they canbegin production. Production is the process of changingresources into goods that satisfy the needs and wants of

individuals and other businesses. As noted in the Cover Storyabove, production also involves careful planning in getting rawmaterials from suppliers on time. As you read this section, you’lllearn about all the steps in the production process.

Steps in Production OperationsBusinesses may produce consumer goods, or goods sold

directly to individuals to be used as they are. As you learned inChapter 1, businesses may also produce capital goods, which are

3

production: process of changingresources into goods that satisfythe needs and wants of individu-als and businesses

consumer goods: goods pro-duced for individuals and solddirectly to the public to be usedas they are

THE NEW YORK TIMES, APRIL 19, 1999

Each month, a purchasing agent for BOC Gases inMurray Hill, New Jersey, logs on to the Internet andlooks for a bargain. In this case, the bargain involves notonly the price of the product, but an entire cost-saving

process set in motion when the on-screen“order” button is clicked.

Nearly 7,000 miles away from NewJersey, in a Japanese gas processingplant, a BOC supplier receives themillion-dollar order. . . . And within min-

utes, a BOC distribution center in SanDiego receives electronic notice from

Japan that the shipment is on the way.




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OverviewSection 3 describes the four

steps in production operations anddiscusses the impact of technologyon production methods.


Preteaching VocabularyGroup the Terms to Know

as follows: 1. production, con-sumer goods; 2. mechanization,assembly line, division of labor; 3. automation, robotics. Have stu-dents show how the terms in eachof the groupings are related byusing them together in a sentence.


READER’S GUIDE

■ A Rose and MiltonFriedman SeniorFellow, The HooverInstitution, StanfordUniversity

■ Columnist forForbes Magazineand other periodi-cals; author of anationally syndi-cated newspapercolumn

■ Published booksinclude Conquestsand Cultures (1998),Migrations andCultures (1998), andRace and Culture: A World View (1994)

E conomics professor andauthor Thomas Sowell is an

outspoken commentator onpolitical, economic, and socialissues. Sowell suggests that manyof the country’s problems can beaddressed by applying basic eco-nomic concepts to all aspects oflife. In this excerpt, Sowell showshow the failure to apply inven-tory control or the law of supplyand demand has created prob-lems in education:

“When anyone who owns abusiness discovers that unsoldproducts are piling up on the shelfor in the warehouse, it doesn’t takea rocket scientist to figure out thatit is time to cut back productionuntil the inventory declines.

But no such logic applies in theacademic world.

Complaints about the excessnumber of PhDs in the humanitieshave gone on for years. Every year,for 12 consecutive years, Americanuniversities have broken all previ-ous records for the number of PhDs

awarded. . . . Forget about supplyand demand when it comes to academia.

Ironically, doctorates in science,engineering and mathematics havecome down somewhat in recentyears, even though American com-panies are recruiting engineersfrom India, Russia and otherplaces. But in English, history, andother humanities fields, the gradu-ate schools are flooding the marketwith people for whom there are nojobs.”—excerpted from the Jewish World

Review, February 18, 1999

Checking for Understanding

1. According to Sowell, how has a lackof inventory control created the situ-ation where there are too manyPhDs?

2. Do you think the subjects universitystudents study should be determinedby economic concepts? Why or whynot?

3. If you were in a position of authorityon a college campus, how would youresolve the dilemma?

Thomas SowellECONOMIST (1930—)

276

276

BackgroundPoint out that Thomas Sowell

began his teaching career in the1960s. Since that time he hastaught at leading universities in theUnited States, Singapore, Israel,Switzerland, and Germany.Although trained as an economist,Sowell has written extensively onmany other subjects, includingworld history, sociology, politics,and the law.

Answers to Checking for Understanding1. There is little call for humanities PhDs in the job market, yet the number of humani-

ties PhDs awarded continues to increase. If inventory control were applied to this situation, no more humanities PhDs would be awarded until those already holdingthe degree had found jobs.

2. Answers will vary. Ensure that students offer reasons for their answers.3. Answers will vary. Ensure that students’ resolutions are realistic.

Ask students to read the excerptand to note how Sowell applies eco-nomic concepts to higher educationin the United States. Then assignthe Checking for Understandingquestions. After students have com-pleted the assignment, lead them ina class discussion on the following:Should all aspects of life be ruledby economic concepts?

Project Daily FocusTransparency 48 and have students answer the questions.



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Components in a light bulb:

Glass bulb

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1. What are some methods of producing light bulbs?

2. How would you set up the production process to mass-producelight bulbs?



279

deal for the company, purchasers must find answers to such questions as:• Is this the best price?• Are these goods made well? Will they last?• Does this supplier offer such services as equipment repair?• Who pays shipping and insurance costs, and how will goods be

shipped?• How much time is there between ordering goods and receiving

them?

Quality Control Quality control involves overseeing the gradeor freshness of goods, their strength or workability, their con-struction or design, safety, adherence to federal or industry stan-dards, and many other factors. Quality control systems can beas simple as testing one item per thousand produced or testingeach product as it is finished. See Figure 10.9 on page 280.

Inventory Control Almost all manufacturers and many servicebusinesses, such as dry cleaners, need inventories of thematerials they use in making their products or offering theirservices. A production line can come to a complete halt if inventoryruns out. Manufacturers and businesses, such as supermarkets,also keep stockpiles of finished goods on hand for sale.

Purchasing Decisions Before purchasing goods andservices from a supplier, a company must consider the price andquality of those goods as well as services, shipping, and delivery.

B PurchasingSupplierServices

A PurchasingInventory

C Purchasing Shippingand Delivery Services

10.810.8

279



Project Economic ConceptsTransparency 3 and have studentsdiscuss the accompanying questions.



278 CHAPTER 10

products used to make other goods. The machines used to assem-ble automobiles are examples of capital goods.

Besides the actual manufacturing of a good, the productionprocess for both types of goods involves several other operations.These include planning, purchasing, quality control, and inven-tory control. A fifth operation, product design, will be discussedin Chapter 11.

Planning Planning includes choosing a location for the businessand scheduling production. Where a business is located, or perhapseven more important today—how the business will get its productsto consumers—is directly related to how successful the business willbe. Among the location factors to consider are nearness to markets,raw materials, labor supply, and transportation facilities.

For example, businesses that cater to young people should locate near teen hangouts, universities, and so on. See Figure 10.7.Businesses that use coal should locate near their required raw mate-rial—coal fields. Businesses that require many unskilled workersshould locate near urban areas with a large supply of labor. Finally,a business needs to have access to a means of delivering its prod-ucts—highways, railroads, airlines, and pipelines.

Scheduling production operations involves setting start and endtimes for each step in the production process. It includes checkingthe use of labor, machinery, and materi-als so that production moves smoothly.

Purchasing In order to do business,a company obviously needs the rawmaterials to produce its goods or offerits services. It also, however, must havemachinery, office supplies, telephones,and so on. The people who purchasegoods for a business have to decidewhat to buy, from whom, and at whatprice. See Figure 10.8. To get the best

Business Location Locating a sandwich shop next to amovie theater was a wise business decision. Location is themost important planning decision in starting a retail business.

10.710.7

278

Guided PracticeL2 Demonstrating Ideas Afterreviewing the text under the heading“Steps in Production Operations,”organize students into several smallgroups. Assign each group one ofthe steps: planning, purchasing,quality control, and inventory con-trol. Ask groups to develop a sce-nario that illustrates their assignedstep in production operations. Callon groups to present their scenarios.After the presentations are com-pleted, lead the class in a discussionof the importance of the steps in cre-ating a successful business.

Have students look carefully atFigure 10.7. ASK: What locationfactor do you think is involved in placing a sandwich shop nextto a movie theater? Nearness tomarkets—the audience leaving thetheater is a ready market for thesandwich shop.

L ECTURE LAUNCHERLRobotic arms equipped with a video camera are used to help paralyzed patients in theirhomes. These robots move around the house, respond to verbal commands from the owner,and perform simple tasks such as filling a glass of water. Is a robot used to help patients acapital or consumer good? In the production process, what is the role of a capital good?

I. Steps in Production Operations

A. Consumer goods are sold directly to individuals as they are.

B. Capital goods are products used to make other goods.

C. Planning step: choosing where to locate the business and how to get the product toconsumers (scheduling).

D. Purchasing step: obtaining raw materials, machines, and supplies

E. Quality control: checking the quality of your products

F. Inventory control: taking an inventory of materials used in production


Explain why inventory control is important. (A business must have enough inventory tokeep it running smoothly and timely. However, too much inventory can cost the companymoney because some items do not keep well for long periods of time, some items will not sell as new products are developed, or money spent on inventory cannot be spent on otherbusiness expenses )

10-3

PAGES 277–280


Writing Disability A few students who have significant difficulties with written expressionmay find taking notes virtually impossible. Appoint several “scribes” in the class, and pro-vide them with carbon paper or carbonless copy paper. As the class works throughSection 3, have the scribes take complete notes. (They can provide carbons to those whoneed them at the end of the lesson.) Have poorer note takers write only key words orphrases.

Refer to Inclusion for the Social Studies Classroom Strategies and Activities forstudents with different learning styles.


After students have studiedFigure 10.8, ask: Why might acompany purchase goods andservices from several differentsuppliers? This will encouragecompetition among the suppliers,resulting in lower prices for thegoods and services purchased.

Direct students to study the information on purchasing on pages 278–279. Then orga-nize students into several groups, and have groups use this information to develop a for-mat for interviewing purchasing agents about their decision-making procedures. Haveeach group conduct an interview with a purchasing agent at a company in the community.(Ensure that groups do not duplicate companies or types of businesses.) Have groupspresent the results of their interviews in brief reports. Encourage them to share and com-pare these reports.


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Guided Reading Activities 33

Name Date Class



FILLING IN THE BLANKS

Directions: Use your textbook to fill in the blanks using the words in the box. Some words may be usedmore than once.

inventory capital goods automationscheduling robotics purchasingassembly line production quality controltechnology mechanization consumer goodsdivision of labor

Introduction/ Steps in Production Operations1 __________________________ is the process of changing resources into goods that satisfy the needs and wants of

individuals and other businesses. Companies may produce 2 __________________________ , or goods sold directly to

individuals to be used as they are. 3 __________________________ are goods used to make other goods. Planning or

4 __________________________ helps ensure that work will be finished on time. 5 __________________________

involves buying the necessary materials, machines, office supplies, and so on that businesses need to function. After

goods are produced they must go through 6 __________________________ to inspect the quality of the product. The

more 7 __________________________ a business has the less capital if has for other activities.

Technology and Methods of Production8 __________________________ is the use of science to develop new products and new methods of producing

and distributing goods. The five main advances that have most affected production are mechanization,

9 __________________________ , division of labor, automation, and robotics. 10 __________________________

combines the labor of people and large power-driven machines. While the 11 __________________________ is a

production system in which the good being produced moves on a conveyor belt past workers who perform

specialized tasks. With the 12 __________________________ , each worker performs a different task.

13 __________________________ involves machines doing the work, while people oversee them. An assembly line

controlled by a sophisticated computer is an example of 14 __________________________.

10-3


281281

Understanding Key Terms1. Define production, consumer goods, mecha-

nization, assembly line, division of labor,automation, robotics.

Reviewing Objectives2. What are the most important steps in the pro-

duction process?

3. Graphic Organizer Use a diagram like theone below to explain the factors that havechanged production since the early 1800s.

Applying Economic Concepts4. Productivity Imagine that you are financially

prepared to open a small ice-cream cafe.Explain the steps you would follow to begin production. Include information about your plan-ning, purchasing, quality control, and inventorycontrol decisions in your explanation.

5. Categorizing Information Make aspreadsheet listing the five advances in tech-nology discussed in this section. For oneweek, be aware of and count examples ofeach type of technology. At the end of eachday, input your totals in the appropriate col-umn of your spreadsheet. Tabulate yourtotals at the end of the week. Share yourspreadsheet with the rest of the class.




3

In computer science terminology, a “robot”is a software program that can scan E-mail

messages to locate key words and phrasesand respond appropriately without anyhuman input. Companies that do businesson the Internet use robots for all types ofcustomer-service tasks—everything from

tracking orders to offering troubleshootingtips. Many computer engineers believe thatrobots soon will be handling all routine cus-tomer questions. Waiting 20 minutes orlonger on the telephone for a human customer-service representative may soon be a thing of the past! ■

Economic Connection to... TechnologyEconomic Connection to...

ProductionMethods

Changed by . . .

Robotics Robotics refers to sophisticated, computer-controlledmachinery that operates the assembly line. In some industries,robotics regulate every step of the manufacturing process—fromthe selection of raw materials to processing, packaging, andinventory control.

robotics: sophisticated, computer-controlled machinerythat operates an assembly line


No More Waiting?No More Waiting?



ReteachAsk students to write a summary

of the section using the Terms toKnow.

1. All definitions can be found in the Glossary.2. planning, purchasing, quality control, and

inventory control3. Factors that have changed production since

the early 1800s are mechanization, assemblyline, division of labor, automation, and robotics.

4. Most students will suggest that they wouldbegin by planning—choosing a suitable loca-tion and developing a production schedule.

Next, they would purchase all the materialsneeded for production—machinery and rawmaterials. After production was under way, theywould check the quality of goods produced.Finally, they would decide what inventory—both materials needed for production andgoods produced—to keep on the shelves.

5. Spreadsheets will vary.

Ask students to list the majorfinancing and production decisionsthat businesses must make.

Name Date Class

production The process of changing resources into goods that satisfy the needs andwants of individuals and businesses (page 277)

consumer goods Goods that are sold to the public to be used as they are (page 277)

mechanization The process that combines the labor of people and machines (page 280)

assembly line System in which the good being produced moves on a conveyor belt pastworkers, who perform individual tasks on it (page 280)

division of labor System in which a job is broken down into small tasks with a differentworker performing each task (page 280)

automation System in which machines work according to people’s instructions (page 280)

robotics System in which computers control the production machines (page 281)

KEY TERMS

For use with textbook pages 277–281



Suppose that you were put in charge of decorating the school gym for the homecoming dance.How would you approach this project? How would you make sure that you purchase enough ofeverything you need but not more than you can use? How would you organize your helpers?Finally, how would you schedule these tasks to make sure the gym is decorated in time?

This section focuses on the methods of production and all the steps in the production process

10, 3




mechanization: combined laborof people and machines

assembly line: production sys-tem in which the good being pro-duced moves on a conveyor beltpast workers who perform individ-ual tasks in assembling it

division of labor: breaking downof a job into small tasks per-formed by different workers

automation: production processin which machines do the workand people oversee them

Inventories are costly, however. There is an opportunity costinvolved in maintaining inventory. The more inventory a busi-ness has, the less capital it has for other activities. For example, it costs money to warehouse and insure goods against fire andtheft. Some goods such as film and medicines spoil if keptbeyond a certain period of time. Other goods such as cars andstylish clothes become obsolete, or out of date, in time.

Technology and ProductionTechnology is the use of science to develop new products and

new methods for producing and distributing goods and services.From the time of the Industrial Revolution in the late 1700s, tech-nology has changed the methods of production.

Mechanization The Industrial Revolution—the beginning ofthe factory system—came about through mechanization, whichcombines the labor of people and large power-driven machines.With the introduction of spinning and weaving machines in facto-ries, entrepreneurs replaced skilled handiwork with machines runby unskilled workers. The rate of output per labor hour greatlyincreased as a result.

The Assembly Line An outgrowth of mechanizationwas the assembly line. An assembly line is a productionsystem in which the good being produced moves on a conveyor belt past workers who perform individual tasks in assembling it. The Ford Motor Company developed themodern assembly-line process early in the twentieth cen-tury. Because the assembly line results in more efficient useof machines and labor, the costs of production drop.

Division of Labor Assembly-line production is onlypossible with interchangeable parts made in standardsizes, and with the division of labor, or the breakingdown of a job into small tasks. A different worker per-forms each task.

Automation Mechanization combines the labor of peo-ple and machines. In automation, machines do the workand people oversee them. Automation is so common inAmerican society that most of us don’t even think aboutthe efficiency of automated traffic signals, doors, or tellermachines anymore.

Quality Control Trade-Off Themore time spent on quality control—suchas this person inspecting vacuum clean-ers—the higher the production costs.

10.910.9

280

IndependentPracticeL2 Creating Time Lines Have stu-dents work in small groups to createa time line showing how new tech-nology has changed productionmethods in the United States. Sug-gest that groups make their timelines “oversize”—by taping togethersheets of butcher paper. Also, havegroups illustrate their time lines withsketches, photographs, charts,graphs, and other suitable visualmaterials. Direct groups to displaytheir time lines along the classroomwalls. BLOCK SCHEDULINGELL



6. Which of the following are consumer goods?

a. machines used to assemble automobiles b. roboticsc. paper used for printing magazines d. stereo systems

7. What step in production operations involves choosing a location for a business?

a. product design b. purchasingc. planning d. inventory control

SCORE

A1. production

2. mechanization

3. assembly line


5. automation

Ba. production system in which a good moves on a con-

veyor belt past workers who perform individualtasks to assemble it

b. break down of a job into small tasks performed bydifferent workers

c. production process in which machines do the workand people oversee them

d. process of changing resources into goods that satis-fy the needs and wants of individuals and businesses

e. combined labor of people and machines

Matching: Place a letter from column B in the blank in Column A. (10 Points each)

Name Date Class

10, 3

Section Quiz 10–3

ASK: What might less qualitycontrol lead to? Initially, it willlead to lower production costs andlower prices for consumers. How-ever, it may also lead to a loweringof quality, and consumers may turnto other companies for products ofhigher quality.

Inventory Control Trade-offs When making decisions on how much inventory to keepon hand, inventory managers have other costs to consider. If a price of a particular good isexpected to rise, the manager may stockpile it to keep down future costs. Often, a supplierwill discount large orders, and these discounts may outweigh the other costs of keeping alarge inventory.

Extending the Content




283


Investing in the FreeEnterprise System

• Financing business operations and growth is anintegral part of our free enterprise system. It allbegins with people who save by depositing theirfunds in a financial institution.

• Financial institutions, in turn, make these depositsavailable to businesses to finance growth andexpansion.

• Businesses usually perform a cost-benefit analysis before deciding whether to pursue financing for expansion.

• A cost-benefit analysis involves estimating costs,calculating expected revenues, calculatingexpected profits, and calculating the costs of borrowing.

Types of Financing forBusiness Operations

• Raising money for a business through borrowing,or debt financing, can be divided into three cate-gories based on length of time of repayment.

C H A P T E R

SECTION 1

SECTION 2

Chapter Overview Visit the Economics Today and Tomorrow Web site at ett.glencoe.comand click on Chapter 10—Chapter Overviewsto review chapter information.

10

• Short-term financing is for those businesses thatneed funds to cover monthly or seasonal budgethighs and lows.

• Borrowing money for 1 to 10 years to buy moreland, buildings, or equipment is considered intermediate-term financing.

• Long-term financing, such as issuing stock andselling bonds, is used for major business expansion.

• Financial managers must examine interest costs,the market climate, and the financial condition ofthe company, as well as inform holders of commonstock before obtaining financing.

The Production Process

• Production is the process of changing resourcesinto goods that satisfy the needs and wants of indi-viduals and other businesses.

• Producing consumer goods and capital goodsinvolves planning, purchasing, quality control, andinventory control.

• Planning includes choosing a location for the busi-ness and scheduling production.

• The people who purchase goods for a businesshave to decide what to buy, from whom, and atwhat price.

• Five major advances in technology—mecha-nization, the assembly line, the division of labor, automation, and robotics—have drasticallyaffected the methods and costs of production.

SECTION 3

Use the Chapter 10 Summaryto preview, review, condense, orreteach the chapter.

Preview/ReviewVocabulary PuzzleMaker Soft-

ware reinforces the key terms usedin Chapter 10.

Interactive Tutor Self-Assess-ment Software allows students toreview Chapter 10 content.

CondenseHave students listen to the

Chapter 10 Audio Program (alsoavailable in Spanish) in the TCR.Assign the Chapter 10 Audio Pro-gram Activity and give students theChapter 10 Audio Program Test.

ReteachHave students com-

plete Reteaching Activity 10 in theTCR (Spanish Reteaching Activitiesare also available).

C H A P T E R 10

ECONOMICS & YOU



If you do not have accessto a videodisc player, theEconomics & You programs arealso available in VHS.

The Production Process Ask students to keep track of the consumer products that theyuse in their homes during a one-week period. At the end of the tracking period, have stu-dents select one of the products they listed. Have them investigate how the product ismanufactured, how the manufacturer obtains raw materials and other productiveresources, and where and how the product is produced. Direct students to present theirfindings in a brief written report.

Economics Journal

SPOTLIGHT

SPOTLIGHT ON THE ECONOMY

Who says service is dead? When a big outfit like United Parcel

Service is willing to hire a bunch ofDutch rockers to tune a client’s guitars,you know that some companies still willdo anything to keep a customer happy.

UPS Worldwide Logistics beganshipping famed Fender guitars toEurope in April. As happens with

stringed instruments, some-times they arrived out oftune. Previously, the priceyguitars had been sent to 20

European distributors whotuned and tested them.

But that was too costlyand slow. So, to pleaseFender, UPS has hired

four rock guitarists atits warehouse in [the city

of] Roermond, the Netherlands,to do the job. “We’ve checked disk drives forIBM, but this was a unique challenge,” says UPSproject manager Ronald Klingeler.

The challenge, however, was met. In May,when the rock group Kiss played a Saturdaynight concert in Hamburg, it requested a newguitar on Friday—and got one, on time and intune. Fender says the system will cut costs by9% and delivery time from months to weeks.But life with a corporate-funded garage band ishard on some UPS guys. Says Klingeler: “Whenthey see a really nice guitar, they always havethis urge to try it out and play a song.”—Reprinted from June 14, 1999 issue of Business Week by special

permission, copyright © 1999 by The McGraw-Hill Companies, Inc.

Think About It1. What did the supplier (UPS) do to help the client

(Fender)?

2. By using UPS, how much in production costs isFender saving?

3. How was Fender’s delivery time improved?

Check It Out! In this chapter you learned that busi-nesses must make wise decisions when selecting asupplier to ship raw materials as well as finishedgoods. In this article, read to learn how the Fender gui-tar company made a very wise decision when itselected a shipping agent.

282 CHAPTER 10

Going All Out to Pick Up a GigGoing All Out to Pick Up a Gig

282

In 1998 and 1999, UPS wasrated the “World’s Most Admired”mail, package, and freight deliverycompany in a Fortune magazine sur-vey. For this survey, the magazinepolled senior executives and boardmembers of leading corporations,as well as Wall Street analysts. Theywere asked to rate companies onsuch features as quality of manage-ment, product or service quality,innovation, financial strength, andcommitment to community and theenvironment.

Answers to Think About It

The Fender stratocaster, withits unique body contour and onepickup out of line, is perhaps themost recognizable guitar in theworld. Some of the greatest rockmusicians played the “strat,”including Buddy Holly, JimmyHendrix, Eric Clapton, and KurtCobain.

1. UPS hired a rock band to tune and test Fender guitars at its warehouse in theNetherlands, rather than sending the guitars out to 30 European distributors for tun-ing and testing.

2. Fender is saving 9 percent of its production costs by using UPS.3. Delivery time was cut from months to weeks.

To find up-to-date news andanalysis on the economy, busi-ness, technology, markets,entrepreneurs, investments,and finance, have studentssearch feature articles and spe-cial reports on the BusinessWeek Web site.www.businessweek.com

http://www.businessweek.com

CHAPTER 10Assessment and ActivitiesCHAPTER 10

Assessment and Activities

285


2. Synthesizing Information Assume that youhave to buy new inventory that you plan tosell off completely by the end of each month.Determine the most appropriate type offinancing to use to buy this inventory.

ApplyingEconomic ConceptsMaking Financing Decisions Imagine that youown a business. List at least five businessexpansions you would like to make to yourcompany that would require financing.Explain after each type of business expan-sion, such as buying 10 desktop computers,what the appropriate type of financing mightbe. Explain your choices.

CooperativeLearning Project

Organize into three groups, with eachgroup working on one of the following top-ics. After the research is complete, eachgroup will report its findings to the class.

A. Division of Labor The most famous exam-ple of the division of labor focuses on apin factory, which Adam Smith discussedin his book The Wealth of Nations. GroupA should do the following: (1) find thepassage in the book about the pin factory;(2) develop a chart showing the elementsof Adam Smith’s arithmetic example; and(3) calculate the percentage increase inproductivity due to the division of labor.

B. Assembly-Line Techniques This group candivide into two smaller groups. Group B1will report on how Henry Ford developedthe assembly-line process. Group B2 willlook at what Eli Whitney developed withthe use of interchangeable parts.

C. Robotics Group C will research howrobotics developed and how much ofAmerican manufacturing uses robotics.

Reviewing SkillsMaking Generalizations Read the followingexcerpt, then make a generalization based onthe reading.

“Henry Ford introduced the first movingassembly line in 1913 at his Model T plant inHighland Park, Michigan. Different conveyorsystems carried subcomponents to the mainassembly line in a finely orchestrated manner.Before the advent of the assembly line, a Model Ttook more than 12 hours to produce and cost$950. By 1927, after numerous refinements,Model Ts were being turned out in less than halfthat time, with a price tag of $290 apiece.”—Business Week: 100 Years of Innovation, Summer 1999

TechnologyActivityUsing the Internet The Small BusinessAdministration (SBA) was designed to helpsmall businesses with short-term financing.Obtain information about the SBA on theInternet. Write an informative brochure forpotential small business owners, describinghow the SBA can help them get started.

Engineers at the University ofPennsylvania unveiled the ElectronicNumerical Integrator and Computer (ENIAC)for the U.S. government in 1946 to enableartillery men to aim their guns more accu-rately. ENIAC was made up of 30 separateunits, weighed 30 tons, occupied 1,800square feet, had 17,468 vacuum tubes, andcould do nearly 400 multiplications per second. ENIAC, however, was not the firstelectronic computer. Research the earliercomputers built in Britain and Germany.

Applying EconomicConcepts

Answers will vary. Suggest thatstudents do a quick cost-benefitanalysis for each expansion.

CooperativeLearning Project

Have groups document theirresearch and present their results tothe class.

Reviewing SkillsGeneralizations may vary. A pos-

sible response is: The assembly linegreatly reduced the time and cost ofmaking Model T Fords.

Technology ActivityHave students share their

brochures with the rest of the class.

Analyzing theGlobal Economy

Have students present their find-ings in an illustrated report.

ASK: Why might corporationsissue bonds and preferredstock rather than commonstock when overall economicgrowth is slow? Investors wouldfind the fixed rate of return onbonds and preferred stock prefer-able to the uncertain return oncommon stock.

Chapter BonusTest Question

CHAPTER 10Assessment and ActivitiesCHAPTER 10

Assessment and Activities

Identifying Key TermsWrite the letter of the definition in Column Bthat correctly defines each term in Column A.

Column A1. revenues2. consumer goods3. cost-benefit analysis4. debt financing5. profits6. short-term financing7. intermediate-term financing8. assembly line9. mechanization

Column Ba. the money earned after subtracting costs

from revenuesb. raising money for a business through

borrowingc. trade credit and promissory notes are

involved in this kind of financingd. combining labor of people and machinese. process that looks at actions and their

benefits

f. total income from sales of outputg. enables workers to perform individual

tasks more efficientlyh. sold directly to the public to be used as

they arei. leasing is typical in this kind of financing

Recalling Facts and IdeasSection 11. How do individuals turn savings into

investments?2. Outline the steps you would use in reach-

ing a necessary financial decision.

Section 23. What are two reasons a business may

need short-term financing?4. Issuing stocks is a form of what type of

financing?5. Do holders of common stock have any

rights in a corporation? Explain.

Section 36. Besides quality control, what other steps

are involved in the production process?7. What does assembly-line production

require?

Thinking Critically1. Categorizing Information Use a diagram

like the one below to describe how a savercan be both a creditor and a debtor.

10

Self-Check Quiz Visit the Economics Today and Tomorrow Web site at ett.glencoe.comand click on Chapter 10—Self-Check Quizzesto prepare for the Chapter Test.

284 CHAPTER 10

Saver

284

Identifying KeyTerms1. f 6. c2. h 7. i3. e 8. g4. b 9. d5. a

Recalling Facts and Ideas1. by depositing savings in a finan-

cial institution (in exchange forinterest), which then loansfunds to businesses (to financegrowth and expansion)

2. Undertake a cost-benefit analy-sis—estimate all expected oper-ating costs, calculate expectedrevenues, calculate expectedprofits, calculate the cost offinancing, and determine ifexpected profits are greaterthan the cost of financing theoperation.

3. to fill in during periods whencash is low and to finance thebusiness while product is beingproduced—during a farmer’sgrowing season, for example

4. long-term financing

5. Holders of common stock have votingrights in the corporation. As a group, theyelect the board of governors.

6. planning, purchasing, and inventory control

7. movement of a product along a conveyorbelt past workers who perform individualassembly tasks

Thinking Critically1. A saver can be a creditor by depositing

funds in a financial institution or by pur-chasing stocks or bonds. A saver can be adebtor by taking out a loan from a finan-cial institution or by issuing stock orbonds in his or her company.

2. Answers will vary, but most students willsuggest that trade credit is the best financ-ing approach in this instance.

Have students visit theEconomics Today and TomorrowWeb site at ett.glencoe.com toreview Chapter 10 and take the Self-Check Quiz.

MindJogger Videoquiz

Use MindJogger to reviewChapter 10 content.


Answers to Thinking Globally

1. promotions2. Answers may vary. Ensure that students offer reasons for their answers.

287

Thinking Globally1. What is the largest category of advertising for each country?

2. Which of the expenditures for specific countries surprised you the most?Explain your answer.

SingaporeSpending

Category ($millions)Television 129.7Radio 67.0Print* 204.2Outdoor** 10.6Point of Purchase 261.6Promotions*** 535.7Direct Mail 66.3Other 244.6Total $15.2 billion% of World Total 1.6%

VietnamSpending


*newspapers and magazines**billboards, etc.

***coupons, give-aways, etc.

287

Have students answer theThinking Globally questions.

Have students use libraryresources and the Internet to gathersimilar statistics for the UnitedStates. Suggest that they presentthese statistics in table form.

286

Worldwide Advertising Each year the United States spends over $450 billion on advertising. The map below shows advertising expenditures for five countries whoseeconomies are at different levels of development.

KenyaSpending


EgyptSpending


RussiaSpending

Category ($millions)Television 718.4Radio 123.0Print* 1,130.5Outdoor** 58.7Point of Purchase 374.6Promotions*** 2,773.0Direct Mail 314.5Other 4,117.0Total $9.6 billion% of World Total 10.1%

286

Companies around the worldspend well over a trillion dollars tomarket their goods and services.Fewer than 30 countries—most ofthem in Europe, the Pacific Rim,and North America—account for 90percent of this spending. Aboutone-third of all advertising dollarsare spent by American companies.

Point out that each of the coun-tries featured represents a particu-lar level of exposure to advertisingspending. Vietnam represents thelowest level, Kenya the next-to-lowest level, Egypt the intermediatelevel, Russia the next-to-highestlevel, and Singapore the highestlevel. (Mention that countries aregraded on a per capita spendingbasis, not total spending.) Thenhave students compare spendingcategories among the countries. Askthem to explain why particular cate-gories might be more widely usedin some countries than in others.

About one-third of all marketingdollars are spent on promotions—cents-off coupons, sweepstakes,give-aways, and so on—rather thanregular advertising.

Per capita spending on advertising varies widely between developed and less devel-oped countries. In many of the less developed countries of Africa, Asia, and Latin America,less than $5 per person is spent on advertising. However, in Western Europe, the UnitedStates, Canada, Japan, and the stronger economies of the Pacific Rim, per capita spend-ing on advertising stands at nearly $1,400. Japan spends the most per capita—$2,137—on advertising. Another Asian country, Laos, spends the least—just 41 cents.

Extending the Content

About two-thirds of the adver-tising dollars spent around theworld are used to market con-sumer goods and services. Theother third is used by businessesto promote their products to otherbusinesses.

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