1. Instructor Lecture PowerPoints
The U. S. Business Environment
Business Essentials, 8th Edition Ebert/Griffin
Instructor Lecture PowerPoints
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
PowerPoint Presentation prepared by Carol Vollmer Pope Alverno College 1

2. L E A R N I N G O B J E C T I V E S
After reading this chapter, you should be able to:
Define the nature of U.S. business and identify its main goals and functions.
Describe the external environments of business and discuss how these environments affect the success or failure of any organization.
Describe the different types of global economic systems according to the means by which they control the factors of production.
In this chapter we will examine the nature of business in the United States and identify its main goals and functions.
We will learn about the different external environments of business and discuss how they affect the success or failure of any organization.
We will examine the different types of global economic systems, focusing especially on how they control factors of production.
We will explore how markets, demand, and supply affect resource distribution here in the U.S.
Teaching Tips:
Ask the class to engage in the following way with each objective:
Objective 1: Define the nature of U.S. business and identify its main goals and functions.
Please take out a piece of paper and write down one reason why is it important to understand the nature of U.S. business, from your perspective. Now join with another student and share your response. Once you have shared your responses, each pair of students will share their responses with the class.
Responses will vary. Ask the class to decide if the response is valid or invalid.
Objective 2: Describe the external environments of business and discuss how these environments affect the success or failure of any organization.
Please remain in your teams from Objective 1. I would like each team to provide an example of an external business environment and why might it be important. Once you have decided on an example, join with another team and share your answers with your combined team. Each team will then tell the class its best example of an external business environment.
The external environments named should include the following:
Global Business Environment
Technical Business Environment
Political-Legal Business Environment
Domestic Business Environment
Sociocultural Environment
Economic Environment
Objective 3: Describe the different types of global economic systems according to the means by which they control the factors of production.
Please form new pairs of two students. Each pair will write down an answer to the following question: “What is a global economic system?” Each pair will then share the answer with the class.
Answers should include:
Planned economies like Communism or Socialism
Market economies like Capitalism
Mixed economies which offer parts of both
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3. L E A R N I N G O B J E C T I V E S (cont.)
After reading this chapter, you should be able to:
4. Show how markets, demand, and supply affect resource distribution in the United States.
5. Identify the elements of private enterprise and explain the various degrees of competition in the U.S. economic system.
6. Explain the importance of the economic environment to business and identify the factors used to evaluate the performance of an economic system.
Objective 4: Show how markets, demand, and supply affect resource distribution in the United States.
Please combine with another pair of students. Take a moment and answer the following questions:
How have global markets, demand, and supply affected gasoline pricing in the United States?
Why did the prices drop so suddenly at the end of 2008 after rising so drastically?
Once you have completed your answers, please share them with your team. Each team will then report their answers to the entire class.
What made this gas crisis so unusual was the fact that it contained global forces of supply and demand. The surging global economy has produced a great need for gasoline, especially the development of the Chinese consumer market and the desire for SUVs and other vehicles that use larger amounts of gas. Dependence on foreign oil sources and the decrease of U.S. gasoline production since 1972 have allowed foreign oil producers to charge whatever price they can get for oil. The price surge impacted the profits of major oil refineries, as well as auto manufacturers who moved to produce more vehicles with higher gas efficiency ratings.
What caused the prices to drop so suddenly in November 2008? The impact of the stock market crash and subsequent bank bailouts had an impact. What is your opinion of why these prices dropped so suddenly?
We will also explore competition in the United States and elements of private enterprise.
In addition we will explore supply and demand, the Gross Domestic Product, and other factors and indicators used to evaluate the performance of an economic system.
Teaching Tips:
Objective 5: Identify the elements of private enterprise and explain the various degrees of competition in the U.S. economic system.
In your teams, please discuss and provide the rest of the class with the answer to the question, “What is competition?”
Answers should include:
Perfect competition
Monopolistic competition
Oligopoly
Monopoly
Answers can also include individual factors of each. See Table 1-2.
Objective 6: Explain the importance of the economic environment to business and identify the factors used to evaluate the performance of an economic system.
Please answer this question in your team: “What is Gross Domestic Product?” Now please share your answer with the class.
The Gross Domestic Product is the value of all goods and services produced within a given period by a national economy through domestic factors of production. It measures aggregate output.
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4. The Concept of Business and Profit
An organization that provides (sells) goods or services to earn profits.
Profits
The difference between a business’s revenues and its expenses.
Consumer Choice and Demand
Consumers choose how to satisfy their wants and needs.
Opportunity and Enterprise
Identify needs and capitalize on the opportunity.
When we explore the concepts of business and profit, we need to examine four different areas:
These include the business or organization that produces and/or provides goods or services that are sold to make a profit.
Profit is the difference between the revenues received from the sale of its goods or services less its expenses.
Why do business owners want to make a profit? They need to be rewarded for risking their time and money!
Consumers make choices about products that satisfy their wants and needs. By doing this they create demand for a product or service. Business owners decide how they will meet those consumer wants and needs through product or service development and delivery. In order to succeed in business, the business owner needs to identify a promising opportunity and then develop a good business plan to capitalize on the idea and thus make a profit.
Teaching Tips:
Please write down an example of a new product or service you have seen on TV, heard about on the radio, or read about in the newspaper, a magazine, or on the Internet. Next to your example, please describe the consumer need or want this new product or service satisfies. Now let’s hear some of your examples.
Answers will vary.
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5. The Concept of Business and Profit (cont.)
The Benefits of Business
Provide goods and services
Employ workers which results in increased quality of life and standard of living
Innovation and opportunities
Enhanced personal incomes of owners and stockholders
Support for charities and community leadership
How does a business benefit the U.S. or a foreign economy?
Here are some answers:
First, the business creates innovations and opportunities for new products or services.
It then employs workers to produce or deliver these services or products.
Then it provides those goods or services to customers who need or want them.
This increases the standard of living and quality of life of the people.
The business owners enhance their own incomes, as well as those of their stockholders, with the profits from the sales.
They pay taxes to support the government.
They also support charities and provide community leadership through acting in a socially responsible manner.
Teaching Tips:
Using your example from our last exercise, please write down how the new product or service you named earlier achieves one of the benefits of business we have just reviewed.
Answers will vary.
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6. The External Environments of Business
Everything outside an organization’s boundaries that might affect it
Six areas: domestic business, global business, technological, political-legal, sociocultural, and economic environments
External environments include everything that is outside an organization’s boundaries or, in other words, everything that is outside the control of the organization. This includes:
The domestic business environment—It is not possible for an organization to control what is happening in the domestic market with its suppliers, competitors, and distributors, among others.
The global business environment—An organization cannot control what happens elsewhere in the world.
The technological environment—Technology is changing every 6 months and an organization cannot control what technology is developed.
The political-legal environment—An organization can’t control what happens with laws or leaders who are elected.
The sociocultural environment—An organization can’t control people, places, or their backgrounds and cultural heritage.
The economic environment—An organization itself cannot control what happens to the economy as we have seen in the Fall of 2008.
Teaching Tips:
What do you call the impact of an element of an external business environment on an organization? Please remember that everything in the external environment is outside the control of the organization.
Positive impacts are called business opportunities. Negative impacts are called threats to the organization.
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7. The External Environments of Business (cont.)
Domestic Business Environment
The environment in which a firm conducts its operations and derives its revenues by:
Seeking to be close to customers
Building relationships with suppliers
Distinguishing itself from competitors
Let’s look first at the Domestic Business Environment.
This is the environment in which the organization conducts its operations and receives its revenues.
In this environment the organization wants to be close to its customers, but cannot control them, their needs, or their wants.
Also in this environment the organization wants to form close relationships with its suppliers, but cannot control these suppliers or their issues within their organizations, such as strikes or shortages, which can cause delivery issues.
And finally, in this environment the organization wants to distinguish itself from its competitors, and again, it cannot control its competitors or their actions or reactions within the market.
Teaching Tips:
What are the three elements of the domestic business environment?
Close relationships with customers, strong relationships with suppliers, and distinguishing differences between the organization and its competitors.
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8. The External Environments of Business (cont.)
Global Business Environment
The international forces that affect a business:
International trade agreements
International economic conditions
Political unrest
International market opportunities
Suppliers
Cultures
Competitors
Currency values
Now let’s examine the Global Business Environment. This environment includes the international forces that affect an organization. These include:
International trade agreements such as the European Union, Mercosur, and others.
International economic conditions such as high inflation rates and credit card interest rates in Latin America.
Political unrest, which can follow the election of a new president in a country or can involve land reform issues.
International market opportunities, such as Wal-Mart expanding into China or Latin America.
Suppliers outsourcing, such as airlines or credit card companies locating their call centers in India.
Cultural differences—for example, compare the international excitement about soccer, or futbol as it is called everywhere else in the world, to how the sport is viewed in the United States.
Competition, such as Wal-Mart’s chief competitor Carrefour in Europe and Mexico.
Currency values, which cause exchange rates to fluctuate and can cause the revenues businesses receive for their products to go down.
Teaching Tips:
Please join with another class member. In your team please choose one of the international forces that affect a business. Then please briefly discuss and describe an example of the force your team picked. Let’s share our examples with the class.
Answers will vary but can build upon examples presented earlier in this slide presentation.
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9. The External Environments of Business (cont.)
Technological Environment
All the ways by which firms create value for their constituents:
Human knowledge
Work methods
Physical equipment
Electronics and telecommunications
Various business activity processing systems
The Technological Environment includes all of the ways in which organizations create value for the stakeholders or constituents. These include:
Human knowledge, such as specialized technical skills, programming, and information about the organization.
Work methods, including use of robotics, flow of work through a plant or inventory management.
Physical equipment such as specialized machines that might require computer-aided design.
Electronics and telecommunications such as computers, cell phones, video conferencing, Internet meetings, and more.
Other business activity processing systems such as enterprise resource planning systems.
Teaching Tips:
In your same team, please choose one of the five ways firms create value for their constituents. Please discuss and describe an example of your choice. Please share your example with the class.
Answers will vary but could build on the examples listed above in this slide.
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10. The External Environments of Business (cont.)
Political-Legal Environment
The relationship between business and the government; laws regulate what an organization can and cannot do in many areas including:
Products
Advertising practices
Safety and health considerations
The Political-Legal Environment reflects the regulatory relationship between the government and its legal system. It also includes agencies that define what organizations can and can’t do. Some of these regulations include:
Product identification laws that require ingredients to be listed on food products.
Local zoning laws that might require a business to obtain a license to operate.
Advertising practices like car dealers needing to disclose terms of a lease in their ads.
Safety and health considerations such as OSHA laws and warnings on cigarette packages.
Acceptable standards of business conduct like requiring employees to take random drug tests.
The Political-Legal Environment also includes political stability, especially for multinational corporations or firms that do business internationally. In addition, pro- or anti-business feelings within the United States and other countries should also be important considerations for businesses.
Teaching Tips:
What advice would you give to a U.S.-based company that is planning on entering the Chinese market in regards to safety and health considerations?
Answers may vary, but could include the fact that there have been many recent problems with toys produced in China in terms of lead-based paint and other safety issues, so companies need to look at Chinese law and how this might impact them. Another answer could focus on child labor in China and the fact that sweat shops exist in China and there are no real laws against the use of child labor.
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11. The External Environments of Business (cont.)
Sociocultural Environment
The customs, mores, values, and demographic characteristics of the society
The standards of business conduct a society is likely to accept
The Sociocultural Environment includes characteristics in which an organization operates, such as:
Customs, like the holiday celebrations of different cultures
Mores, such as acceptable behaviors or beliefs
Values, such as the importance of religion or family
Demographic characteristics of the society such as education level, ethnicity, or income level
In addition, these factors and processes determine the goods and services a society or specific group of consumers are likely to need or want. They also determine the type of business conduct a society is likely to accept. For example, in some South American countries there is a difference in the definition of the terms “moral” and “ethical.”
“Moral” refers to the way a person behaves in relation to other people, where the word “ethical” refers to the behavior of society as a whole, and does not change with time or circumstance. Latin American MBA programs, for example, have been criticized for not teaching “business ethics.” But when you look at the difference between the two terms “moral” and “ethical,” you can see why “ethics” is not looked at as something that can be changed in Latin American business.
Teaching Tips:
How do we define “business ethics” in the United States?
Answers can vary but might include the concept of social responsibility of a business in regards to the environment, treatment of employees, dealings with shareholders, etc.
Please split into teams of two students. Each team will write down three examples of one of the four characteristics we just reviewed. These include: 1) customs, 2) mores, 3) values, and 4) demographics. After they have finished, each team will share their examples with the class and give reasons why their examples are outside the control of the organization.
Answers will vary but can include different customs from various cultures, as well as different mores, values, and demographics. Students need to explain why the organization cannot control these examples.
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12. The External Environments of Business (cont.)
Economic Environment
The relevant conditions that exist in the economic system in which a company operates
In a strong economy where many people have jobs, a growing company may find it necessary to pay higher wages and offer more benefits in order to attract workers.
In a weaker economy where people are looking for jobs, a firm may be able to pay less and offer fewer benefits.
The Economic Environment includes conditions that exist in the economic system in which the organization operates.
The economy of a country is outside the control of the organization and it can impact the company by making it necessary for it to increase wages and benefits in a good economy, because more people are employed and these types of incentives are needed in order to attract workers from other companies.
The opposite is also true. If many people are looking for work and the economy is in a stagnant or recessionary period, the company may be able to offer lower wages and fewer benefits to employees.
Teaching Tips:
What impact has the economic crisis in the United States in the Fall of 2008 had on wages and jobs?
Many jobs were cut since consumers were buying fewer goods and services. For example, DHL package delivery service ceased operations in the U.S. and auto manufacturers cut tens of thousands of jobs due to the economic downturn.
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13. Economic Systems Economic System Factors of Production
A nation’s system for allocating its resources among its citizens, both individuals and organizations
Factors of Production
Labor
Capital
Entrepreneurs
Physical resources
Information resources
Economic Systems include a nation’s method for allocating its resources among its citizens, which includes both individuals and organizations. In order to make these allocations, the nation and its organizations need to address factors of production. These include:
Labor, which is called “human resources” in many organizations. This includes the number of people who are employed to perform specific functions.
Capital, or the financial resources that are needed to produce goods and services.
Entrepreneurs or the people who take risks by starting a new business that provides goods or services to the citizens of the nation.
Physical resources, which include actual, tangible things used to conduct business by an organization. These could include construction of factories, office buildings, or raw materials like steel, bricks, or roads.
Information resources, including data and any other information that is used by businesses.
Teaching Tips:
In your teams of two, please choose one of the five factors of production. Discuss and write down two examples of your factor of production. After your team discussion, you will share your examples with the class.
Answers will vary but could include the following for each factor of production:
Labor: People who are hired by a government, company, or organization to provide goods or services.
Capital: Money that is loaned to a business by a bank or the government for production of goods or services, or money invested by shareholders in a business.
Entrepreneurs: People who start small businesses to provide goods and services to people in the society. Examples could include florists, funeral parlors, ice cream shops, small grocery stores, computer consulting firms, etc.
Physical resources: Factories, office furniture, office supplies, desks, chairs, machinery to produce products, iron to produce steel to build buildings, etc.
Information resources: Databases of people, places, or things needed to conduct business.
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14. Two Types of Economic Systems
Planned Economy
A centralized government controls all or most factors of production and makes all or most production and allocation decisions for the economy.
Market Economy
Individual producers and consumers control production and allocation by creating combinations of supply and demand.
There are two basic types of economic systems. These include:
Planned Economies: In a planned economy, a centralized government controls all or most factors of production. The central government also makes all or most goods or products and services. The government also decides how those goods and services are allocated within the economy of the country.
Market Economies: In a market economy, individual producers and consumers control production of goods and services as well as delivery and allocation through the creation of supply and demand.
A market is a method used for exchange between buyers and sellers of a good or service.
Teaching Tips:
What is an example of a planned economy?
Communism is an example of a planned economy. We will discuss Communism in more detail in a moment.
What is an example of a market economy?
Answers could include the United States, Capitalism, or Free Market economies.
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15. Types of Economic Systems
Planned Economy
- Communism – individuals contribute according to their abilities and receive benefits according to their needs.
The government owns and operates all factors of production.
The government assigns people to jobs and owns all businesses and controls business decisions.
Communism is an example of a planned economy. Karl Marx is known as the father of communism.
In Communism, individuals contribute according to their abilities and receive benefits according to their needs.
In a Communist economy, the government owns and operates all factors of production.
In addition, the government in a Communist economy assigns people to jobs. It also owns all businesses and controls all business decisions.
Teaching Tips:
What countries operate under the Communist economic system?
Answers may include: China, Cuba, Vietnam, Lao, Korea
Are the countries you named really examples of pure Communism? If they are not, why not?
Answers may vary but could include the fact that China has allowed a free market to develop and has allowed certain enterprises to be privatized.
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16. Types of Economic Systems (cont.)
Market Economics
Capitalism
The government supports private ownership and encourages entrepreneurship.
Individuals choose where to work, what to buy, and how much to pay.
Producers choose who to hire, what to produce, and how much to charge.
Market
A mechanism of exchange between buyers and sellers of a good or service.
Two examples of market economies include capitalism and mixed market economies.
In a Capitalistic economy, the government supports and encourages private ownership and entrepreneurship. In fact, the government may provide loans to small businesses to support expansion and development.
People in a capitalistic economy are free to choose where they work, what they buy, and how much they will pay for goods and services.
Producers choose who they want to hire, what they want to produce, and how much they want to charge for their goods and services.
The United States is an example of a capitalistic economy.
Teaching Tips:
Why do you think the United States has a capitalistic economy?
Answers will vary. Some may include the following: because the founders of the Constitution guaranteed our freedom. The Bill of Rights gave us the right to be independent. The U.S. is an individualistic society, based on its Protestant beginnings, not collectivistic like other Catholic or Communist systems.
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17. Types of Economic Systems (cont.)
Market Economics
Mixed Market Economy
Features characteristics of both planned and market economies.
Privatization: The process of converting government enterprises into privately owned companies.
Socialism: The government owns and operates select major industries such as banking and transportation. Smaller businesses are privately owned.
Two examples of market economies include capitalism and mixed market economies.
Mixed market economies include characteristics of both planned and market economies.
In a mixed market economy, the government may decide to privatize business services and companies they own by offering them for sale as privately owned companies. When the Berlin Wall fell, the former East Germany chose to privatize most of its government production. Most Latin American nations have done the same in the last 20 years as they moved from military dictatorships to democracies.
In a mixed market economy, the government may choose to own and operate select major industries, like banking and transportation or even telephone, electric, and water services. Smaller businesses are privately owned and operated.
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18. The Economics of Market Systems
Demand
The willingness and ability of buyers to purchase a product (a good or a service).
Supply
The willingness and ability of producers to offer a good or service for sale.
The Laws of Demand and Supply in a Market Economy
Demand: Buyers will purchase (demand) more of a product as its price drops and less of a product as its price increases.
Supply: Producers will offer (supply) more of a product for sale as its price rises and less of a product as its price drops.
Let’s explore supply and demand, which are key to the economics of market systems. Demand can be defined as the willingness and ability of buyers to purchase a good or service. For example, the demand for oil has increased over the past 25 years.
Supply can be defined as the willingness and ability of producers to offer a good or service for sale. Think about the market for gasoline in the United States and China. The U.S. has moved away from its production of domestic oil, so the supply has decreased. The U.S. has had to rely more on foreign oil, and foreign oil producers can offer oil or gas at whatever price they believe the market will bear.
The laws of supply and demand are at play in the market system. Producers will offer, or supply, more of a product for sale as its price increases. They will offer less of the product as its price drops. Buyers will purchase or demand more of a product as its price drops. They will demand less of the product as its price increases. Therefore, demand and supply are interconnected, as we will see from the demand and supply curves.
Teaching Tips:
Please form teams of two students. Each team will write down three examples of a product or service that is in high demand by consumers today. Your team will also write down what would happen if the price 1) increases for that product and 2) decreases for the same product or service. Each team will then share their favorite example with the class.
Answers will vary based on the good or service chosen. Apply the definitions as each team reports to the class on their examples.
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19. Demand and Supply in a Market Economy
Demand and Supply Schedule
The relationships among different levels of demand and supply at different price levels
Demand curve: How much product will be demanded (bought) at different prices.
Supply curve: How much product will be supplied (offered for sale) at different prices.
Market price (equilibrium price): The price at which the quantity of goods demanded and the quantity of goods supplied are equal.
The demand and supply schedule explains the relationships among different levels of demand and supply at different price levels. These relationships are obtained from marketing research, historical data, and other market studies.
We briefly mentioned earlier that demand and supply intersect in the market.
The demand curve shows graphically how much product will be demanded or purchased at different price levels.
The supply curve depicts how much of the product will be supplied, or offered for sale, at different price levels.
The market price or equilibrium price is the price at which the quantity of good demanded equals the quantity of good supplied. Graphically, we will see how the market price is shown at the intersection of the demand and supply curves.
Let’s see how this looks.
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20. Demand and Supply (cont.)
Here we can look at the demand curve for pizza.
When the price of pizza is high, fewer people are willing to pay for it. But as the price decreases, more people are willing to buy pizza. Or, in other words, more people “demand” the pizza at a lower price.
This is the demand curve for pizza.
Teaching Tips:
What price would you be willing to pay for the best piece of pizza you have ever eaten?
Listen to the student answers and point out on the graph where their demand fits.
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21. Demand and Supply (cont.)
In the first graph on the left you can see that when the price of pizza is low, more people are willing to buy it. But pizza makers don’t have the money to invest in making pizza, so they make fewer pizzas. When this happens, the supply of pizza is limited and the price of pizza will rise. Only when the price of pizza rises will the pizza makers be willing and able to increase the supply. This is the supply curve for pizza.
The second graph shows the equilibrium price of market price for pizza. The supply curve, or blue line, rises as the price of the pizza rises. The demand curve, or red line, falls as the price of pizza falls. At the point where the two lines cross—at approximately $10 and at a quantity of 1,000 pizzas, the supply and demand curves cross. This is the point at which the price that suppliers can charge is equal to the price that a maximum number of customers are willing to pay. This is the profit-maximizing quantity for the pizza makers and it is also the equilibrium price, where demand for pizza and the supply of pizza meet.
Teaching Tips:
Look at the second graph. What is the market price for pizza?
$10
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22. Demand and Supply (cont.)
Surplus
A situation in which the quantity supplied exceeds the quantity demanded
Shortage
A situation in which the quantity demanded will be greater than the quantity supplied
When we examine supply and demand we also need to consider surplus and shortage.
A surplus exists when the quantity supplied of a product is greater than the quantity demanded by consumers. This situation can cause losses because the business may have to sell its inventory at a lower price than the cost of manufacturing the product.
A shortage exists when the quantity demanded of a product is greater than the quantity supplied by the manufacturer. This situation also causes losses because the opportunity existed for additional sales if production could have been increased. This situation also invited increased competition, since the current manufacturer cannot produce what the consumers have demanded. This leaves a gap in the market that can be filled by a competitor.
Teaching Tips:
Think back to our pizza example. What happens when our pizza maker at a restaurant five miles down the road makes too many pizzas on a snowy Friday night?
He has to throw them away because not enough people come in to eat them. He loses money.
What if our pizza maker only provides pizza by delivery on a snowy Friday night and he makes the normal number of pizzas?
He doesn’t have enough because everyone wants to stay in and have pizza delivered. When the pizza doesn’t arrive within an hour, customers will call the pizza place across the street, which made enough pizzas after listening to the weather forecast!
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23. Private Enterprise in a Market Economy
Private Enterprise System
Allows individuals to pursue their own interests with minimal government restriction.
Elements of a Private Enterprise System
Private property rights
Freedom of choice
Profits
Competition
Let’s examine the private enterprise system. A private enterprise system allows individuals to follow their own interests with minimal government restriction. For example, if you want to open a new business to rival Starbucks, let’s say a new health drink chain that mixes health teas from China and Latin America with exotic teas, you are free to do this.
There are four key elements of a private enterprise system. Let’s review them:
Private property rights: This means you are free to purchase or rent a building for your new business, trademark or copyright your new idea, and be assured of protection.
Freedom of choice: This means you are free to choose what type of fruit juice and tea combinations you want to offer in your new health drink franchise.
Profits: You are free to charge whatever price the market will bear for your new health drink, and you can keep all the profits. The government does not require you to turn profits over to them.
Competition: You will most likely face competition for your new healthy fruit juice franchise, and you can’t get the government to stop your competition from providing similar products. However, if you have copyrighted your drink recipes, your competition cannot provide exactly the same product for sale.
Teaching Tips:
What would happen if you wanted to enter a planned market economy with your new healthy fruit juice and tea franchise?
In a planned economy, the government would need to approve your idea and might take it for themselves. Profit would go to the government and be shared among the people. There would be no profits for you and no competition would exist.
What would happen in a mixed market economy, such as China, if you wanted to introduce your new product?
You would be allowed to start your business but it would take longer than in the U.S. In addition, once you opened your business you would have competitors copying your product immediately and opening the same type of store. They might change only one small thing or the name. Intellectual property rights, or copyright and trademark, are slow to emerge and be controlled in China.
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24. Degrees of Competition
Perfect Competition
No single firm is powerful enough to influence the price of its product.
All firms in an industry are small.
The number of firms in the industry is large.
Four Principles:
Buyers view all products as identical.
Buyers and sellers know the prices that others are paying and receiving in the marketplace.
Firms easily enter or leave the market.
Prices are set exclusively by supply and demand.
Now we will look more at perfect competition. In perfect competition, prices are determined only by supply and demand, because no one company is powerful enough to influence the price of its product. In perfect competition all organizations in the industry are small and the number of firms in the industry is large.
The principles of perfect competition include the following:
Buyers or consumers see all products offered as identical. There are no differences perceived between your new healthy fruit juice and tea drink and your competitors’ similar product.
Buyers and sellers know the prices that consumers and suppliers are paying and receiving in the marketplace. For example, in many developing nations all the banana sellers will set up stands in the same area of the road. They all charge the same price and get their bananas from the same source. They all pay the same amount for their bananas.
It is easy for firms or banana stands to enter or leave the market. The banana seller can come with his or her supply of bananas, set up a stand in minutes, or take it down and leave and not come back.
Prices are set exclusively by supply and demand, and these prices are accepted by both sellers and buyers. In our banana stand example, this means that all the sellers on a particular stretch of highway know the price the buyer is willing to pay, and both they and the consumer accept the price.
Teaching Tips:
Would a series of children’s lemonade stands be an example of perfect competition? Why or why not?
Let’s look at the principles of perfect competition. Buyers certainly view all the products as identical. However the children may not, thinking they have a better flavor of lemonade, don’t use sugar, etc. The second principle holds true, since every child on the block can see what the prices are for all the lemonade stands and the buyers know the same as well. The third principle holds true, since the child can easily take down or put up his or her lemonade stand. In looking at the fourth principle, it also holds true, since people are only going to pay what is charged and the children all set the price similarly, but one could argue that the children could set different prices.
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25. Degrees of Competition (cont.)
Monopolistic Competition
Numerous sellers try to differentiate their products from those of competitors in an attempt to influence price.
There are many sellers, though fewer than in pure competition.
Sellers can enter or leave the market easily.
The large number of buyers relative to sellers applies potential limits to prices.
Now let’s examine monopolistic competition. Within monopolistic competition there are also four principles we need to review:
There are numerous sellers trying to differentiate their products from those of competitors so as to have some control over the price.
There are many sellers, though fewer than in pure competition.
Sellers can enter or leave the market easily.
The large number of buyers in relation to the number of sellers applies potential upper limits to prices.
So, if we look at our lemonade stand idea from earlier, this model may apply more specifically to these young salespeople and their stands. Why is this the case? Because as we discussed, each child may try to offer a different flavor of lemonade or offer it with or without sugar. This is an application of the first principle of monopolistic competition. There are still lots of lemonade stands on our street, but far fewer than the banana stands in Latin America. This is an example of the second principle. The sellers can still leave or enter the market easily, as we discussed. However, when we look at the fourth principle, we may have more neighbors or commuters who want to buy the lemonade and fewer stands, so the price may be higher.
Teaching Tips:
Please join with another class member. In your team, please come up with two examples of monopolistic competition and explain how the four principles apply.
Answers will vary. In order to determine if the idea of each student team is monopolistic competition, assist them by reviewing each of the four principles and ask them to explain if the principle can clearly be applied or not.
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26. Degrees of Competition (cont.)
Oligopoly
An industry with only a few large sellers.
Entry by new competitors is hard because large capital investment is needed.
The actions of one firm can significantly affect the sales of every other firm in the industry.
The prices of comparable products are usually similar.
As the trend toward globalization continues, most experts believe that oligopolies will become increasingly prevalent.
Now we are going to examine another form of competition called oligopoly. There are five key principles that apply to an oligopoly:
An oligopoly operates in an industry with only a few large sellers or suppliers. For example, let’s discuss the gasoline market in the United States. Certainly there are maybe five to ten key providers of gasoline, with many different gas stations supplying the same or competing brands.
Entry by new competitors, or new gasoline companies, is hard because a large investment of capital is needed to open a new gas company or even build a new gas station.
The actions of one gasoline company can significantly affect the sales of every other firm in the industry. Certainly, when one gasoline company lowers or raises its prices, all the others respond accordingly.
The prices of comparable products, such as regular or super gasoline, etc., are usually similar.
As the trend toward globalization continues, most experts believe that oligopolies will become increasingly prevalent.
Teaching Tips:
Let’s examine this last principle in more detail. Please write down one industry in which oligopolies will become increasingly prevalent and explain the reason to your student partner. Then let’s share some of our thoughts with the class.
The answers will vary. However, as in the last slide, have the students refer to the five principles when reviewing their examples. Some examples could include the cellular phone industry, the provision of broadband Internet services and “hypermarkets.”
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27. Degrees of Competition (cont.)
Monopoly
An industry or market that has only one producer (or else is so dominated by one producer that other firms cannot compete with it).
Natural monopolies: Industries in which one firm can most efficiently supply all needed goods or services.
Example: Electric company
The concept of a true monopoly applies when an industry or market has only one producer or is dominated by one producer so completely that other firms cannot compete with it. This sole supplier enjoys complete control over the prices of its products and the only real constraint it faces is a decrease in consumer demand due to increased prices.
There are also natural monopolies. These monopolies occur in industries in which one firm can most efficiently supply all the needed goods and services. These types of monopolies are typically allowed and regulated by government agencies or legislated acts. An example of this type of monopoly is the local electric company. Rate increases have to be voted on by state boards or governments.
Teaching Tips:
Please take a minute now to talk to your student partner and think of another example of a monopoly. Then let’s share these with the class.
Answers could include cable TV, Internet service, natural gas, and others. Again, have each student team defend their choice by applying the key principles of a monopoly.
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28. Economic Indicators Economic Indicators
Statistics that show whether an economic system is strengthening, weakening, or remaining stable
Economic growth indicators
Aggregate output, standard of living, gross domestic product, and productivity
Economic stability indicators
Inflation and unemployment
Once we understand the types of market economies and forms of competition, we need to understand how economies will measure the performance of their economic system.
Economic indicators are statistics that show whether an economic system is strengthening, weakening, or remaining stable. In the United States, these measure the two key goals of our economic system, which are economic growth and economic stability.
Economic growth indicators include aggregate output, standard of living, gross domestic product, and productivity. Economic stability indicators include measuring the rates of inflation and unemployment.
Teaching Tips:
Why would an economy want to use economic indicators?
Economic indicators let the rest of the world know the economic status of a country. This can impact foreign investment in the country, or the entrance of new firms and multinational corporations with new products into the country.
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29. Economic Indicators (cont.)
Business Cycle
The pattern of short-term ups and downs (expansions and contractions) in an economy.
Aggregate Output
Growth during the business cycle is measured by the total quantity of goods and services produced by an economic system during a given period.
Standard of Living
The total quantity and quality of goods and services that consumers can purchase with the currency used in their economic system.
Let’s examine some of the elements of economic growth, aggregate output, and the standard of living.
A business cycle is a pattern of short-term ups and downs, or better, expansions and contractions, in an economy. A graph of these cycles across time can give a broad picture of the growth of the country or economic system.
Aggregate output is the total quantity of goods and services produced by an economic system during a given period of time, and it measures the growth during the business cycle, for example, over a quarter or during a calendar year.
The standard of living is the total quantity and quality of goods and services that consumers can purchase with the currency used in their economic system. For example, this measures the type of life the consumers live, the types of goods they own, and the types of services they can afford to pay for.
Teaching Tips:
Please work with your student partner to develop an example of some of the goods and services that can be purchased by different income classes and represent the standard of living for a specific demographic group of people in the United States. For example, what items might be included in the standard of living for a family living on $40,000 per year versus a family living on $100,000 per year in the U.S.? Once you have completed your discussion, we will share these with the class.
Answers will vary but will reflect commonly purchased goods and services appropriate to that demographic income level.
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30. Economic Indicators (cont.)
Gross Domestic Product (GDP)
An aggregate output measure of the total value of all goods and services produced within a given period by a national economy through domestic factors of production.
Gross National Product (GNP)
The total value of all goods and services produced by a national economy within a given period, regardless of where the factors of production are located.
Let’s discuss two important economic indicators:
The first is the Gross Domestic Product, or GDP, as it is most frequently referred to. The GDP is an aggregate output measure of the total value of all goods and services produced within a given time period by a national economy through its domestic factors of production. What does this mean? In general, the news media will monitor the growth of or decline in the GDP against the previous year. If the GDP is going up, the output of the entire domestic economy is going up. If the GDP is going up, it means the nation is experiencing economic growth. If the GDP shows a decline, as it did in the last part of 2008, it means the economy is declining.
The second economic indicator is the Gross National Product, or the GNP, as it is usually called. The GNP reflects the total value of all goods and services produced by a national economy within a given period of time, regardless of where the factors of production are located.
Teaching Tips:
What is the difference between the GDP and the GNP?
The GDP measures growth based on the total value of all goods and services produced through domestic factors of production.
The GNP measures this same growth but includes the total value of all goods and services produced regardless of where the factors of production are located.
The difference is in the location of the factors of production.
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