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Chapter 1

What’s New in This

Edition?

• New chapter-opening
vignette
• Removed Aftermath of
9/11 section
• Updated examples and
statistics
• Updated figures and
photos

LIST OF IN-CLASS
ACTIVITIES
See page 1-1.

LIST OF HOMEWORK
ASSIGNMENTS
See page 1-2.

DETAILED LECTURE
OUTLINE
See page 1-3.

CHAPTER OUTLINE
See page 1-7.

Resources for This Chapter

The following resources are available for this chapter: Additional Materials
In This Instructor’s Manual • PowerPoint Presentation: Available on the Instructor’s Resource CD (IRCD).
• List of In-Class Activities to Accompany This Chapter: See page 1-1. • Test Item File: Available on the Instructor’s Resource CD (IRCD).
• List of Homework Assignments to Accompany This Chapter: See • Video: Helping Businesses Do Business: U.S. Department of
page 1-2. Commerce. Available on VHS/DVD.
• Detailed Lecture Outline: See page 1-3. • Online Materials: See www.prenhall.com/ebert for online supple-
ments to this chapter.
• Chapter Outline: See page 1-7.
• Additional Handout: Business Accountability: When Smoke Gets
in Your Eyes. See page 1-8.
• Additional Handout: Supplemental Case Study: Supply and Demand
for Pollution Permits. See page 1-9.

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Making the Transition

from Business, Eighth
Edition?
If you’re switching from
Ricky Griffin and Ron
Ebert’s hardcover eighth edi-
tion of Business to this edi-
tion of Business Essentials,
you’ll find some of the extra
content you’re used to seeing
in Business online at
www.prenhall.com/ebert.

In this section, use

PowerPoint 1-1,
1-2, 1-3.

Chapter Overview
Many students come to an introduction to business class not quite sure
what’s in it for them, but the course has something for everyone, from
those who have been in the business world a while to those just getting
started. As this book unfolds, you’ll develop an understanding of the
foundations of business, and you’ll be able to apply what you already
know (or what you are starting to learn) about business to many parts of
the course.
This first chapter dives right into the world of business, explaining just
what business is, what its main goals and functions are, and how the
external environments of business affect the success and failure of any
organization. The chapter also describes global economic systems
according to the means by which they control the factors of production,
shows how markets, demand, and supply affect resource distribution in
the United States, and discusses the elements of private enterprise and
the degrees of competition in the U.S. economic system. Finally, the
chapter explains the importance of the economic environment to busi-
ness and identifies the factors used to evaluate the performance of an
economic system.

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In-Class Activity: Ice-Breaker

What Do You Know About Business?
Activity Overview:
This activity helps students assess their level of knowledge about
business and set their own learning goals for the class.
Time Limit:
20 minutes
What to Do:
1. Ask each student to take out a piece of paper and divide it into
two columns. In the first column, students should write the most
important four or five things they currently know about business,
and in the second column, the four or five things they would like
to learn. Tell them if they are having difficulty coming up with
items to list, take a look at the table of contents of the text. It
will give them some clues so that this task doesn’t frustrate
them. (5 minutes)
2. Divide students into groups of three to five people and ask them to
share their lists with each other. As they listen, they can delete or add
anything that seems relevant. (5 minutes)
3. Ask them to switch groups so that they are with all new people, and
repeat the process of sharing their lists. (5 minutes)
4. Ask students to switch to a third group of all new people. With this
group, the goal is to synthesize their lists into one big idea of what
they know, and one big idea of what they want to learn. (5 minutes)
Don’t Forget:
This activity allows students to get to know each other as well as set
expectations for the course. The underlying agenda is to get them talking to
each other, setting the stage for active participation throughout the class.
Wrap-Up:
Wrap up the discussion by having each group report back to the class.
You may want to record their responses and post them in the room for
reference as you move through the course.

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

■■■
TEACHING TIP
Though the definition of
business includes profit as
a motive, remind students
that most business principles
also apply to not-for-profit
organizations.

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In this section, use

PowerPoint 1-7
through 1-13.

In-Class Activity: Small-Group Discussion

Scanning the Environment
Activity Overview:
This activity asks students to consider how various parts of the external
environment affect businesses and industries.
Time Limit:
25 minutes
What to Do:
1. For larger groups, divide the class into four-member groups; for
smaller groups, divide the class into two-member groups.
2. Assign each group a specific industry (for example: automotive,
airline, fast food, computer, apparel, restaurant).
3. Ask each group to consider what variables from the technological,
political-legal, sociocultural, and economic environments affect their
assigned industry. (15 minutes)
4. Ask a spokesperson from each group to share their input. (10 minutes)
Don’t Forget:
Remind students that external environmental elements can change dra-
matically, affecting specific industries differently over time.
Wrap-Up:
Wrap up the discussion by making sure that students understand that the
nature of a specific business within an industry and the types and quanti-
ties of products/services produced can influence the impact of external
environmental variables.

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In this section, use

PowerPoint 1-14
through 1-17.

■■■
TEACHING TIP
Remind students that inputs
used to produce outputs
are also called factors of
production; they include
physical resources, labor,
capital, entrepreneurship,
and information resources.

What are the factors of

production used to produce
a quart of orange juice?

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Entrepreneurship involves
tremendous risk-taking
and is a welcome ingredient
in a free-market system.
What characteristics of
our free-market system
encourage risk-taking?

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■■■
TEACHING TIP
Remind students that an
economic system is defined
by how it allocates factors
of production. In a planned
economy, the government
owns and controls these
factors; in a market econ-
omy, producers/consumers
buy and sell what they
choose.

Give an example of a coun-

try with a planned economy.
What makes this economy
planned? Give an example
of a country with a market
economy. How is the eco-
nomic system different in
this country?

In-Class Activity: Up for Debate

Comparing Economic Systems
Activity Overview:
This activity gets students talking about how similar and different the U.S.
economic system is to other systems.
Time Limit:
30 minutes
What to Do:
1. Divide the class into small groups. Ask groups to assume they have
just overheard a classmate say, “The United States is becoming more
socialist everyday—with all the government control.” Have each
group list reasons why the statement could be true and reasons why
the statement could be false. (15 minutes)
2. Reassemble the class and discuss each group’s thoughts. (15 minutes)
Don’t Forget:
Remind students that a government’s level of control distinguishes capi-
talism from socialism. If you have foreign students in your class, you may
want them to say a bit about the economic system in their native country.
Wrap-Up:
Wrap up the discussion by reminding students that the U.S. economic
system and a socialist system have many similarities and differences. For
example, workers in socialist economies often work fewer hours, have
longer vacations, and receive more health, education, and child-care
benefits than do workers in capitalist economies. On the other hand, the
federal government does control some basic services in the United States
as well as various aspects of the market through agencies such as the
Food and Drug Administration and the Federal Communication
Commission.

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■■■
TEACHING TIP
Make sure students under-
stand that a mixed market
economy is characterized by
government ownership of
major industries working
alongside privately owned
industries.

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In-Class Self-Check
Answers:
1. c
2. b
3. False

In this section, use

PowerPoint 1-18
through 1-26.

In-Class Activity: Supplemental Case Study Discussion

Supply and Demand for Pollution Permits
(See page 1-9 of this Instructor’s Edition.)
Activity Overview:
This activity asks students to apply chapter concepts to a case study.
Time Limit:
30 minutes
What to Do:
1. In advance, make copies of the Supplemental Case Study on page
1-9 of this Instructor’s Edition and distribute them to students.
2. Divide students into groups and ask them to read the case and
answer the questions in their small groups. (15 minutes)
(a) How does trading in pollution permits at BP demonstrate the laws
of demand and supply?
(b) What would influence the demand for pollution permits if they
were traded globally?
(c) Should companies be allowed to trade permits? Should countries
be allowed to? Why or why not?

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HOMEWORK:
EXERCISING YOUR
ETHICS: INDIVIDUAL
EXERCISE
Prescribing a Dose of
Competitive Medicine
Now is a good time to
assign the Exercising
Your Ethics: Individual
Exercise from the end-
of-chapter materials
(page 33) as homework.
This assignment asks
students to consider the
ethical dilemmas that arise
through increased pricing
when competition is low.
For the complete
assignment instructions,
see page 33.
At-Home Completion Time:
30 minutes

What is equilibrium price?

What happens if incomes
rise and demand increases?
What happens if producers
have a surplus and supply
increases?

continued...
3. Once students have answered the questions, discuss their answers Don’t Forget:
as a class. As students discuss their answers, make sure they touch Make sure that you keep students on the topic of supply and demand.
on the following points: (15 minutes)
Wrap-Up:
(a) Those who want to buy permits and those who want to sell them
have created a market where the price is set by the action of Wrap up the discussion by asking students for other examples of envi-
supply and demand. ronmental issues affecting supply and demand.
(b) The strictness of government controls on emissions and the indi-
vidual company’s ability to meet the quota, as well as the cost of
failure and the price of the needed permit.
(c) Answers will vary, though there will be much debate about the
ethics involved in buying and selling permits.

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■■■
TEACHING TIP
Remind students that
perfect competition is
characterized by (a) many
buyers, (b) many sellers,
and (c) buyers and sellers
who accept a going price.

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■■■
TEACHING TIP
Remind students that
monopolistic competition
is characterized by (a) many
buyers, (b) many sellers,
and (c) products that are
differentiated.

■■■
TEACHING TIP
Reinforce that oligopoly is
characterized by (a) many
buyers, (b) few sellers,
(c) products that are quite
similar, and (d) a change
in price by one seller often
meaning a change in price
by all sellers.

■■■
TEACHING TIP
Remind students that a
monopoly is characterized
by (a) many buyers,
(b) only one seller, and
(c) prices being set by
the one seller.

Which level of competition

best describes the market
in each of the following
scenarios?
• your local Pizza
Hut (monopolistic
competition)
• a local farmer selling
apples for applesauce
(perfect competition)
• cell phone service
(oligopoly)
• Gap jeans (monopolistic
competition)

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In-Class Self-Check

Answers:
4. d
5. c
6. False

In this section,
use PowerPoint 1-27
and on

Helping Businesses
Do Business: U. S.
Department of Commerce
Running Time:
10:26
Now is a good point to play
the video that accompanies
the chapter as it demon-
strates the role of factors of
production and supply and
demand within world eco-
nomic systems.
For discussion questions
and answers, see page 35.

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HOMEWORK:
Let’s Go Shopping!
Now is a good time to
assign Application
Exercise 9 from the end-
of-chapter materials
(page 31) as homework.
This assignment asks
students to visit a local
shopping mall and deter-
mine what degree of
competition stores in the
mall face in their immedi-
ate environment.
For the complete
assignment instructions,
see page 31.
At-Home Completion Time:
1 to 1.5 hours

In-Class Activity: Up for Debate

Is Competition Good?
Activity Overview:
This activity asks students to think about competition and the role that it
plays in our economic system as they read the Entrepreneurship and
New Ventures feature on page 19 in the textbook.
Time Limit:
45 minutes
What to Do:
1. Ask students to think about competition as an essential ingredient
in a free-enterprise system as they read the Entrepreneurship
and New Ventures feature on page 19 in the textbook.
(10 minutes)
2. Divide the class into small groups and ask them to discuss and make
notes on some situations in which competition is good for the U.S.
economy and some situations in which competition is bad for the U.S.
economy. Group members should try to be in agreement. (15 minutes)
3. Regroup the class and ask the groups to explain the rationale for their
answers, asking for feedback from the class as the various situations
are discussed. On what parts of the discussion does the class agree
or disagree? (15 minutes)
4. Ask the class to come to a consensus: Is competition good or bad? (5
minutes)
Don’t Forget:
If the class cannot arrive at a consensus, they might consider voting.
Wrap-Up:
Remind students that competition is an essential part of a free-enterprise
system, as entrepreneurship invites competition in many industries. Not every
enterprise will succeed in the marketplace, but competition does hold prices
at market level and contributes to a high quality of goods and services.

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■■■
TEACHING TIP
Make sure that students
understand that gross
domestic product includes
only the value of products
produced within a nation’s
borders; the figure includes
the value of products pro-
duced by both domestic and
foreign companies within
those borders.

■■■
TEACHING TIP
Reinforce that gross
national product includes
the value of products
produced by a country
regardless of where they are
produced; this figure does
not include the value of
products produced within
the country by a foreign
company.

In-Class Activity: Business Accountability Handout Discussion

The Geography of Jobs 2. Divide students into three- or four-member groups and ask them
(See page 1-8 of this Instructor’s Edition.) to read the handout. Students should discuss within their groups the
pros and cons of (a) outsourcing in order to keep prices down and
Activity Overview: (b) reducing dependence on outsourcing in order to better fulfill social
This activity asks students to read a supplemental article and ponder obligations toward stakeholders. (15 minutes)
whether outsourcing is a detriment to social responsibility. 3. Reassemble the class and discuss each group’s opinions. (15 minutes)
Time Limit: Don’t Forget:
30 minutes This is a case in which there is no simple answer!
What to Do: Wrap-Up:
1. In advance, make copies of the “Business Accountability” article on Wrap up the activity by reminding students that some industries may rely
page 1-8 of this Instructor’s Edition and distribute them to students. more heavily on outsourcing than others; further, some industries gain higher-
Make sure that students are familiar with outsourcing before you quality standards and expertise through outsourcing. Also remind students of
divide them into groups. positive trade relationships that evolve through dependence on outsourcing.

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How can economic growth

be measured through
aggregate output, standard
of living, gross domestic
product, and productivity?

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■■■
TEACHING TIP
Make sure students under-
stand that inflation occurs
when overall price levels go
up because too much money
is floating around; as a result,
purchasing power declines.

In-Class Activity: Exercising Your Ethics: Team Exercise

Making the Right Decision (See page 34 of the textbook.)
Activity Overview:
This activity asks students to examine the ethical issues that can arise
when making business decisions.
Time Limit:
35 minutes
What to Do:
1. Divide students into four-member teams and ask them to turn to
page 34 in the textbook. Tell teams to read and follow the instructions
for the Exercising Your Ethics: Team Exercise. Students should each
choose one of the different roles in the exercise. (20 minutes)
2. Reassemble the class as a whole and discuss what disagreements
came up within their groups. How did the role they were assigned
affect their perspective? (15 minutes)
Don’t Forget:
Remind students to stay within their assigned “roles.”
Wrap-Up:
There is seldom a yes/no, right/wrong, black/white answer to ethical
decisions in business. Remind students that a rule of thumb might be,
in some instances, to make the decision that positively affects the
greatest number of people.

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HOMEWORK:
Interview a Manager
Now is a good time to
assign Application
Exercise 10 from the end-
of-chapter materials
(page 31) as homework.
This assignment asks
students to interview a
business owner or senior
manager and ask them how
demand and supply affect
their business, what essen-
tial factors of production are
most central to the firm’s
operations, and how fluctua-
tions in economic indicators
affect their business.
For the complete
assignment instructions,
see page 31.
At-Home Completion Time:
1–2 hours

■■■
TEACHING TIP
Reinforce that the govern-
ment regulates the money
supply and interest rates
through monetary policy;
the government influences
money supply via taxation
and spending through
fiscal policy.

In-Class Activity: Building Your Business Skills

Responding to Competition (See page 32 of the textbook.)
Activity Overview:
This activity asks students to analyze the impact of price changes on
demand and ways to offset competition.
Time Limit:
45 minutes
What to Do:
1. Divide students into groups of four or five and ask them to turn to
page 32 in the textbook. Tell groups to follow the instructions for
the Building Your Business Skills exercise. (30 minutes)
2. Reassemble the class as a whole and discuss the Follow-Up
Questions. Each group should share input. See page 32 for potential
answers to the Follow-Up Questions. (15 minutes)
Don’t Forget:
This may also be completed as a homework assignment.
Wrap-Up:
A number of variables can affect supply and demand, not just price, and
the lowest price is not always the best option to use in the marketplace.
Remind students that different types of services and products, other than
those mentioned in the exercise, would greatly alter their discussion.

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In-Class Self-Check

Answers:
7. b
8. c
9. False

■■■
TEACHING TIP
One great way to end the
chapter discussion is to play
a form of Jeopardy with the
class. Divide the class into
teams and ask teams quick
questions about the chapter
material. The winning team
continues to get the first
chance to answer until they
lose to another team. You,
the instructor, serve as
timekeeper, scorer, and
moderator.

In-Class Activity: Chapter Case Discussion

What Goes Up . . . Can Go Even Higher!/Hitting the Peak Don’t Forget:
Remind students that the chapter case starts at the beginning of the
Activity Overview:
chapter and concludes at the end.
For a quick review, consider breaking your class into small groups to
address the case discussion questions at the end of the chapter. Wrap-Up:
Wrap up the discussion by reinforcing any chapter concepts you feel
Time Limit:
students still don’t understand.
20 minutes
What to Do:
1. Divide students into five groups and ask them to read the chapter
case. Assign each group one of the Questions for Discussion on
page 28. (10 minutes)
2. After the groups have completed their respective answers, reassem-
ble the class and discuss each question. (10 minutes)

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Answers to Questions for Discussion
1. Capital, physical resources, labor, and, increasingly, information
resources and entrepreneurs are the factors of production in the
petroleum industry.
2. Historically, petroleum production has been an unregulated natural
monopoly in which the supply curve can be vertical. A company
strives to maximize profits by producing at the level where marginal
revenue equals marginal cost. However, increasing demand has
spurred increased production and development of alternative forms of
energy. When demand increases and production (supply) remains the
same, costs increase. When production is increased or new alterna-
tives are brought to market, supply increases, and if demand remains
the same, prices decrease. However, historically in the United States,
demand has always maintained step with or outpaced supply, thus
encouraging ever-increasing prices.
28 Business Essentials | Chapter 1: The U.S. Business Environment
3. An increase in energy prices, for example, will result in decreased
spending power for both consumers and businesses. Widespread
energy price increases will affect the cost of industrial production
and, thus, the prices of both business and consumer goods. If more
money is being spent on energy than on products, the GNP may ulti-
mately be affected. If prices of other commodities rise as a result, the
unemployment rate could also be affected in the long run.
4. Answers will vary, but encourage students to explore how capitalism
seeks to maximize profits through the most efficient use of given
production factors while adhering to the law of supply and demand.
Sometimes companies go beyond the set rules to attain a maximum
benefit, thus encouraging more regulation.
5. Answers will vary, but encourage students to explore how supply
and demand will be affected with their proposed alternatives.
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Answers to Questions and Exercises
Questions for Review
1. The five factors of production are labor, capital, entrepreneurs, physi-
cal resources, and information resources. All five factors are crucial;
however, their relative importance depends on the product and indus-
try. In the software development business, for example, labor and
information resources are especially important, but the business
couldn’t survive without capital and physical resources (computers),
and it wouldn’t have been launched without an entrepreneur.
2. The curve that describes the range of possible prices that a buyer will
pay for a range of quantities demanded by a buyer is the demand
curve. The curve that describes the range of price that a seller can
charge for a range of quantities supplied by the seller is called the
supply curve. The point where the demand curve and the supply
curve intersect is the point at which the intentions of buyers and
sellers coincide. The price at this point is the equilibrium price.
3. GDP measures the total value of all goods and services produced
in a year by a nation’s economy through domestic factors of produc-
tion. Real GDP is GDP adjusted for inflation. Both measure annual
performance of a given economy.
4. Inflation is both good and bad because it can lead to a spiral of rising
wages chasing rising prices, which decreases the standard of living. It is
good because at moderate levels, it can signal the beginning of a period
of economic growth. Monetary policy, particularly the ability to adjust
interest rates, is government’s most powerful tool to control inflation.
Questions for Analysis
5. The failure of communism has led to an increase in the number of
mixed and market economies. Answers will vary as to what would
cause a resurgence of planned economies, but factors might include
a failure of capitalism to effectively distribute society’s resources, or
an unbearable level of crime and corruption.
6. Answers will vary; however, the Pokémon craze provides an example
of a shortage followed by a surplus. A few years ago, Pokémon trad-
ing cards were selling for 10 to 20 times their list price. Later,
Chapter 1: The U.S. Business Environment | Business Essentials
Pokémon cards were selling for less than half price as stores attempted
to clear out their inventory. Any clearance sale illustrates the concept of
surplus driving down prices. The classic example of a shortage is
scalpers selling event tickets at inflated prices. In both cases, the mar-
ket eventually determines a price at which all the supply can be sold.
7. Answers will vary, but all students should include prices paid for con-
sumer goods and the availability of desirable jobs. Managers are affected
by inflation because it tends to drive up wages and by unemployment
because it affects their ability to find workers. Also, both inflation and
unemployment affect consumer and industrial demand, which play a key
role in management.
8. A nation’s economic growth can be measured through its aggregate
output, resulting standard of living, GDP, and productivity. Economic
stability, on the other hand, refers to the condition in which the
amount of money available in an economic system and the quantity
of goods and services produced in it are growing at the same rate.
Application Exercises
9. Answers will vary, but students should focus on the criteria for
competition discussed in the chapter. For example, businesses
with direct competitors operate within monopolistic competition;
products are often differentiated by style, color, quality levels, and
brand names. If only a few sellers of a product exist, as in an oli-
gopoly, products will be quite similar, and a change in price by one
seller will mean a change in price by all sellers.
10. Answers will vary, but students should recognize that demand and
supply affect every business in some way. Typical factors of produc-
tion cited in this answer include capital, labor, physical resources,
information resources, and entrepreneurship. Economic indicators
affect businesses differently at different times, depending on whether
they are manufacturers or retailers. Ultimately, price increases in an
industry will affect the buying power of consumers, which will affect
how much is produced and purchased.
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Answers to Building Your Business Skills Follow-Up Questions
1. Suppliers who provide extras, such as e-mail, Web pages, chat
rooms, instant messaging, news, weather, travel directions, shopping
networks, and so on will be able to pump up demand. In order to pro-
vide these additional services, suppliers will need to invest in the nec-
essary technology, equipment, and staff. They would do well to focus
their spending on those extras that would create loyalty, making it
more difficult for consumers to change services based on price alone.
32 Business Essentials | Chapter 1: The U.S. Business Environment
2. No, not when competition is based on speed of delivery, quality of
goods or services, wide selection, personalized service, premium
image, or some other nonmonetary factor.
3. It may be difficult to speculate. Answers will vary; however, if ser-
vices offered are differentiated in ways suggested, monopolistic
competition will likely prevail.
EBERMC01_0132287587.QXD 10/25/06 5:19 PM Page 33

Looking for the

Business Plan Project?
The business plan project for
this textbook falls at the end
of each of the six main sec-
tions of the book. However,
if you’d like to assign the
first part of the business plan
project at this time, see
Chapter 4, page 137, for
the complete assignment
instructions and information.

Answers to Exercising Your Ethics: Individual Exercise Questions to Address

1. Since prescription drugs are essentially the same regardless of the
supplier, the market has determined an equilibrium price at which
supply and demand are equal. Competition keeps the price in check.
One of the pharmacies could raise its prices only if it offered addi-
tional services that differentiated its products enough that consumers
were willing to pay extra. However, the owner of the competing
pharmacy needs to keep in mind that if he raises prices too high,
other suppliers will find a way into the market.
2. The success of our economic system is based on competition and
choice. By engaging in collusion, the pharmacy owners are inhibiting
the fair operation of the market. This is especially ugly, given that for
many people prescription drugs are crucial to achieving or maintain-
ing health. By colluding, the pharmacy owners would be forcing the
weakest residents of the town to pay exorbitant prices, at least in the
short term.
3. Answers will vary, but students should at least acknowledge the ethi-
cal issues. For example, engaging in collusion inhibits the fair opera-
tion of the market. One competitor is dealing unfairly with another,
and the innocent consumers are paying for it.

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

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Answers to Video Case Discussion Questions
Video Running Time: Question Completion Time:
10:26 30 minutes
Answers to Discussion Questions
1. When a U.S. company pays more for human resources and other
factors of production, its costs are higher than those of competitors
operating outside the United States. In turn, higher costs generally lead
to higher prices, which could put the U.S. company at a competitive
disadvantage in world markets, where non-U.S. companies with lower
costs may be able to sell their products for lower prices.
2. The equilibrium price is likely to differ from country to country,
depending on the different market conditions affecting the amount
demanded and the amount supplied. Encourage students to discuss
the demand and supply situation of a particular product in countries
with which they are familiar.
3. A small U.S. company may have relatively easy access to capital from
various sources (including friends and family, venture capital firms,
banks, and other sources). It may also have easy access to physical
resources, such as computers, facilities, and raw materials, depending
on the nature of its operations and the goods or services it produces.
U.S. companies generally have access to information resources through
the Internet and other information technology. Access to labor is usually
fairly easy, although access to specialized labor may vary depending on
the company’s location and nature of its business. Finally, access to
entrepreneurial talent is relatively easy, given the drive, creativity, and
Chapter 1: The U.S. Business Environment | Business Essentials
imagination of many people who start or buy small businesses. With
regard to the company’s competitive position, cost savings is always a
factor when resources are easily accessible. In addition, proximity to
resources provides quicker production times and, thus, quicker delivery
to the market.
4. More competitors are likely to enter a market when demand exceeds
supply. This is because the competitors will perceive opportunities to
satisfy a market need based on strong demand for a particular prod-
uct. Prices are likely to be higher when demand exceeds supply,
attracting more competitors to the market. On the other hand, if sup-
ply exceeded demand, competitors would be competing for a portion
of the smaller demand market.
5. Two arguments in favor of having the tax-supported U.S. Department
of Commerce help U.S. companies do business abroad include:
(1) companies that generate profits in other countries are likely to buy
some inputs, such as physical resources, in the United States,
thereby improving the U.S. economy and creating or keeping jobs
in the United States; (2) companies that sell abroad help create or
enlarge the market for certain products, raising demand and paving
the way for other U.S. companies to enter those markets. Two oppos-
ing arguments include (1) U.S. jobs may be lost if the companies
move production and/or administrative offices to other countries;
(2) the tax money should be used instead to encourage non-U.S.
companies to do business in the United States, creating jobs and
boosting the domestic economy.
35
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LIST OF IN-CLASS ACTIVITIES

AUTHOR’S CHOICE IN-CLASS ACTIVITIES

Instructor’s
Edition Page
Activity Description Time Limit Reference

Ice-Breaker: What Do You Students assess their level of knowledge about business 25 min. 4
Know About Business? and set their own learning goals for the class.
Small-Group Discussion: Students consider how parts of the external environment 25 min. 6
Scanning the Environment affect businesses and industries.
Up for Debate: Comparing Teams of students discuss types of economic systems. 30 min. 11
Economic Systems
Supplemental Case Study Students read a supplemental case study and discuss 30 min. 13, 1-9
Discussion: Supply and how it applies to chapter concepts.
Demand for Pollution Permits
Video Time: Helping Businesses Students watch and discuss the Video Running 18, 35
Do Business: U.S. Department chapter video. Time: 10:26
of Commerce Discussion
Time: 30 min.
Up for Debate: Is Teams of students discuss competition and the role it plays 45 min. 19
Competition Good? in our economic system.
Business Accountability Students read an article about outsourcing and then 30 min. 20, 1-8
Handout Discussion: discuss whether it is a detriment to social
The Geography of Jobs responsibility.
Exercising Your Ethics Teams of students examine some of the ethical issues 35 min. 24, 34
Team Exercise: Making that can surface when making business decisions.
the Right Decision
Building Your Business Skills: Teams of students analyze the impact of price changes 45 min. 26, 32
Responding to Competition on demand and ways to offset competition.
Chapter Case Small groups address the case discussion questions at 20 min. 27–28
Discussion: What Goes the end of the chapter.
Up . . . Can Go Even
Higher!/Hitting the Peak

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LIST OF HOMEWORK ASSIGNMENTS

AUTHOR’S CHOICE HOMEWORK ASSIGNMENTS

At-Home Instructor’s Edition

Activity Description Deliverable Completion Time Page Reference

Exercising Your Ethics: Students examine how Answers to the exercise 30 min. 14, 33
Individual Exercise: ethical issues can arise Questions to Address
Prescribing a Dose of from increased pricing when
Competitive Medicine competition is low.
Application Exercise 9: Students visit a shopping mall A brief paper detailing their 1 to 1.5 hours 19, 31
Let’s Go Shopping! and determine what degree responses to the activity
of competition stores face
in their immediate environment.
Application Students interview a business A brief paper detailing the 1 to 2 hours 26, 31
Exercise 10: Interview owner or senior manager, outcome of the interview
a Manager finding out how demand and
supply affect the business,
what essential factors of
production are most important,
and the impact of economic
indicators on the business.

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DETAILED LECTURE OUTLINE

CHAPTER 1: THE U.S. BUSINESS ENVIRONMENT
I. The Concept of Business and the Concept of Profit (Use PowerPoint 1-4, 1-5, 1-6)
A business is an organization that provides goods and services to earn profits.
Profits are the difference between a business’ revenues and expenses.
A. Consumer Choice and Demand
In a capitalistic system like that of the United States, consumers have freedom of
choice. In turn, businesses must take into account consumer demand in their pursuit
of profits.
B. Opportunity and Enterprise
Unmet consumer demands provide promising opportunities for potential business
success.
C. The Benefits of Business
Businesses produce most of the goods and services consumed, employ most working
people, create new innovations, and provide opportunities for new businesses to
serve as suppliers. Further, businesses contribute to the quality of life and the stan-
dard of living.
II. The External Environments of Business (Use PowerPoint 1-7 through 1-13)
The external environment consists of everything outside an organization’s bound-
aries that might affect it. There are six major dimensions of the external environment.
A. Domestic Business Environment
The domestic business environment refers to the environment in which a firm
conducts its operations and derives its revenues.
B. Global Business Environment
The global business environment refers to the international forces that affect a busi-
ness; various factors affect the global environment at both the general and immediate
levels.
C. Technological Environment
The technological environment generally includes all the ways by which firms
create value for their constituents; technology includes human knowledge, work
methods, physical equipment, electronics and telecommunications, and various
processing systems.
D. Political-Legal Environment
The political-legal environment reflects the relationship between business and
government, usually in the form of government regulation of business.
E. Sociocultural Environment
The sociocultural environment includes the customs, mores, values, and
demographic characteristics of the society in which an organization functions.
F. Economic Environment
The economic environment refers to relevant conditions that exist in the economic
system in which a company operates.
III. Economic Systems (Use PowerPoint 1-14 through 1-17)
An economic system is a nation’s system for allocating its resources among its
individual citizens and organizations.
A. Factors of Production
A basic difference between economic systems is the way in which they manage their
resources, known as factors of production.
1. Labor. The human resource element in businesses, labor includes the physical and
intellectual contributions people make while engaged in economic production.
2. Capital. The financial resources needed to operate an enterprise are known as
capital.

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3. Entrepreneurs. An entrepreneur is an individual who accepts the risks and

opportunities entailed by creating and operating a new business.
4. Physical Resources. The tangible things that organizations use to conduct their
business are physical resources.
5. Information Resources. Businesses rely on information resources, such as
market forecasts, the specialized knowledge of people, and economic data.
B. Types of Economic Systems
Economic systems vary, depending on how the factors of production are managed.
1. Planned Economies. These systems rely on partial or total government control
of the factors of production. With communism—as currently operating in North
Korea and the People’s Republic of China—all sources of production are owned
and operated by the government.
2. Market Economies. Producers and consumers control production and allocation
decisions through supply and demand. The political basis of a market economy is
capitalism, which allows the private ownership of the factors of production and
encourages entrepreneurship by offering profits as incentives.
3. Mixed Market Economies. This type of economy features characteristics of both
planned and market economies; many countries are moving from planned systems
to mixed market systems through privatization, which involves the transforma-
tion of government-controlled businesses into privately owned enterprises. In the
partially planned system called socialism, the government owns and operates
selected major industries.
IV. The Economics of Market Systems (Use PowerPoint 1-18 through 1-26)
Market systems allow businesses the flexibility to decide what to produce, how much
to produce, and what price to charge; customers are a driving force in market systems
since they decide what to buy and at what price. Demand and supply are the predom-
inant forces that guide decisions about what to buy and what to sell.
A. Demand and Supply in a Market Economy
Billions of exchanges take place every day between businesses and individuals;
between businesses; and among individuals, businesses, and governments.
Exchanges conducted in one area often affect exchanges elsewhere.
1. The Laws of Demand and Supply. Demand is the willingness and ability of buyers
to purchase a product; supply is the willingness and ability of producers to offer a
good or service for sale. The law of demand states that buyers will purchase more
of a product as its price drops; the law of supply states that producers will offer
more of a product for sale as its price increases.
a. The Demand and Supply Schedule. The demand and supply schedule indicates
how much of a product will be sold at various prices.
b. Demand and Supply Curves. A demand curve shows how many products will
be demanded at different prices; a supply curve shows how many products will
be supplied at various prices. The point at which the curves intersect is the
market price (or equilibrium price).
c. Surpluses and Shortages. With a surplus, the quantity supplied exceeds the quan-
tity demanded; quantity demanded exceeds quantity supplied with a shortage.
B. Private Enterprise and Competition in a Market Economy
Individuals pursue their own interests with minimal government restriction in a
private enterprise system; such a system requires private property rights, freedom
of choice, profits, and competition. Competition occurs when two or more busi-
nesses vie for the same resources or customers.
1. Degrees of Competition. Economists have identified four degrees of competition
in a private enterprise system.

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a. Perfect Competition. Many small firms exist in an industry; no single firm is

powerful enough to influence price.
b. Monopolistic Competition. Few sellers but many buyers exist, so buyers focus on
numerous differentiation strategies, such as brand names, design, and advertising.
c. Oligopoly. An industry has only a handful of sellers; market entry is difficult
because large capital investment is needed.
d. Monopoly. An industry or market has only one producer; that producer enjoys
complete control over price.
V. Economic Indicators (Use PowerPoint 1.27 and on)
Economic indicators are statistics that show whether an economic system is strength-
ening, weakening, or remaining stable.
A. Economic Growth, Aggregate Output, and Standard of Living
Aggregate output is the total quantity of goods and services produced by an economic
system during a given period. Simply put, an increase in aggregate output is growth.
Standard of living refers to the total quantity and quality of goods and services that
can be purchased with the currency used in an economic system; standard of living
increases when the quantity of goods and services increases, and the economic system
provides more of the goods and services people want.
1. Gross Domestic Product (GDP). The GDP is the total value of all goods and
services produced within a given period through domestic factors of production;
GDP is a measurement of aggregate output. Gross national product (GNP)
refers to the total value of all goods and services produced by a national economy
within a given period regardless of where the factors of production are located.
a. Real Growth Rate. Real growth depends on output increasing at a faster rate
than population; the real growth rate of the U.S. economic system seems quite
healthy and the U.S. standard of living should be increasing.
b. GDP per Capita. GDP per capita means GDP per person. GDP divided by total
population = GDP per capita.
c. Real GDP. Real GDP means that GDP has been adjusted to account for
changes in currency values and price changes.
d. Purchasing Power Parity. Purchasing power parity is the principle that
exchange rates are set so that the prices of similar products in different coun-
tries are about the same.
2. Productivity. Productivity compares how much a system produces with the
resources needed to produce it; increases in productivity yield increases in the
standard of living.
a. Balance of Trade. A country’s balance of trade is the economic value of all
the products that it exports minus the economic value of its imported products.
A positive balance results when the value of a country’s exports is greater than
its imports; that is, more money is flowing into the country as a result of export-
ing. A negative balance results when a country imports more than it exports.
b. National Debt. A country’s national debt is the amount of money that is owed
to creditors.
B. Economic Stability
Stability results when the amount of money available in an economic system and the
quantity of goods and services produced in it are growing at about the same rate.
1. Inflation. Inflation occurs when widespread price increases plague an economic
system; the amount of money in the economic system exceeds the amount of
actual output. Inflation can be measured by the consumer price index (CPI),
which weighs prices of typical products purchased by consumers living in urban
areas. Inflation rate = Change in price index/Initial price index ⫻ 100.

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2. Unemployment. Unemployment is the level of joblessness among people actively

seeking work in an economic system; when unemployment is high, a surplus of
available workers exists. Unemployment is sometimes a symptom of a recession,
when aggregate output declines, or of a depression, a prolonged and deep recession.
C. Managing the U.S. Economy
The government manages the U.S. economic system through both fiscal and mone-
tary policies. Fiscal policies manage the collection and spending of revenues; tax
increases can function as fiscal policies. Monetary policies focus on controlling the
size of the nation’s money supply; the government can influence banks to lend
money and can influence the supply of money by manipulating interest rates.
Stabilization policy is made up of both fiscal and monetary policies; the goal is to
smooth out fluctuations in output and unemployment and to stabilize prices.

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CHAPTER OUTLINE
CHAPTER 1: THE U.S. BUSINESS ENVIRONMENT IV. The Economics of Market Systems
Opening Case: What Goes Up . . . Can Go Even A. Demand and Supply in a Market Economy
Higher!/Hitting the Peak 1. The Laws of Demand and Supply
a. The Demand and Supply Schedule
I. The Concept of Business and the Concept b. Demand and Supply Curves
of Profit
c. Surpluses and Shortages
A. Consumer Choice and Demand
B. Private Enterprise and Competition
B. Opportunity and Enterprise in a Market Economy
C. The Benefits of Business 1. Degrees of Competition
II. The External Environments of Business a. Perfect Competition
A. Domestic Business Environment b. Monopolistic Competition
B. Global Business Environment c. Oligopoly
C. Technological Environment d. Monopoly
D. Political-Legal Environment V. Economic Indicators
E. Sociocultural Environment A. Economic Growth, Aggregate Output, and Standard
of Living
F. Economic Environment
1. Gross Domestic Product (GDP)
III. Economic Systems a. Real Growth Rate
A. Factors of Production b. GDP per Capita
1. Labor c. Real GDF
2. Capital d. Purchasing Power Parity
3. Entrepreneurs 2. Productivity
4. Physical Resources a. Balance of Trade
5. Information Resources b. National Debt
B. Types of Economic Systems B. Economic Stability
1. Planned Economies 1. Inflation
2. Market Economies 2. Unemployment
3. Mixed Market Economies C. Managing the U.S. Economy

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HANDOUT: BUSINESS ACCOUNTABILITY
THE GEOGRAPHY OF JOBS
Businesses are accountable to numerous external constituents.
Also, managers sometimes have to optimize their decision
making when dealing with conflicting interests. Nowhere is
this more visible than in the current debate over the continued
outsourcing of jobs to foreign employees.
Outsourcing is not a recent phenomenon. For years
manufacturers have subcontracted their labor to low-cost
factories in developing nations. Nike and Reebok, for
instance, outsource the production of all their athletic shoes
to factories in Southeast Asia. And many other companies
have similar practices. In general, the jobs that have been
outsourced have been relatively low-skill in nature. While
labor and other observers have long been aware of this prac-
tice, business leaders have been able to argue with some con-
viction that this practice would lead to more high-quality
jobs in the United States.
In recent years, a major change in outsourcing has
occurred as more companies have started to outsource skilled
and/or white-collar jobs to other countries. Companies like
Microsoft find that highly skilled software programmers in
places like India can perform as well as their U.S. counterparts
for about a quarter of the salary costs. Boeing is now having
some of its engineering work done abroad. And some experts
are beginning to visualize how many other basic services,
ranging from income tax preparation to financial analysis to
medical records interpretation, can also be exported.
Chapter 1: The U.S. Business Environment | Business Essentials
How big is the problem? Experts project that 3.3 million
jobs will be exported from the United States by 2015, and that
another 14 million jobs have been identified as being “at risk.”
Many experts also agree that while outsourcing may be bad
for various specific individuals, in the long term it will be
good for the country as a whole. And besides, as one CEO
argues, “If your competitor is sending jobs overseas, you’re
almost forced to do the same.”
That sentiment sums up the debate nicely. On the one
hand, if businesses are accountable to their shareholders, they
are obligated to keep their costs as low as possible and to
remain competitive in their respective marketplaces. From
this perspective, then, they should outsource whenever and
wherever feasible. On the other hand, to the extent that busi-
nesses have a social obligation and an obligation to their cur-
rent workers, they must take into account the social and
human cost of displacing U.S. workers. So which side is
right? This is a case in which there is no simple answer, and
what is right or wrong is in the eye of the beholder.
Discussion Questions
(a) What are the pros and cons of outsourcing in order to
keep prices down?
(b) What are the pros and cons of reducing dependence on
outsourcing in order to better fulfill social obligations
toward stakeholders?
1-8
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HANDOUT: SUPPLEMENTAL CASE STUDY
SUPPLY AND DEMAND FOR POLLUTION PERMITS
When Julie Hardwick, a manager for a division of BP Amoco
PLC, checks her computer every day, she’s not looking for
information about her company’s stock. She’s finding out
whether other divisions of BP are looking to trade their per-
mits to emit pollutants that cause global warming. Units that
have leftover permits after meeting their emission-reduction
quotas are allowed to sell them to other units that need them to
cover shortfalls in their own efforts to meet their goals. The
company reports that it is saving millions of dollars through
creative reductions in fuel consumption, prompted by the use
of permits. Other firms in the developed countries are using
permits as well, hoping to reduce pollution before their
governments make it mandatory.
Some believe that trading permits between companies or
across national borders will prove difficult because of the wide
variety of sources of pollution and the problem of maintaining
fairness in the use of the permits. For instance, should heavy
polluters be made to clean up pollution instead of being able
to trade for permits to continue to pollute? Some corporations
already use an alternative called offset rights, which are posi-
tive steps that offset the pollution a company can’t easily
1-9 Business Essentials | Chapter 1: The U.S. Business Environment
control. Some typical offsets include the use of clean energy,
such as solar or wind power, and the planting or protecting of
forests and fields that absorb carbon dioxide, a major pollu-
tant. The Nature Conservancy has used several offset deals to
fund rain forest preservation projects, for example.
Others believe that trading can succeed, and that measur-
ing each country’s use of fossil fuels will provide a usable
gauge of how many permits it should be allowed. Once rules
for trading have been established, the cost of complying with
pollution controls will drop, and opportunities to come up
with creative new sources of energy will proliferate.
Source: Janet Ginsberg, “Letting the Free Market Clear the Air,”
Business Week, November 6, 2000, 200, 204.
Discussion Questions
(a) How does trading in pollution permits at BP demon-
strate the laws of demand and supply?
(b) What would influence the demand for pollution permits
if they were traded globally?
(c) Should companies be allowed to trade permits? Should
countries be allowed to? Why or why not?
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Notes: