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BUSN INTRODUCTION TO BUSINESS
11
MARCE KELLY
Santa Monica College
CHUCK WILLIAMS
Butler University
Australia • Brazil • Mexico • Singapore • United Kingdom • United States
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Printed in the United States of America

Print Number: 01 Print Year: 2017
KELLY/WILLIAMS
BUSN 11 BRIEF CONTENTS
PA R T 1 T H E B U S I N E S S E N V I R O N M E N T
1 Business Now: Change Is the Only Constant 2
2 Economics: The Framework for Business 18
3 The World Marketplace: Business without Borders 38
4 Business Ethics and Social Responsibility: Doing Well by
Doing Good 58
5 Business Communication: Creating and Delivering Messages
that Matter 76
PA R T 2 C R E AT I N G A B U S I N E S S
6 Business Formation: Choosing the Form That Fits 92
7 Small Business and Entrepreneurship: Economic Rocket Fuel 112
PA R T 3 F IN A N C ING A B U S INE S S
8 Accounting: Decision Making by the Numbers 128
9 Finance: Acquiring and Using Funds to Maximize Value 148
10 Financial Markets: Allocating Financial Resources 170
PA R T 4 M A R K E T I N G A B U S I N E S S
11 Marketing: Building Profitable Customer Connections 190
12 Product and Promotion: Creating and Communicating Value 208
13 Distribution and Pricing: Right Product, Right Person, Right Place,
Right Price 236
PA R T 5 M A N A G I N G A B U S I N E S S
14 Management, Motivation, and Leadership: Bringing Business
to Life 252
15 Human Resource Management: Building a Top-Quality Workforce 270
16 Managing Information and Technology: Finding New Ways to Learn
and Link 286
17 Operations Management: Putting It All Together 306
Personal Finance Appendix 328

Endnotes 341
Glossary 362
Index 379
Tear-out cards
Online Appendices
Matelly/Getty Images
Appendix 1: Labor Unions and Collective Bargaining

Appendix 2: Business Law
Brief Contents iii
CONTENTS
3 The World Marketplace:

Letter to Students ix
Business without Borders 38

Part 1 3-1 An Unprecedented Opportunity 38
THE BUSINESS 3-2 Key Reasons for International Trade

3-3 Global Trade: Taking Measure 43
42
ENVIRONMENT 3-4 Seizing the Opportunity: Strategies for Reaching

Global Markets 44
3-5 Barriers to International Trade 47
3-6 Free Trade: The Movement Gains Momentum 51
4 Business Ethics and Social

Rawpixel.com/Shutterstock
Responsibility: Doing Well

by Doing Good 58
4-1 Ethics and Social Responsibility: A Close
Relationship 58
4-2 Business Ethics: Not an Oxymoron 60
1 Business Now: Change 4-3 Ethics: Multiple Touchpoints 61

4-4 Defining Social Responsibility: Making the World a
Is the Only Constant 2 Better Place 64
1-1 Business Now: Moving at Breakneck Speed 2 4-5 Ethics and Social Responsibility in the Global Arena:
1-2 The History of Business: Putting It All in Context 6 A House of Mirrors? 71
1-3 Nonprofits and the Economy: The Business of 4-6 Monitoring Ethics and Social Responsibility: Who Is
Doing Good 7 Minding the Store? 73
1-4 Factors of Production: The Basic Building Blocks 7
1-5 The Business Environment: The Context for Success 8 5 Business Communication:
1-6 Business and You: Making It Personal 16 Creating and Delivering
Messages that Matter 76
2 Economics: The Framework 5-1 Excellent Communication Skills: Your Invisible
Advantage 76
for Business 18
5-2 Nonverbal Communication: Beyond the Words 78
2-1 Economics: Navigating a Crisis 18
5-3 Choose the Right Channel: A Rich Array of Options 80
2-2 Managing the Economy Through Fiscal
and Monetary Policy 21 5-4 Pick the Right Words: Is That Car Pre-Loved or Just
Plain Used?! 80
2-3 Capitalism: The Free Market System 26
5-5 Write High-Impact Messages: Breaking through
2-4 Planned Economies: Socialism and Communism 30 the Clutter 84
2-5 Mixed Economies: The Story of the Future 31 5-6 Create and Deliver Successful Verbal Presentations:
2-6 Evaluating Economic Performance: What’s Working? 33 Hook ’Em and Reel ’Em In! 87
iv Contents
Part 2 Part 3
CREATING A BUSINESS FINANCING A BUSINESS
Monkey Business Images/Shutterstock
Uber Images/Shutterstock
6 Business Formation: Choosing 8 Accounting: Decision Making
the Form That Fits 92 by the Numbers 128
6-1 Business Ownership Options: The Big Four 92 8-1 Accounting: Who Needs It—and Who Does It? 128
6-2 Advantages and Disadvantages of Sole 8-2 Financial Accounting: Intended for Those on the
Proprietorships 95 Outside Looking In 130
6-3 Partnerships: Two Heads (and Bankrolls) Can Be Better 8-3 Financial Statements: Read All About Us 132
Than One 96 8-4 Interpreting Financial Statements:
6-4 Corporations: The Advantages and Disadvantages Digging Beneath the Surface 138
of Being an Artificial Person 98 8-5 Budgeting: Planning for Accountability 141
6-5 The Limited Liability Company: The New Kid 8-6 Inside Intelligence: The Role of Managerial
on the Block 104 Accounting 143
6-6 Franchising: Proven Methods for a Price 106
7 Small Business and 9 Finance: Acquiring and Using

Funds to Maximize Value 148
Entrepreneurship: Economic 9-1 What Motivates Financial Decisions? 148
Rocket Fuel 112 9-2 Identifying Financial Needs: Evaluation
7-1 Launching a New Venture: What’s in It for Me? 112 and Planning 151
7-2 The Entrepreneur: A Distinctive Profile 114 9-3 Finding Funds: What Are the Options? 155
7-3 Finding the Money: Funding Options 9-4 Leverage and Capital Structure: How Much Debt Is
for Small Businesses 117 Too Much Debt? 159
7-4 Opportunities and Threats for Small Business: A Two- 9-5 Acquiring and Managing Current Assets 163
Sided Coin 119 9-6 Capital Budgeting: In It for the Long Haul 165
7-5 Launch Options: Reviewing the Pros and Cons 121
7-6 Small Business and the Economy: An Outsized
Impact 124
Contents v
10 Financial Markets: Allocating 11-3 Marketing Strategy: Where Are You Going, and How
Will You Get There? 195
Financial Resources 170 11-4 Customer Behavior: Decisions, Decisions,
Decisions! 201
10-1 The Role of Financial Markets and Their Key
Players 170 11-5 Marketing Research: So What Do They
Really Think? 202
10-2 Regulating Financial Markets to Protect Investors
and Improve Stability 173 11-6 Social Responsibility and Technology: A Major
Marketing Shift 205
10-3 Investing in Financial Securities: What Are the
Options? 176
10-4 Issuing and Trading Securities: The Primary
and Secondary Markets 180
12 Product and Promotion:
Creating and Communicating
10-5 Personal Investing 183
Value 208
10-6 Keeping Tabs on the Market 187
12-1 Product: It’s Probably More Than You Thought 208
12-2 Product Differentiation and Planning: A Meaningful
Difference 212
Part 4 12-3 Innovation and the Product Life Cycle: Nuts, Bolts, and
a Spark of Brilliance 216
MARKETING A BUSINESS 12-4 Promotion: Influencing Consumer Decisions 220
12-5 A Meaningful Message: Finding the Big Idea 221
12-6 The Promotional Mix: Communicating the
Big Idea 223
13 Distribution and Pricing: Right

Product, Right Person, Right
Ryan Pierse/Getty Images
Place, Right Price 236

13-1 Distribution: Getting Your Product to Your
Customer 236
13-2 Wholesalers: Sorting Out the Options 239
13-3 Retailers: The Consumer Connection 240
11 Marketing: Building Profitable 13-4 Physical Distribution: Planes, Trains, and Much,
Much More 243
Customer Connections 190 13-5 Pricing Objectives and Strategies: A High-Stakes
11-1 Marketing: Getting Value by Giving Value 190 Game 245
11-2 The Customer: Front and Center 194 13-6 Pricing in Practice: A Real-World Approach 247
vi Contents
15-4 Human Resource Planning: Drawing
Part 5 the Map 274
15-5 Legal Issues: HR and the Long Arm
MANAGING A BUSINESS of the Law 283
16 Managing Information and

Technology: Finding New
Ways to Learn and Link 286
16-1 Information Technology: Explosive Change 286
Monkey Business Images/Shutterstock

16-2 Cloud Computing: The Sky’s the Limit! 292
16-3 Information Technology and Decision Making:
A Crucial Aid 293
16-4 Information Technology and the World
of E-Commerce 295
16-5 Challenges and Concerns Arising from
New Technologies 299
14 Management, Motivation, 17 Operations Management:

and Leadership: Bringing Putting It All Together 306
Business to Life 252 17-1 Operations Management: Producing Value
in a Changing Environment 306
14-1 Bringing Resources to Life 252
17-2 What Do Operations Managers Do? 310
14-2 Motivation: Lighting the Fire 255
17-3 Implications of a Service-Based Economy:
14-3 Planning: Figuring Out Where to Go and How Responding to Different Challenges 316
to Get There 259
17-4 The Technology of Operations 317
14-4 Organizing: Fitting Together the Puzzle Pieces 263
17-5 Focus on Quality 319
14-5 Leadership: Directing and Inspiring 267
17-6 The Move to Be Lean and Green: Cutting Cost
14-6 Controlling: Making Sure It All Works 268 and Cutting Waste 323
15 Human Resource Personal Finance Appendix 328

Endnotes 341
Management: Building a
Top-Quality Workforce 270 Glossary 362
Index 379
15-1 Human Resource Management: Bringing Business
to Life 270 Tear-out cards
15-2 Human Resource Management Challenges: Major
Online Appendices
Hurdles 271 Appendix 1: Labor Unions and Collective
Bargaining
15-3 Human Resources Managers: Corporate Black
Sheep? 273 Appendix 2: Business Law
Contents vii
With love and
appreciation
to Kathy,
the best friend imaginable!
—Marce Kelly
To Jenny,
the book is done, let’s play!
—Chuck Williams
LETTER TO STUDENTS
The idea for this book—a whole new way of learning— part of the package. You can access a rich variety of study
began with students like you across the country. We paid tools via computer or iPad—the choice is yours.
attention to students who wanted to learn about business We did one other thing we hope you’ll like. We paid a
without slogging through endless pages of dry text. We lis- lot of attention to students’ concerns about the high price
tened to students who wanted to sit through class without of college textbooks. We made it our mission to ensure that
craving a triple espresso. We responded to students who our package not only meets your needs but does so with-
wanted to use their favorite gadgets to prepare for tests. out busting your budget!
So we are confident that BUSN will meet your needs. This innovative, student-focused package was devel-
The short, lively text covers all the key concepts without oped by the authors—Marce Kelly and Chuck Williams—
the fluff. The examples are relevant and engaging, and the and the experienced Cengage Learning publishers. The
visual style makes the book fun to read. But the text is only Cengage team contributed a deep understanding of stu-
dents and professors across the nation, and the authors
brought years of teaching and business experience.
Marce Kelly, who earned her MBA from UCLA’s Anderson
School of Management, spent the first 14 years of her ca-
reer in marketing, building brands for Neutrogena and
The Walt Disney Corporation. But her true love is teaching,
so in 2000 she accepted a full-time teaching p osition at
Santa Monica College. Professor Kelly has received seven
Outstanding Instructor awards from the International
Education Center and has been named four times to

Who’s Who Among American Teachers.
Chuck Williams’ interests include employee recruitment
and turnover, performance appraisal, and employee train-
ing and goal setting. Most recently, he was the Dean of
Butler University’s College of Business. He has taught in ex-
ecutive development programs at Oklahoma State Univer-
Marce Kelly sity, the University of Oklahoma, Texas Christian University,
and the University of the Pacific. Dr. Williams was honored
by TCU’s M.J. Neeley School of Business with the undergrad-
uate Outstanding Faculty Teaching Award, was a recipient
of TCU’s Dean’s Teaching Award, and was TCU’s nominee for
the U.S. Professor of the Year competition sponsored by the
Carnegie Foundation for the Advancement of Teaching. He
has written three other textbooks: Management, Effective
Management: A Multimedia Approach, and MGMT.
We would appreciate any comments or sugges-
tions you want to offer about this package. You can reach
© Brent Smith, Butler University
Chuck Williams at [email protected], and Marce Kelly

at [email protected]. We wish you a fun, positive,
productive term, and look forward to your feedback!
Chuck Williams
Letter to Students ix
1 Business Now:
Change Is the Only Constant
LEARNING OBJECTIVES
After studying this chapter, you will be able to:
1-1 Define business and discuss the role of business in the economy
Remember to visit
Rawpixel.com/Shutterstock.com
1-2 Explain the evolution of modern business
1-3 Discuss the role of nonprofit organizations in the economy

PAGE 17
for additional
1-4 Outline the core factors of production and how they affect the economy
STUDY TOOLS
1-5 Describe today’s business environment and discuss each key dimension
1-6 Explain how current business trends might affect your career choices
1-1 BUSINESS NOW: MOVING AT BREAKNECK SPEED

Day by day, the business world simply spins faster. Industries rise—and
sometimes fall—in the course of a few short months. Technologies forge
instant connections across the globe. Powerful new trends surface and
submerge, sometimes within less than a year. In this fast-paced, fluid
environment, change is the only constant. According to Charles Darwin,
it is not the strongest of the species that survive, nor the most intelligent,
but the one most responsive to change. And so it is with business.
Successful firms lean forward and embrace the change. and consumers alike in today’s dynamic business environ-
They seek the opportunities and avoid the pitfalls. They ment. Digging deeper into current culture, several leading-
carefully evaluate risks. They completely understand their edge trendspotting experts have recently identified an
market, and they adhere to ethical practices. Their core goal: array of key trends likely to shape the world’s economies
to generate long-term profits by delivering unsurpassed as we close out the turbulent teenage years of the twenty-
value to their customers. first century. A few highlights:
value The relationship between Over the past decade, ■■ Instant Skills: Remember how the rise of Ins-
the price of a good or a service the explosive growth in so-
and the benefits that it offers its tagram made all of us into pseudo professional
cial media has played a piv- photographers? Well, Trendwatching.com pre-
customers.
otal new role for businesses dicts that hundreds of millions of status-hungry
2 PART ONE: The Business Environment
“T
You
he chief
miss 100%
business
of the
of the
shots you
“consumers will care less about what they have or American
don’t take.”
people is business”
buy and more about what they can do or create”—
— CWAYA L VNI NE GC OR EO TL ZI DKGY.E
seeking services that eliminate time and learning
A M E R I C AHNO CP KR E YS I SD TE AN RT
barriers to their creation of professional quality
output.
■■ Fun and Games: Research suggests that the aver-
age human attention span, currently only slightly of humor. For instance, Slack allows users to create
longer than that of a goldfish, is decreasing rapidly. custom emojis using colleagues’ faces and displays
Not surprisingly, capturing and retaining the atten- error messages such as, “We’ve seen this problem
tion of customers, employees, and investors is more clear up with a restart of your browser, a solution
challenging than ever. In spite of declining attention which we suggest to you now only with great regret
spans, creating a sense of fun is gaining momentum and self-loathing.”
as an effective tool for engaging audiences. It’s fairly ■■ Robolove: Everyone knows that robots can save
easy to understand why—wouldn’t you rather do time and money—and who doesn’t like efficiency?
something fun than something boring? Swedish But do we like the robots themselves? Many people
amusement park Liseberg recently released an app imagine a bleak robotic future with robocops out of
to accompany its new Helix roller coaster. Attendees control and robo-workers putting human workers
standing in line for the attraction could use the app to out of work. That may well happen, but Trendwatch-
play a free Helix-themed game, and every 15 minutes, ing.com predicts that many of us will thoroughly
the player with the highest score got a pass to skip enjoy our early contacts with robots. For instance,
the line. This strategy was not only creative, but it also Düsseldorf Airport in Germany recently unveiled the
increased visitors’ fun! Similarly, workplace messaging world’s first robotic parking valet. Customers leave
app Slack became one of the fastest growing business their car, and a robot picks it up and positions the
applications in history due, in part, to its playful sense vehicle in one of 249 dedicated spaces. The system
CHAPTER 1: Business Now: Change Is the Only Constant 3

connects to the airport’s flight database, meaning ■■ I will vote. Always.
that customers find their vehicle ready and waiting ■■ I will force myself to finally make a phone call.
for them upon their return. Hard to get more conve-
nient than that—and the robotic valet doesn’t even ■■ If my first-born is a boy, I promise not to name him
expect a tip!1 Uber.
Joking aside, millennials now represent both

■■ Virtual Experience Economy: the largest customer and the largest employee
Anyone who was nearly plowed segment of the population, which means that
over in 2016 by someone with his or successful businesses must take them seriously.
her head down—totally engrossed As baby boomers continue to retire in record
in the search for an elusive Pokemon numbers, businesses will soon begin to face a
(or maybe you were the one plowing severe leadership gap. Training and develop-
people down)—knows just how im- ing millennials to fill that gap will be a critical
mersive a virtual or augmented reality success factor for many businesses in the very
experience can be. Trendspotting near future.
experts at Trendwatching.com boldly ■■ Preparing for Generation Z: As the
project that “digital experiences will last millennials move through college
quickly come to carry a status- and enter the workforce, Genera-
weight equal to ‘real’ experiences, tion Z—comprised of people born
if not become more sought-after between 1996 and 2011—is rolling
and prized.” Take music concerts in right behind them. Generation Z,
for example. The holographic also known as the Digital Native genera-
“performance” of rapper Tupac’s tion, outnumbers millennials by one million
Shakur at the 2012 Coachella music people. In fact, more than a quarter of Amer-
festival (15 years after the artist’s death) ica’s population belongs to this generation.
garnered more headlines than any other Although it would be easy to characterize
concert that year. A holographic Michael Generation Z as an exaggerated version of
Jackson made similar waves two years later millennials, it wouldn’t do them justice—
at the 2014 Billboard Awards. China, an early they are fundamentally different. Mil-
developer and adopter of virtual reality lennials shaped the Internet, but digital
games and shopping programs, seems Kjpargeter/Shutterstock.com natives can’t remember a world without
poised to become a leading-edge player in it. The defining event of generation Z
the virtual experience economy.2 was the Great Recession, which means that many
of them don’t trust business. While their millennial
■■ Taking Millennials Seriously: The millennial counterparts were glad to be “walking billboards”
generation—comprised of people born between for trendy brands such as Hollister, Abercrombie &
1980 and 1995—likely includes many of the stu- Fitch, and Supreme, the most stylish digital natives
dents reading this text. Millennials have been at are likely to sport vintage clothing from thrift stores.
the butt end of a lot of jokes about their outsized Digital natives don’t feel entitled to a great job when
sense of entitlement, large number of meaningless they graduate college; they think they’ll be lucky
trophies, and “addiction” to their cell phones. The to get one. In the meantime, they are saving their
Los Angeles Times, for example, recently published a money, only spending when a business offers them
“Millennial Pledge” that it suggested all millennials value. Digital natives use their considerable techni-
affirm before they qualify for actual adulthood. A cal prowess to seek out the best possible values;
few excerpts: no-frills, only-pay-for-what-you-use businesses are
■■ Just once, I will try eating without texting. highly appealing to them. Similar to millennials,
digital natives tend to be extremely tolerant and
■■ I will not consider the cilantro on my taco to be a inclusive, with little understanding of or room in their
vegetable. lives for bigotry of any kind. They also tend to have
■■ Each year, I will pen at least one thank-you note very short attention spans (8 seconds on average),
using what’s left of my cursive writing skills. in part because they juggle their lives among an
O O P S! W H AT W E R E T H E Y T H I N K I N G ?
Not Every Dumb Move Is an Utter Disaster…
In the wake of disastrous mistakes and outrageous international airport. Fortunately, there were no collisions—
mismanagement across our economy, it might be the worst harm done was to Siri’s reputation as a navigator.4
tough to remember that some mistakes are actually pretty ▪▪ Geography lessons needed: In 2016, Coca-Cola sent
amusing. Several examples might help remind you. a promotional tweet featuring an outdated map of Russia.
▪▪ Bad fabric, not fat thighs: In early 2013, Lululemon Offended Russian patriots responded with pictures of
Athletica was forced to recall its popular (and expensive) yoga themselves pouring the soft drink into toilets with the
pants, because many women found them utterly see-through. hashtag #BanCocaCola.5
Later in the year, the founder of the firm was forced to resign ▪▪ Thank you, Captain Obvious! A surprising number of
after blaming the problem on women with fat thighs who firms just can’t seem to credit their customers with even
rubbed the fabric too sheer with multiple uses.3 basic intelligence. Marks & Spencer’s labeled one of their
▪▪ Apple angst: In a rare display of new product devel- Bread Puddings, PRODUCT WILL BE HOT AFTER HEATING.
opment weakness, Apple released its Maps program before On a Sears hairdryer, DO NOT USE WHILE SLEEPING. And
it was ready for the Big Time. Mostly harmless, the program on packaging for a Rowenta iron, DO NOT IRON CLOTHES
baffled millions of trusting consumers. But in Fairbanks, ON BODY. While these warnings most likely have a legal
Alaska, it directed hapless users onto active runways of the backstory, it’s hard for a reasonable consumer not to see
them as silly goofs.6
average of five different screens. In sum, millennials As the economy has finally emerged from the Great Re-
approached adulthood hoping to be discovered, cession, and unemployment and financial ruin are less of a
while digital natives approach adulthood planning threat, fewer people have been motivated to risk starting
to work for success.7 new businesses.8 People who do risk their time, money,
and other resources to start and manage a business are
1-1a Business Basics: Some Key called entrepreneurs.
Interestingly, as entrepreneurs create wealth for them-
Definitions selves, they produce a ripple effect that enriches everyone
While you can certainly recognize a business when you around them. For instance, if your new website becomes
see one, more formal definitions may help as you read the next Facebook, who will benefit? Clearly, you will. And
through this book. A business is any organization or you’ll probably spend at least some of that money enrich-
activity that provides goods and services in an effort to ing your local clubs, clothing stores, and car dealerships.
earn a Profit is the financial reward that comes from But others will benefit, too,
starting and running a business. More specifically, profit including your members, business Any organization or
is the money that a business earns in sales (or revenue), advertisers on your site and activity that provides goods and
minus expenses such as the cost of goods and the cost the staff who support them, services in an effort to earn a profit.
of salaries. But clearly, not every business earns a profit contractors who build your profit The money that a business
all the time. When a business brings in less money than facilities, and the govern- earns in sales (or revenue), minus
it needs to cover expenses, it incurs a loss. If you launch ment that collects your expenses, such as the cost of goods
and the cost of salaries. Revenue 2
a music label, for instance, you’ll need to pay your artists, taxes. The impact of one Expenses 5 Profit (or Loss).
lease a studio, and purchase equipment, among other ex- successful entrepreneur can
penses. If your label generates hits, you’ll earn more than extend to the far reaches of loss When a business incurs
expenses that are greater than its
enough to cover all your expenses and make yourself the economy. In fact, fast- revenue.
rich. But a series of duds could leave you holding the bag. growing new firms generate
Just the possibility of earning a profit provides a powerful about 10% of all new jobs entrepreneurs People who
risk their time, money, and other
incentive for people of all backgrounds to launch their in any given year.9 Multiply resources to start and manage a
own enterprises. But unfortunately, the rate of new busi- the impact by thousands business.
ness start-ups has been decreasing over the past few years. of entrepreneurs—each
working in his or her own self-interest—and you can see
how the profit motive benefits virtually everyone.
From a bigger-picture perspective, business drives up
the standard of living for people worldwide, contribut-
ing to a higher quality of life. Businesses not only provide
the products and services that people enjoy but also pro-
Hulton Collection/Hulton Archive/Getty Images

vide the jobs that people need. Beyond the obvious, busi-
ness contributes to society through innovation—think cars,
TVs, and tablet computers. Business also helps raise the stan-
dard of living through taxes, which the government spends
on projects that range from streetlights to environmental
cleanup. Socially responsible firms contribute even more
by actively advocating for the well-being of the society that
feeds their success.
Henry Ford’s assembly line began operation

1-2 THE HISTORY OF BUSINESS: on December 1, 1913. Initially developed for
the Model T, this new production system
PUTTING IT ALL IN CONTEXT allowed manufacturers of all kinds to
output products like never before.
You may be surprised to learn that—unlike today—
business hasn’t always been focused on what the customer
wants. In fact, business in the United States has changed
rather dramatically over the past 200–300 years. Most busi- laws to regulate business and protect consumers and
ness historians divide the history of American business workers, creating more balance in the economy.
into five distinct eras, which overlap during the periods of ■■ The Production Era: In the early part of the 1900s,
transition: major businesses focused on further refining the
■■ The Industrial Revolution: Technological ad- production process and creating greater efficien-
vances fueled a period of rapid industrialization in cies. Jobs became even more specialized, increasing
America from the mid-1700s to the mid-1800s. As productivity and lowering costs and prices. In 1913,
mass production took hold, huge factories replaced Henry Ford introduced the assembly line, which
skilled artisan workshops. The factories hired large quickly became standard across major manufactur-
numbers of semiskilled workers who specialized in a ing industries. With managers focused on efficiency,
limited number of tasks. The result was unprecedent- the customer was an afterthought. But when
ed production efficiency but also a loss of individual customers tightened their belts during the Great
ownership and personal pride in the production Depression and World War II, businesses took notice.
process. The “hard sell” emerged: a ggressive persuasion de-
signed to separate consumers from their cash.
■■ The Entrepreneurship Era: Building on the foun-
dation of the Industrial Revolution, large-scale entre- ■■ The Marketing Era: After World War II, the balance
preneurs emerged in the second half of the 1800s, of power shifted away from producers and toward
building business empires. These industrial titans cre- consumers, flooding the market with enticing choices.
ated enormous wealth, raising the overall standard of To differentiate themselves from their competitors, busi-
living across the country. But many also dominated nesses began to develop brands, or distinctive identities,
their markets, forcing out to help consumers understand the differences among
competitors, manipulat- various products. The marketing concept emerged: a
standard of living The consumer focus that permeates successful companies
quality and quantity of goods and
ing prices, exploiting
workers, and decimating in every department, at every level. This approach con-
services available to a population.
the environment. Toward tinues to influence business decisions today as global
quality of life The overall competition heats up to unprecedented levels.
sense of well-being experienced the end of the 1800s, the
by either an individual or a group. government stepped into ■■ The Relationship Era: Building on the marketing
the business realm, passing concept, today, leading-edge firms look beyond each
The Connection Economy
Success today no longer requires building great things, although 2. Trust. Finding ways to connect and create value only works
there will always be big rewards for building the best new things when the players share basic trust.
(see Apple, Tesla, and Virgin, among other success stories). 3. Permission. When you offer ideas to people who give you
According to industry leaders, the most successful firms of the permission to do so, it’s a resource. Without that permission,
present rely on connection—either connecting buyers and sellers it’s an annoyance. What’s new and significant is that the
or connecting consumers and information. Uber, the largest permission must be earned, and not requested.
ride-sharing company, owns no vehicles but connects people to 4. The exchange of ideas. True value emerges when people
rides and drivers to customers. Airbnb, the largest provider of exchange ideas deliberately and with established purpose
accommodations, owns no real estate but connects people to (at a meet-up or conference, for instance).
lodging. Kickstarter and Indiegogo, both giants of crowdfunding,
Godin also emphases the importance of generosity and art.
have no money to invest but may soon surpass traditional venture
No one wants to connect with a person who always takes but
capital firms by connecting investors to opportunities. According
never gives back. You must add value to all of your interactions
to entrepreneur and author Seth Godin, the connection economy
to make the connection worthwhile. Art is important, according
works best when the following four conditions are met:
to Godin, because forward-thinking people are looking for the
1. Coordination. Without coordination, connections can’t extraordinary. Traditional systems are inherently boring and
happen. In fact, the most significant business opportunities unremarkable. In the connection economy, people are seeking
may lie in areas that currently appear chaotic. the remarkable—the things that are truly worthy of remark.10
immediate transaction with a customer and aim to goods and services and contribute in significant ways to
build long-term relationships. Satisfied customers our region’s economic stability and growth.” Nationwide,
can become advocates for a business, spreading the nonprofits employ about one in ten workers, accounting
word with more speed and credibility than even the for more paid workers than the entire construction indus-
best promotional campaign. And cultivating current try and more than the finance, insurance, and real-estate
customers is more profitable than constantly seeking sectors combined. And nonprofit museums, schools, the-
new ones. One key tool is technology. Using the Web aters, and orchestras have become economic magnets
and other digital resources, businesses gather detailed for many communities, drawing additional investment.11
information about their customers and use these data
to serve them better, “bringing a level of customer
centricity that we’ve never seen before,” according to
1-4 FACTORS OF PRODUCTION:
Graeme Noseworthy, marketing director for IBM. THE BASIC BUILDING BLOCKS
Both businesses and nonprofits rely on factors of
1-3 NONPROFITS AND THE production—four fundamental resources—to achieve
their objectives. Some combination of these factors is cru-
ECONOMY: THE BUSINESS cial for an economic system to work and create wealth. As
OF DOING GOOD you read through the factors,
keep in mind that they don’t
Nonprofit organizations play a critical role in the economy, come free of charge. Human nonprofits Business-like
resources, for instance, re- establishments that employ people
often working hand in hand with businesses to improve and produce goods and services with
the quality of life in our society. Focusing on areas such as quire wages, while entrepre-
the fundamental goal of contributing
health, human services, education, art, religion, and cul- neurs need a profit incentive. to the community rather than
ture, nonprofits are business-like establishments, but ■■ Natural Resources: generating financial gain.
their primary goals do not include profits. Chuck Bean, This factor includes all factors of production Four
executive director of the Nonprofit Roundtable, explains: inputs that offer value fundamental elements—natural
“By definition, nonprofits are not in the business of finan- in their natural state, resources, capital, human resources,
and entrepreneurship—that
cial gain. We’re in the business of doing good. However, such as land, fresh wa- businesses need to achieve their
nonprofits are still businesses in every other sense— ter, wind, and mineral objectives.
they employ people, they take in revenue, they produce deposits. Most natural
■■ Entrepreneurship: Entrepreneurs are people
who take the risk of launching and operating their
own businesses, largely in response to the profit
incentive. They tend to see opportunities where
others don’t, and they use their own resources
to capitalize on that potential. Entrepreneurial
enterprises can kick-start an economy, creating a
tidal wave of opportunity by harnessing the other
factors of production. But entrepreneurs don’t
thrive in an environment that doesn’t support
them. The key ingredient is economic freedom:
freedom of choice (whom to hire, for instance, or
kojoku/Shutterstock.com
what to produce), freedom from excess regulation,
and freedom from too much taxation. Protection
from corruption and unfair competition is another
entrepreneurial “must.”
Many businesses work with nonprofits to Clearly, all of these factors must be in place for an
boost their impact in the community. economy to thrive. But which factor is most important?
One way to answer that question is to examine cur-
rent economies around the world. Russia and China are
resources must be extracted, purified, or harnessed; both rich in natural resources and human resources, and
people cannot actually create them. (Note that ag- both countries have a solid level of capital (growing in
ricultural products, which people do create through China, and deteriorating in Russia). Yet, neither country
planting and tending, are not a natural resource.) The is wealthy; both rank relatively low in terms of gross
value of all natural resources tends to rise with high national income per person. The missing ingredient
demand, low supply, or both. seems to be entrepreneurship, limited in Russia largely
■■ Capital: This factor includes machines, tools, build- through corruption and in China through government
ings, information, and technology—the synthetic interference and taxes. Contrast those examples with,
resources that a business needs to produce goods or say, Hong Kong. The population is small, and the natural
services. Computers and telecommunications capa- resources are severely limited, yet Hong Kong has con-
bility have become pivotal elements of capital across sistently ranked among the richest regions in Asia. The
a surprising range of industries, from financial reason: operating for many years under the British legal
services to professional sports. You may be surprised and economic system, the government actively encour-
to learn that in this context, capital does not include aged entrepreneurship, which fueled the creation of
money, but, clearly, businesses use money to acquire, wealth. Recognizing the potential of entrepreneurship,
maintain, and upgrade their capital. China has recently done more to relax regulations and
■■ Human Resources: This factor encompasses the support free enterprise. The result has been tremendous
physical, intellectual, and creative contributions growth, which may yet bring China into the ranks of the
of everyone who works within an economy. As wealthier nations.12
technology replaces a growing number of manual
labor jobs, education and motivation have become
increasingly important to human resource develop-
1-5 THE BUSINESS ENVIRONMENT:
ment. Given the impor- THE CONTEXT FOR SUCCESS
tance of knowledge to
business environment The workforce effectiveness, No business operates in a vacuum. Outside factors play
setting in which business operates. some business experts, a vital role in determining whether each individual busi-
The five key components are such as management ness succeeds or fails. Likewise, the broader business
economic environment, competitive
guru Peter Drucker, break environment can make the critical difference in
environment, technological
environment, social environment, out knowledge as its own whether an overall economy thrives or disintegrates. The
and global environment. category, separate from five key dimensions of the business environment are
human resources. the economic environment, the competitive environment,
the technological environment, the social environment,
and the global environment, as shown in Exhibit 1.1. “A banker is a fellow who lends
you his umbrella when the sun
1-5a The Economic Environment is shining, but wants it back the
In September 2008, the U.S. economy plunged into minute it begins to rain.”
the worst fiscal crisis since the Great Depression. Huge, — M A R K T WA I N ,
venerable financial institutions faced collapse, spurring AMERICAN AUTHOR
unprecedented bailouts by the federal government
and the Federal Reserve. By the end of the year, the
stock market had lost more than a third of its value, and
on renewable energy—to position the U.S. economy for
11.1 million Americans were out of work. Housing prices
stability and growth in the decades to come. (The price,
fell precipitously, and foreclosure rates reached record
of course, was more national debt, which will ultimately
levels. As fear swept through the banking industry, neither
counterbalance some of the benefits.) Although the U.S.
businesses nor individuals could borrow money to meet
economic recovery continued through 2015, the entire
their needs. Economic turmoil in the United States spread
world economy began to stagger in early 2016 as eco-
quickly around the world, fueling a global economic crisis.
nomic instability in China caused frightening ripples
The U.S. economy continued to stagger through 2010
around the globe.
and 2011, with unemployment remaining stubbornly
The government also takes active steps on an on-
high, although signs of recovery began to emerge in late
going basis to reduce the risks of starting and running a
2012, and certainly in 2013. The Federal Reserve—the U.S.
business. The result: free enterprise and fair competition
central banking system—took unprecedented, proac-
flourish. Despite the economic crisis, research suggests
tive steps to encourage an economic turnaround. And
that most budding entrepreneurs still plan to launch their
President Barack Obama spearheaded passage of a mas-
firms in the next three years. One government policy that
sive economic stimulus package, designed not only to
supports business is the relatively low federal tax rate, both
create jobs but also to build infrastructure—with a focus
for individuals and businesses. A number of states—from
Alabama to Nevada—make their local economies even
more appealing by providing special tax deals to attract
Exhibit 1.1 new firms. The federal government also runs entire agen-
cies that support business, such as the Small Business
The Business Environment Administration. Other branches of the government, such
as the Federal Trade Commission, actively promote fair
competitive practices, which help give every enterprise a
chance to succeed.
Ec iron
En
on m
t
v
en
nm l
Another key element of the U.S. economic environ-

vi ocia
om en
i c t
S
ro
ment is legislation that supports enforceable contracts.

En
For instance, if you contract a baker to supply your health

food company with 10,000 pounds of raw kale chips at
BUSINESS $1.00 per pound, that firm must comply or face legal con-
sequences. The firm can’t wait until a day before delivery
tive t G and jack up the price to $10.00 per pound because you
peti Env lobal
Com ronmen iron
Env
i men
t would almost certainly respond with a successful lawsuit.
Many U.S. businesspeople take enforceable contracts for
Envir onme nt
Technological
granted, but in a number of developing countries—which

offer some of today’s largest business opportunities—
contracts are often not enforceable (at least not in day-
to-day practice).
Corruption also affects the economic environment.
Each dimension of the business environment affects both individual A low level of corruption and bribery dramatically re-
businesses and the economy in general. duces the risks of running a business by ensuring that
everyone plays by the same set of rules—rules that are
clearly visible to every player. Fortunately, U.S. laws keep
EXHIBIT 1.2 2 016 GLOBAL BRAND CHAMPIONS
domestic corruption mostly—but not completely—at
bay. Other ethical lapses, such as shady accounting, can
AND THE ONES TO WATCH,
also increase the cost of doing business for everyone
INTERBRAND
involved. But in the wake of corporate ethical meltdowns Percentage
such as Enron, the federal government has passed Most Valuable Biggest Gainer Growth
tough-minded new regulations to increase corporate
Apple Facebook 148%
accountability. If the new legislation effectively curbs
illegal and unethical practices, every business will have a Google Amazon 133%
fair chance at success. Coca-Cola Lego 125%
Upcoming chapters on economics and ethics will ad-
dress these economic challenges and their significance in Microsoft Nissan 122%
more depth. But bottom line, we have reason for cautious Toyota Adobe 121%
(some would say very cautious) optimism. The American
IBM Starbucks 120%
economy has a proven track record of flexibility and resil-
ience, which will surely help us navigate this crisis and un- Samsung Zara 119%
cover new opportunities. Amazon Mercedes-Benz 118%
1-5b The Competitive Environment Mercedes-Benz Porsche 118%
GE Hermes 117%
As global competition intensifies yet further, leading-
edge companies have focused on customer satisfaction Source: Best Global Brands 2016, Interbrand, http://interbrand.com/best-brands/best-global-brands/2016
/ranking/, accessed January 23, 2017.
like never before. The goal: to develop long-term, mu-
tually beneficial relationships with customers. Getting
Interbrand highlights brands that use imagination and
current customers to buy more of your product is a lot
innovation to deliver value to their customers. Exhibit 1.2
less expensive than convincing potential customers to
shows the winners and the up-and-comers in the race
try your product for the first time. And if you transform
to capture the hearts, minds, and dollars of consumers
your current customers into loyal advocates—vocal
around the world.
promoters of your product or service—they’ll get those
new customers for you more effectively than any ad- Leading Edge versus Bleeding Edge Speed-to-
vertising or discount program. Companies such as Ama- market—the rate at which a firm transforms concepts into
zon, Coca-Cola, and Northwestern Mutual life insurance actual products—can be another key source of competi-
lead their industries in customer satisfaction, which tive advantage. And the pace of change just keeps getting
translates into higher profits even when the competi- faster. In this tumultuous setting, companies that stay ahead
tion is tough.13 of the pack often enjoy a distinct advantage. But keep in
Customer satisfaction comes in large part from deliv- mind that there’s a difference between leading edge and
ering unsurpassed value. The best measure of value is the bleeding edge. Bleeding-edge firms launch products that
size of the gap between product benefits and price. A prod- fail because they’re too far ahead of the market. During
uct has value when its benefits to the customer are equal the late 1990s, for example, in the heart of the dot.com
to or greater than the price that the customer pays. Keep in boom, Webvan, a grocery delivery service, launched to
mind that the cheapest product doesn’t necessarily repre- huge fanfare. But the firm went bankrupt just a few years
sent the best value. If a 99-cent toy from Big Lots breaks in later in 2001, partly because customers weren’t yet ready to
a day, customers may be willing to pay several dollars more dump traditional grocery stores in favor of cyber-shopping.
for a similar toy from somewhere else. But if that 99-cent Leading-edge firms, on the other hand, offer products just
toy lasts all year, customers will be delighted by the value as the market becomes ready to embrace them.14
and will likely encourage their friends and family to shop at Apple provides an excellent example of leading edge.
Big Lots. The key to value is quality, and virtually all success- You may be surprised to learn that Apple—which controls
ful firms offer top-quality about 70%15 of the digital music player market—did not
products relative to their offer the first MP3 player. Instead, it surveyed the existing
speed-to-market The rate at
which a new product moves from direct competitors. market to help develop a new product, the iPod, which
conception to commercialization. A recent ranking was far superior in terms of design and ease-of-use. But
study by consulting firm Apple didn’t stop with one successful MP3 player. Racing
role in both employee sat-
isfaction and strong stock
performance.17
Finding and hold-
ing the best talent will
likely become a crucial
competitive issue in the
next decade as the baby
boom generation begins
to retire. The 500 largest
U.S. companies anticipate
losing about half of their
senior managers over
the next five to six years.
Since January 1, 2011, ap-
proximately 10,000 baby
Nadalina/Shutterstock.com
boomers began to turn 65
(the traditional retirement
age) every day, and the
Pew Research Center an-
ticipates that this trend
will continue for 19 years.
Workforce Magazine named American Express as its top company Replacing the skills and
for HR management in 2016. Google, Accenture, USAA, and AT&T experience these workers
rounded out the rest of the top five. bring to their jobs may
be tough: baby boomers
include about 77 million
to stay ahead, they soon introduced the colorful, more af- people, while the generation that follows includes only
fordable iPod mini. And before sales reached their peak, 46 million. Firms that cultivate human resources now will
they launched the iPod Nano, which essentially pulled the find themselves better able to compete as the market for
rug from under the blockbuster iPod mini just a few short top talent tightens.18 However, job market contraction may
months before the holiday selling season. Why? If they not be an issue, because a growing number of baby boom-
hadn’t done it, someone else may well have done it instead. ers opt to either postpone retirement or continue working
And Apple is almost maniacally focused on maintaining its part-time during retirement, in the face of inadequate
competitive lead.16 financial resources.
1-5c The Workforce Advantage 1-5d The Technological Environment

Employees can contribute another key dimension to a firm’s The broad definition of business technology includes
competitive edge. Recent research suggests that investing any tools that businesses can use to become more effi-
in worker satisfaction yields tangible, bottom-line results. cient and effective. But more specifically, in today’s world,
The researchers evaluated the stock price of Fortune maga- business technology usually refers to computers, telecom-
zine’s annual list of the “100 Best Companies to Work for in munications, and other digital tools. Over the past few
America” to the S&P 500, which reflects the overall market. decades, the impact of digital technology on business
From 2009 to 2014, cumulative stock market returns for the has been utterly transfor-
“100 Best” were up 1205%, compared to 1121% for the mative. New industries
S&P 500. On an annualized basis, this translates to a return of have emerged, while oth- business technology Any
about 120.4% per year for the “100 Best,” and about 114.1% ers have disappeared. And tools—especially computers,
telecommunications, and other
per year for the S&P 500 over the same time period. While some fields—such as travel,
digital products—that businesses
the critical difference in performance most likely stemmed banking, and music—have can use to become more efficient
from employee satisfaction, other factors—such as excellent changed dramatically. Even and effective.
product and superb top management—likely also played a in categories with relatively
The Uber Syndrome
No doubt about it—senior executives make the most money in are the global economic environment and geopolitical tensions.
business. They also have the most to worry about, however. In a The global economy is more integrated today than ever before,
2015 study of senior executives, one participant described her and a crisis within any major country can quickly spread around
firm’s biggest worry as “the ‘Uber Syndrome’—where a competitor the world. We’ve seen this time and time again in recent years,
with a completely different business model enters your industry from the Grecian debt crisis of 2009 to the Chinese stock market
and flattens you.” In today’s tumultuous business world, this plunge of early 2016. Dennis Nally, global chairman of PwC
concern is completely understandable. Analyzing the research, Consultancy, explains why geopolitical tension is a threat to
Fortune magazine editor Geoff Colvin noticed that this year, for the global economy: “[If] you’ve got hot spots anywhere in
the first time, most business leaders expected new competitors the world, it creates instability . . . business leaders hate
to be outsiders. Business leaders know they must disrupt—or be instability.” The latest PwC survey of CEOs shows that among
disrupted. The solution to this impending threat, according to American CEOs in particular, there is widespread recognition
the small cohort of highly successful firms that the research dubs that a strong corporate purpose is vital in the digital world.
“torchbearers,” seems to be to focus more on customers and less In addition, CEOs are focused on building stronger trust with
on competitors. When a disruptive player makes its move, loyal employees and customers alike. So if your life goal is to reach
customers are less likely to defect and destroy your business. the top rung at a major corporation, don’t expect to leave your
worries behind. It would seem that the higher you go, the more
According to a separate survey of CEOs released in 2016, the
pressing the worries.19
two largest concerns among chief executives around the world
unchanged products, companies have leveraged technol- networks with suppliers and distributors to create a more
ogy to streamline production and create new efficiencies. seamless flow of goods and services.20
Examples include new processes such as computerized Alternative selling strategies thrive on the Internet,
billing, digital animation, and robotic manufacturing. For giving rise to a more individualized buying experience. If
fast-moving firms, the technological environment repre- you’ve browsed seller reviews on eBay or received shop-
sents a rich source of competitive advantage, but it clearly ping recommendations from Amazon, you’ll have a sense
can be a major threat for companies that are slow to adopt of how personal web marketing can feel. Online technology
or to integrate new approaches. also allows leading-edge firms to offer customized products
The creation of the World Wide Web has trans- at prices that are comparable to standardized products. On
formed not only business but also people’s lives. Anyone, the Burton website, for instance, customers can “custom
anywhere, anytime can use the Web to send and receive build” professional quality “Custom X” snowboards while sit-
images and data (as long as access is available). One result ting at home in their pajamas. Nike offers a similar service for
is the rise of e-commerce or online sales, which allow NikeID shoes, clothing, and gear.
businesses to tap into a worldwide community of potential As technology continues to evolve at breakneck
customers. In the wake of speed, the scope of change—both in everyday life and
the global economic crisis, business operations—is almost unimaginable. In this envi-
World Wide Web The service e-commerce has slowed ronment, companies that welcome change and manage it
that allows computer users to easily from the breakneck 20%+ well will clearly be the winners.
access and share information on the
Internet in the form of text, graphics,
growth rates of the past five
video, apps, and animation. years, but even so, analysts 1-5e The Social Environment
predict that solid growth
e-commerce Business The social environment embodies the values, attitudes, cus-
will continue. Business-to-
transactions conducted online, toms, and beliefs shared by groups of people. It also covers
typically via the Internet. business selling comprises demographics, or the measurable characteristics of a
the vast majority of total
demographics The population. Demographic factors include population size and
e-commerce sales (and an
measurable characteristics of a density and specific traits such as age, gender, race, educa-
population. Demographic factors even larger share of the tion, and income. Clearly, given all these influences, the social
include population size and density, profits). A growing num-
as well as specific traits such as age, environment changes dramatically from country to country.
ber of businesses have also
gender, and race. And a nation as diverse as the United States features a num-
connected their digital ber of different social environments. Rather than cover the
Do You Do It?
More than 1,000 times a minute, someone in America bites into a Jack in the
Box taco—one of more than a million Jack in the Box tacos sold every day.
With such numbers, you might think that Jack unearthed the secret to
the perfect-tasting taco . . . but you’d be wrong. Jack’s taco has been
variously described by its fans as:
▪▪ “a wet envelope of cat food”
▪▪ “vile and amazing”
▪▪ “disgusting and delectable”
m
▪▪ “repulsive and yet irresistible” ck
.co
o
r st
t te
So why does the Jack in the Box taco do so well? Food writer Sophie Egan offers three S hu
o/
ot
possible reasons. First, it’s cheap. At two for $.99 it’s a real deal. Second, it’s fried. Ph
r st
As much as we like the idea of fruits and vegetables—fried stuff tastes good! Finally, it’s a Hu
metaphorical flip of the bird to the “food police,” who many believe are attempting to exert
too much control over our rights to eat whatever we please. 21
full spectrum, this section focuses on the broad social trends So what does this mean for business? Growing eth-
that have the strongest impact on American business. Under- nic populations offer robust profit potential for firms that
standing the various dimensions of the social environment is pursue them. For instance, a number of major brands
crucial since successful businesses must offer goods and ser- such as Coca-Cola, General Mills, Ford, Nestlé, Purina,
vices that respond to it. and Walmart have invested heavily in the Hispanic mar-
ket over the past five years. Recognizing the potential of
Diversity While the American population has al- the Hispanic market, Japanese automakers have begun
ways included an array of different cultures, the United actively targeting Latino customers. Because of these ef-
States has become more ethnically diverse in recent forts, Hispanic customers are reportedly 15% more likely
years. Caucasians continue to represent the largest chunk than any other group to buy a Japanese-made car. Toyota,
of the population at 63%, but according to the direc-
tor of the U.S. Census Bureau, “The next half century
marks a turning point in continuing trends—the U.S. will be-
come a plurality nation, where the non-Hispanic white pop- Exhibit 1.3
ulation remains the largest single group, but no group is in
U.S. Population Estimates
the majority.” This will probably happen in about 2043. The
Hispanic and Asian populations will probably continue to 80
2014
grow faster than any other ethnic groups. By 2060, nearly one 70
62.2% 2060
% of Population
60
in three U.S. residents will be Hispanic, up from about one in
50
six today. This will happen even though the overwhelming 43.6%
40
wave of immigration from Mexico to the United States has 28.6%
30
stalled and even begun to reverse in the past few years; nev- 17.4%
20
ertheless, among Mexican-born people worldwide, one in 12.4%13.0%
9.1%
10 5.2% 4.9%
ten currently lives in the United States.22 Exhibit 1.3 demon- 2.0%
0
strates the shifting population breakdown. White Black Hispanic Asian Two or
But the national statistics are somewhat misleading, more races
Population Group
since ethnic groups tend to cluster together. African Ameri-
cans, for example, currently comprise about 37% of the Source: Projections of the Size and Composition of the U.S. Population: 2014 to 2060, U.S. Census Bureau,
March 2015, https://www.census.gov/content/dam/Census/library/publications/2015/demo /p25-1143
Mississippi population, Asians comprise about 39% of the .pdf, accessed May 9, 2016.
Hawaii population, and Hispanics comprise about 47% of

the New Mexico population.23
in particular, has been the top-selling brand among Lati- number of people in China over the age of 60 will dou-
nos for more than ten years thanks to its highly targeted ble, leading to a nation where the retired will outnumber
marketing. Targeting an ethnic market can also yield the entire population of Western Europe. There are cur-
remarkable results for products that cross over into main- rently six workers to every retiree, but China’s one-child
stream culture. Music mogul and entrepreneur Russell policy suggests that the number of people providing for
Simmons, for example, initially targeted his music and the old will rapidly collapse.27
clothing to the African American market, but his success The rapidly aging population brings opportunities
quickly spilled over to mainstream culture, helping him and threats for business. Companies in fields that cater
build a hip-hop empire.24 to the elderly—such as healthcare, pharmaceuticals,
Growing diversity also affects the workforce. A di- travel, recreation, and financial management—will clearly
verse staff—one that reflects an increasingly diverse boom. But creative companies in other fields will capi-
marketplace—can yield a powerful competitive ad- talize on the trend as well by reimagining their current
vantage in terms of both innovation and ability to products to serve older clients. Possibilities include books
reach a broad customer base. From global behemoths, and movies—maybe even video games—with mature
such as Coca-Cola and Verizon, to local corner stores, characters; low-impact fitness programs such as water
companies have taken proactive steps to hire and nur- aerobics; and cell phones and PDAs with more readable
ture people from a broad range of backgrounds. And screens. Again, the potential payoff of age diversity is
that doesn’t just reflect racial or ethnic roots. True diver- clear: companies with older employees are more likely to
sity also includes differences in gender, age, religion, and find innovative ways to reach the aging consumer market.
nationality, among other areas. Leading-edge firms have But the larger numbers of retired people also pose sig-
also taken proactive steps to train their entire workforce nificant threats to overall business success. With a smaller
to manage diversity for top performance.25 labor pool, companies will need to compete even harder
Effectively managing diversity should only become for top talent, driving up recruitment and payroll costs.
easier as time goes by. Multiple studies demonstrate that As state and federal governments stretch to serve the ag-
young American adults are the most tolerant age group, ing population, taxes may increase, putting an additional
and they are moving in a more tolerant direction than ear- burden on business. And as mid-career workers spend
lier generations regarding racial differences, immigrants, more on elder care, they may find themselves with less to
and homosexuality. As this generation gathers influence spend on other goods and services, shrinking the size of
and experience in the workforce, they are likely to lever- the consumer market.
age diversity in their organizations to hone their edge in a
fiercely competitive marketplace.26 Rising Worker Expectations Workers of all ages
continue to seek flexibility from their employers. More-
Aging Population As life spans increase and birth- over, following massive corporate layoffs in the early
rates decrease, the American population is rapidly ag- 2000s, employees are much less apt to be loyal to their
ing. The U.S. Census Bureau projects that the nation’s firms. A study released in 2013 showed that on average,
population age 65 and older will more than double employees in Fortune 500 firms have a median tenure of
between 2005 and 2060. By 2060, older Americans will only 3.68 years. As young people today enter the work-
represent just over one in five residents, up from one in force, they bring higher expectations for their employers
seven today. Also, the number of working-age Ameri- in terms of salary, job responsibility, and flexibility—and
cans will shrink from 63% to 57% less willingness to pay dues by
of the population, dramatically working extra-long hours or doing a
increasing the number of people In Asia, the average high volume of “grunt work.” Smart
who are depending on each work- firms are responding to the change
ing American. And the United
person’s living in worker expectations by forging a
States isn’t alone in this trend. The standards are new partnership with their employ-
population is aging across the currently set to rise ees. The goal is a greater level of
developed world, from Western mutual respect through open com-
by 10,000% in one
Europe to Japan. China faces the munication, information sharing,
same issue, magnified by its huge lifetime! and training. And the not-so-hid-
population. Demographers esti- —NEWSWEEK den agenda, of course, is stronger
mate that in the next 20 years the long-term performance.28
Ethics and Social
Responsibility With
high-profile ethical melt-
downs dominating the
headlines in the past few
years, workers, consum-
ers, and government Over the past couple of decades, China has been a
alike have begun to magnet for manufacturing jobs because of the high
hold businesses—and the people who run population and low wages—about $3.50 per hour (in-
them—to a higher standard. Federal legislation, passed cluding government-mandated benefits) versus about
in the wake of the Enron fiasco, demands transparent $19.50 in the United States—although the gap is rap-
financial management and more accountability from idly closing due to double-digit annual wage inflation
senior executives. And recognizing their key role in busi- in China. And India has been especially adept at attract-
ness success, a growing number of consumers and working high-tech jobs, in part because of their world-class,
ers have begun to insist that companies play a proactive English-speaking university graduates who are willing
role in making their communities—and often the world to work for less than their counterparts around the
community—better places. Sustainability—doing busi- globe.30
ness today without harming the ability of future genera- The migration of jobs relates closely to the global
tions to meet their needs—has become a core issue in movement toward free trade. In 1995, a renegotia-
the marketplace, driving business policies, investment tion of the General Agreement on Tariffs and
decisions, and consumer purchases on an unprece- Trade (GATT)—signed by 125 countries—took bold
dented scale.29 steps to lower tariffs (taxes on imports) and to reduce
trade restrictions worldwide. The result: goods move
more freely than ever across international boundar-
1-5f The Global Environment
ies. Individual groups of countries have gone even
The U.S. economy operates within the context of the global further, creating blocs of nations with virtually unre-
environment, interacting continually with other economies. stricted trade. Mexico, Canada, and the United States
In fact, over the past two decades, technology and free have laid the groundwork for a free-trade mega-market
trade have blurred the lines between individual economies through the North American Free Trade Agreement
around the world. Technology has forged unprecedented (NAFTA), and 25 European
links among countries, making it cost effective—even ef- countries have created a free trade An international
ficient—to establish computer help centers in Mumbai to powerful free-trading bloc economic and political movement
serve customers in Boston, or to hire programmers in Bue- through the European designed to help goods and services
nos Aires to make websites for companies in Stockholm. Union, which has been flow more freely across international
boundaries.
Not surprisingly, jobs have migrated to the lowest bidder weakened by a severe,
with the highest quality—regardless of where that bidder ongoing financial crisis. General Agreement on
is based. The free-trade movement Tariffs and Trade (GATT) An
international trade agreement that
Often, the lowest bidder is based in China or India. has lowered prices and has taken bold steps to lower tariffs
Both economies are growing at breakneck speed, largely increased quality across and promote free trade worldwide.
because they attract enormous foreign investment. virtually every product
category as competition becomes truly global. We’ll states. And in 2013, Typhoon Haiyan decimated the Phil-
discuss these issues and their implications in more ippines. The wars in Afghanistan and Iraq—while a boon
depth in Chapter 3. to the defense industry—have dampened the economic
potential of both areas. With nationalism on the rise, and
A Multi-Pronged Threat In the past decade growing religious and ethnic tensions around the world,
alone, war, terrorism, disease, and natural disasters have the global economy may continue to suffer collateral
taken a horrific toll in human lives across the globe. The damage.31
economic toll has been devastating as well, affecting
businesses around the world. The 9/11 terrorist attacks
in New York and Washington, D.C., decimated the travel
industry and led to multibillion-dollar government out-
1-6 B USINESS AND YOU: MAKING
lays for Homeland Security. In 2002, a terrorist bombing IT PERSONAL
at an Indonesian nightclub killed nearly 200 people, de-
stroying tourism on the holiday island of Bali. Similarly, Whatever your career choice—from video game devel-
the 2015 terror attacks in Paris dealt a devastating blow oper to real-estate agent, to web designer—business will
to tourism throughout Europe, which was already strug- affect your life. Both the broader economy and your own
gling to handle an overwhelming refugee crisis. The business skills will influence the level of your personal fi-
2003 deadly epidemic of the SARS flu dealt a powerful nancial success. In light of these factors, making the right
blow to the economies of Hong Kong, Beijing, and To- career choice can be a bit scary. But the good news is that
ronto. And the Ebola outbreak of 2014 had a catastrophic experts advise graduating students to “Do what you love.”
impact on several impoverished African economies that This is a hardheaded strategy, not softhearted puffery. Fol-
could least afford the hit. Less than two years later, the lowing your passion makes dollars and sense in today’s
Indian Ocean tsunami wiped out the fishing industry on environment, which values less-routine abilities such
long swaths of the Indian and Sri Lankan coastlines and as creativity, communication, and caring. These abilities
crippled the booming Thai tourism industry. That same tend to be more rewarding for most people than routine,
year, in 2005, Hurricane Katrina destroyed homes and programmable skills that computers can easily emulate.
businesses alike and brought the Gulf Coast oil industry Following your passion doesn’t guarantee a fat paycheck,
to a virtual standstill. In 2012, Hurricane Sandy wreaked but it does boost your chances of both financial and per-
$50 billion of economic damage on the eastern seaboard sonal success.32
THE BIG PICTURE

Business today is complex, global, and faster will continue to change the business landscape. And a new focus
moving than ever before. Looking forward, on ethics and social responsibility will likely transform the role of
the rate of change seems likely to accelerate yet further. business in society. This book will focus on the impact of change
Although the full impact of the global economic crisis is still in every facet of business, from management to marketing,
unclear, China and India seem poised to gain economic clout, to money, with an emphasis on how the elements of business
raising worldwide competition to a whole new level. Technology relate to each other and how business as a whole relates to you.
CAREERS IN BUSINESS
Manager of New Media business strategy. According to Salary.com, the median
base salary for social media marketing managers in 2016
Work with marketing team to determine what motivates was $93,659, although there was significant variation
and inspires consumers. Lead development and execution based on company, location, industry, experience, and
of digital marketing campaigns across a variety of platforms benefits. Most new media positions require experience
to build a deep, meaningful, and genuine relationship in the field and a four-year degree in either business or
with consumers. Develop and manage interactive viral communication. Many also prefer a master’s degree in
campaigns, integrate interactive media into the overall business (an MBA).
STUDY TOOLS 1
LOCATED AT BACK OF THE TEXTBOOK
■■ Rip-Out Chapter Review Card
■■ Gain unique perspectives on key concepts with new concept ■■ Study with existing flashcards and make your own
videos in the e-book
■■ Increase your comprehension with online homework and
quizzes

2 Economics:
The Framework for Business
LEARNING OBJECTIVES
After studying this chapter, you will be able to:
2-1 Define economics and discuss the evolving global economic crisis
Remember to visit
2-2 Analyze the impact of fiscal and monetary policy on the economy
2-3 Explain and evaluate the free market system and supply and demand
PAGE 37
for additional
2-4 Explain and evaluate planned market systems
STUDY TOOLS
2-5 Describe the trend toward mixed market systems
2-6 Discuss key terms and tools to evaluate economic performance
2-1 ECONOMICS: NAVIGATING A CRISIS

In September 2008, the United States plunged into a deep economic crisis. The
banking system hovered on the edge of collapse. Property values plummeted,
and home foreclosure rates soared. Massive layoffs put more than a million
Americans out of work. By the end of the year, the stock market had lost
more than a third of its value, and financial turmoil in the United States
economy A financial and
had sparked sequential economic shocks from Europe to
social system of how resources South America, to Asia and beyond. The outlook was grim.
flow through society, from
production to distribution, to
consumption.
economics The study of the How did this happen? definitions: The economy is essentially a financial and
choices that people, companies, Why? How could the social system. It represents the flow of resources
and governments make in economy get back on through society, from production to distribution, to
allocating society’s resources. consumption. Economics is the study of the choices
track?
macroeconomics The Understanding these that people, companies, and governments make in al-
study of a country’s overall issues—and how the gov- locating those resources. The field of economics falls
economic dynamics, such as
ernment, businesses, and into two core categories: macroeconomics and micro-
the employment rate, the gross
domestic product, and taxation individuals responded economics. Macroeconomics is the study of a coun-
policies. to them—requires under- try’s overall economic dynamics, such as the
standing some basic employment rate, the gross domestic product, and
“E
Tconomics
he chief business
is very useful
of the as
taxation policies. While macroeconomic issues may aAmerican
form of employment
people is business”
for
seem abstract, they directly affect your day-to-day life,
economists.” C A LV I N C O O L I D G E
influencing key variables such as what jobs will be avail-
able for you, how much cash you’ll actually take home — J O H N K E N N E T H G AAL M
B RE AR II CT AH N, EPCROENSOI DMEI NS TT
after taxes, or how much you can buy with that cash in
any given month. Microeconomics focuses on
smaller economic units such as individual consumers,
families, and individual businesses. Both macroeco- feared that the country was hovering on the brink of a
nomics and microeconomics have played an integral full-blown recession.1
role in the global economic crisis. In an effort to avert recession by increasing the money
supply and encouraging investment, the Federal Reserve—
2-1a Global Economic Crisis: the nation’s central bank—decreased interest rates from
6.5% in mid-2000 to 1.25% by the end of 2002. As a result,
How Did This Happen? the economy was awash with money, but opportunities to
The seeds of the crisis were planted more than a decade invest yielded paltry returns. This is when subprime mort-
ago, during a time of prosperity. Through the last half gage loans came into play. Most experts define subprime
of the 1990s, America enjoyed unprecedented growth. mortgages as loans to borrowers with low credit scores,
Unemployment was low, productivity was high, infla- high debt-to-income ratios, or other signs of a reduced abil-
tion was low, and the real standard of living for the aver- ity to repay the money they borrow.
age American rose significantly. The American economy These subprime mort-
grew by more than $2.4 trillion, a jump of nearly 33% gage loans were attractive
in just five years. But the scene changed for the worse to borrowers and lenders microeconomics The study
of smaller economic units such
when the dot-com bubble burst in 2000, followed by alike. For the borrowers, as individual consumers, families,
the 9/11 terrorist attacks in 2001. As the stock market getting a loan suddenly be- and individual businesses.
dropped and unemployment rose, economic experts came a cinch, and for the
CHAPTER 2: Economics: The Framework for Business 19
A Trillion Dollars? Say What?
Between stimulating the economy and managing the federal carry the
debt, “a trillion dollars” is a figure you may have heard a lot roll, since
lately. But getting your mind around what that actually means it would
may be a little tricky, since it’s just so much money. To under- weigh more
than one
stand the true magnitude of a trillion dollars, consider this:
million tons.
■■ If you had started spending a million dollars a day—every
day, without fail—at the start of the Roman Empire, you still Turning the
wouldn’t have spent a trillion dollars by 2016; in fact, you’d economy around
have more than $250 billion left over. may take even
■■ One trillion dollars, laid end-to-end, would stretch farther more than a trillion
than the distance from the earth to the sun. You could also dollars, but make no
wrap your chain of bills more than 12,000 times around the mistake when you
iStock.com/Selensergen
earth’s equator. hear those numbers
■■ If you were to fly a jet at the speed of sound, spooling out a roll thrown around on the
of dollar bills behind you, it would take you more than 14 years news—a trillion dollars
to release a trillion dollars. But your plane probably couldn’t is an awful lot of money!2
first time ever, hundreds of thousands of people could af- themselves “upside down”—they owed their lenders more
ford homes. The lenders were all too willing to give them than the value of their homes. Once this happened, they
mortgage loans, sometimes with little or no documenta- couldn’t refinance to lower their payments. Foreclosure
tion (such as proof of income), and sometimes with little rates climbed at an increasing pace. RealtyTrac, a leading
or no money down. As demand for homes skyrocketed, online marketplace for foreclosure properties, reported
prices continued to rise year after year. Borrowers took that foreclosure rates were 33% higher in 2010 than they
on adjustable-rate loans assuming that when their loans were in all of 2009. In 2011, the foreclosure rate dropped
adjusted up—usually sharply up—they could simply re- to the lowest level since 2007, when the recession began.
finance their now-more-valuable homes for a new low And by January 2014, the inventory of foreclosed homes
starter rate and maybe even pull out some cash. had experienced 16 consecutive months of year-to-year
Subprime loans were attractive to lenders because double-digit declines, signaling that the fragile economic
they provided a higher return than many other invest recovery had finally taken hold.3
ments, and—given the growth in housing prices—they As mortgage values dropped, financial institutions
seemed relatively low risk. Banks and investment houses in- began to feel the pressure—especially firms such as Bear
vented a range of stunningly complex financial instruments Stearns that specialized in trading mortgage-backed secu-
to slice up and resell the mortgages as specialized securi- rities, and firms such as Washington Mutual that focused
ties. Hedge funds swapped the new securities, convinced on selling subprime mortgages. When financial institutions
that they were virtually risk-free. With a lack of regulation— actually began to face collapse, a wave of fear washed over
or any other government oversight—financial institutions the entire banking industry. Banks became unwilling to
did not maintain sufficient reserves lend money to each other or to cli-
in case those mortgage-backed ents, which meant that funds were
funds lost value. “The financial crisis not available for businesses to fi-
And they did indeed lose nance either day-to-day operations
value. In 2006, housing prices
is a stark reminder or longer-term growth. Company
peaked, and in the months that that transparency after company—from General Mo-
followed, prices began falling pre- and disclosure are tors to Yahoo!, to American Express,
cipitously (see Exhibit 2.1), drop- to countless small employers—
essential in today’s
ping nearly 35% from the market began to announce layoffs. The
peak in 2006 through the market marketplace.” December 2008 unemployment
trough in 2009. Increasing num- — U . S . S E N AT O R J A C K R E E D rate hit 7.2%. About 2.6 million
bers of subprime borrowers found Americans lost their jobs in 2008,
bankruptcy was imminent without government
Exhibit 2.1 assistance. (Ford, the other member of the Big
Three, also admitted to financial problems but
House Price Index claimed that it was not in the dire straits faced
225 by its domestic competitors.) Facing the loss of
Case-Shiller House Index –U.S. 20-City Index
more than 2.5 million jobs related to the auto

200 industry, the Treasury agreed to spend a portion
of what remained of the $700 billion in a partial
175 auto industry bailout.5 Although much of the
public railed against the expensive government
150 bailout program, by 2010 it appeared likely that
TARP could end up costing taxpayers far less
125 than anticipated, or even nothing, as insurance
companies and banks began to break even, or in
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many cases earn profits, and pay back their gov-
Date
ernment loans.6
Source: Housing’s Rise and Fall in 20 Cities, December 27, 2011, The New York Times website, http://www As the new administration began, Presi-
.nytimes.com/interactive/2011/05/31/business/economy/case-shiller-index.html#city/IND20, accessed
January 25, 2012. dent Obama proposed, and Congress passed, an
$825 billion economic stimulus package called
the American Recovery and Reinvestment Act,
designed to turn the economy around over the
making 2008 the worst year for jobs since 1945. And the next two years. The plan included cutting taxes, building
unemployment rate continued to rise, hitting 9.3% in 2009 infrastructure, and investing $150 billion in green energy.
and 9.6% in 2010, leading to total Great Recession job In late 2011, the economy began to turn around at a very
losses of nearly 8 million, many of which will never come slow pace. Employment grew slowly for 49 months in a
back as the economy continues to change and old skills row—the best run since at least World War II. Although
become obsolete.4 The national average unemployment employment numbers improved, many people traded
rate began to drop in late 2011 and continued to trend good-paying jobs for part-time work and/or lower-paying
down throughout 2014, 2015, and 2016, another sign that positions. This has constrained incomes and restrained
the economic recovery has taken hold. consumer spending in the years since.7
All of these moves by the federal government and the
2-1b Moving in a Better Direction Federal Reserve are part of fiscal and monetary policy.
Although the benefits were not immediately obvious in the

face of a downward trend, the federal government and
the Federal Reserve—known as “the Fed”—intervened in the
2-2 MANAGING THE ECONOMY
economy at an unprecedented level to prevent total finan- THROUGH FISCAL
cial disaster. In March 2008, the Fed staved off b
ankruptcy at
Bear Stearns. In early September 2008, the U.S. Department
AND MONETARY POLICY
of the Treasury seized Fannie Mae and Freddie Mac, which
While the free market drives performance in the American
owned about half of the U.S. mortgage market. A week later,
economy, the federal government and the F ederal Reserve
the Fed bailed out tottering global insurance giant AIG with
can help shape performance. During the recent crisis, both
an $85 billion loan. But the bleeding continued.
the government and the Fed have taken proactive—
The negative spiral spurred Congress to pass a contro-
some say heavy-handed—roles to mitigate this economic
versial $700 billion economic bailout plan in early October
2008, called TARP (the Troubled Assets Relief Program). By
the end of the year, the Treasury had spent the first half of
that money investing in banks, although early results were
“Government does not solve
imperceptible for the economy. Just as the Treasury be-
gan to release funds to the banks, GM and Chrysler, two problems; it subsidizes them.”
of the Big Three U.S. automakers, announced they also —U.S. PRESIDENT RONALD REAGAN
desperately needed a bailout. Both firms suggested that
contraction. The overarching goal is controlled, sus- can pay for debts that it has already incurred. Typi-
tained growth, and both fiscal and monetary policy cally, debt ceiling hikes are fairly routine; in fact,
can help achieve this objective. Congress has raised the debt ceiling 74 times since
iStock.com/Talaj
1962, and ten times since 2001, all with little or no no-
2-2a Fiscal Policy tice. But as federal debt began to nudge the ceil-
ing in 2011, it garnered unprecedented political
Fiscal policy refers to government efforts to in-
and journalistic attention because various politi-
fluence the economy through taxation
cal groups saw the issue as an
and spending decisions that are
opportunity to further their
designed to encourage growth,
political agenda. Those who
boost employment, and curb
wanted to raise the debt ceiling
inflation. Clearly, fiscal strategies
portrayed others as irresponsible
are closely tied to political philoso-
buffoons who were willing to shut
phy. But regardless of politics, most
down the government simply to make a
economists agree that lower taxes can boost
point without any real long-term change in
the economy by leaving more money in people’s
spending. Those who did not want to raise the
pockets for them to spend or invest. Most also agree
debt ceiling argued that the others are spendthrift
that government spending can boost the economy
bureaucrats who must learn to live within their means
in the short term by providing jobs, such as mail carrier,
like the Americans who elected them.
bridge repairer, or park ranger; and in the long term by in-
After weeks of high-profile wrangling, Congress fi-
vesting in critical public assets, such as a national renew-
nally agreed to raise the debt ceiling, which temporarily
able energy grid. Done well, both taxation and spending
averted a shutdown crisis, but the deal they reached to do
can offer economic benefits. The tricky part is finding the
so created the fiscal cliff. The fiscal cliff was a package of
right balance between the two approaches. As American
draconian across-the-board spending cuts and sharp tax
economist Henry Hazlitt pointed out, it’s important to keep
hikes scheduled to hit at the same time that could dra-
in mind that “[e]ither immediately or ultimately, every dol-
matically decrease the U.S. budget deficit. Going over the
lar of government spending must be raised through a dol-
fiscal cliff could potentially cripple the U.S. economy, and
lar of taxation; once we look at the matter in this way, the
possibly even cause the United States to default on some
supposed miracles of government spending will appear in
of its debt, which could send world markets into a tailspin.
another light.”
But once again, Congress could not reach a reasonable
long-term agreement, so they simply passed last-minute
2-2b Debt Ceiling/Fiscal Cliff
legislation that pushed the really tough tax and spending
In mid-2011, the U.S. economy shuddered again as the decisions farther down the road. The federal government
news headlines screamed with dire warnings about a na- actually did shut down for 16 days in October 2013 after
tional or even international much congressional squabbling failed to produce a bud-
economic meltdown when get agreement. The government reopened with passage
fiscal policy Government we hit the federal debt ceil- of another temporary agreement that again delayed the
efforts to influence the economy ing. What did this mean? tough fiscal choices. If the country continues to fracture
through taxation and spending. The debt ceiling is the max- along political lines, it may become increasingly difficult to
budget surplus Overage imum amount Congress reach a federal budget agreement, leading to more regular
that occurs when revenue is lets the government bor- government shutdowns.8
higher than expenses over a given row. In theory, this is meant Every year, the government must create a budget,
period of time.
to limit the amount that the or a financial plan, that outlines expected revenue from
budget deficit Shortfall that government can borrow, taxes and fees, and expected spending. If revenue is
occurs when expenses are higher but in practice, voting on higher than spending, the government incurs a budget
than revenue over a given period
of time.
the debt ceiling happens surplus (rare in recent years, but usually quite welcome!).
separately from voting on If spending is higher than revenue, the government in-
federal debt The sum of taxes and spending, so the curs a budget deficit and must borrow money to cover
all the money that the federal
government has borrowed over debt ceiling ends up be- the shortfall. The sum of all the money borrowed over
the years and not yet repaid. ing mostly about whether the years and not yet repaid is the total federal debt.
the federal government Exhibit 2.2 shows key sources of revenue and key expenses
Exhibit 2.2
Federal Government Revenue and Expenses
Federal Government Revenue Federal Government Expenses
Fiscal 2017 Estimated (billions of dollars) Fiscal 2017 Estimated (billions of dollars)
$295.8
National Defense
$490.7 International Affairs
Individual $617.0 $55.8 Net Interest on Debt
$1,141.2 Income Taxes
$567.6 $302.7 Medicare
Corporate
$1,788.0 Income Taxes Income Security
Social $605.0 Social Security
$972.6
Security Taxes Health
$418.7 Other $535.9 Other
TOTAL = $3,643.7 TOTAL = $4,147.2
Source: Economic Report of the president, 2016, Table B–19. Federal receipts and outlays, by major category, and surplus or deficit, fiscal years 1950–2017, https://www.whitehouse.gov/sites/default/files/docs
/ERP_2016_Book_Complete%20JA.pdf, accessed July 30, 2017.
for the federal government in 2011. Note that spending The Fed is headed by a seven-member Board of Gov-
significantly outstrips receipts, creating a one-year budget ernors. The president appoints each member of the Board
deficit of more than a trillion dollars. Clearly, any additional to serve a single 14-year term—though a member can also
spending without corresponding tax increases could dra- complete a former member’s unexpired term and still be
matically increase the shortfall. appointed to a full term of his or her own. These terms are
As of early 2017, the total U.S. federal debt stood at staggered, with one expiring every two years, so that no
nearly $20 trillion, a staggering $61,000 for every U.S. single president can appoint all of the members. This struc-
citizen. ture helps ensure that the Fed can act independently of
The debt has only grown bigger every year since political pressure.
1957, and the pace of growth will likely increase further in In addition to setting monetary policy, the Board
the wake of the economic crisis. This matters to each tax- of Governors oversees the operation of the 12 Federal
payer because as the government repays the debt—not Reserve Banks that carry out Fed policies and perform
to mention paying the skyrocketing interest to finance banking services for commercial banks in their
this debt—less and less money will be available for other districts. Interestingly, the federal government does
uses; services may be eliminated (e.g., student loans, vet- not own these Federal Reserve Banks. Instead, they’re
erans’ benefits, housing subsidies), or taxes will soar, or owned by the member commercial banks in their indi-
perhaps even both. vidual districts.
The president appoints
one of the seven members
2-2c Monetary Policy
of the Board of Governors to monetary policy Federal
Monetary policy refers to actions that shape the serve as its chair—a position Reserve decisions that shape the
economy by influencing interest rates and the supply of so powerful that many con- economy by influencing interest
money. The Federal Reserve—essentially the central bank sider him or her the second rates and the supply of money.
of the United States—manages U.S. monetary policy. most powerful person on commercial banks
For the first time in its history, the Fed has also taken an earth. For nearly 19 years, the Privately owned financial
institutions that accept demand
activist role in bailing out and propping up shaky finan- chair was Alan Greenspan.
deposits and make loans and
cial firms during the economic crisis. Other Fed functions When Greenspan retired in provide other services for the
include banking services for member banks and the fed- early 2006, President Bush public.
eral government. appointed economist Ben
What Does It Really Mean to Call an Uber?
If you’re like most people, the first thing that comes joining forces with Uber in 2016. The partnership was
to mind when you think about “calling an Uber” is launched as demand from some of Airbus’s traditional
hailing a car for a local trip or maybe arranging a customers—oil and gas companies—dropped in the
food delivery to satisfy a craving via UberEATS. wake of falling commodity prices. But Uber has
But if you are a member of the entertainment expanded beyond just helicopter rides. In India,
www.hollandfoto.net/Shutterstock.com
elite, calling an Uber may well mean hailing Uber’s services include on-demand rickshaws, and
a helicopter via UberChopper to get to the in Turkey, it offers on-demand boats. It’s fun to
Cannes Film Festival or to avoid the bumper- imagine what calling an Uber might mean in the
to-bumper traffic between Manhattan future—on-demand drones? On-demand robots?
and the Hamptons on a steamy New York Time will tell.9
weekend. Airbus expanded its private
helicopter service into all-new markets by
Bernanke to the chair role. Bernanke led the Fed’s proactive about $3.18 trillion, and the M2 version of the money sup-
efforts to turn the ailing economy around. In early 2014, the ply totaled about $12.7 trillion. In practice, the term “money
Senate confirmed economist Janet Yellen as new chair of supply” most often refers to M2. (Note that credit cards are
the Fed. Yellen is the first female chair, and she has focused not part of the money supply, although they do have an
primarily on fighting unemployment by encouraging eco- unmistakable impact on the flow of money through the
nomic expansion. economy.)10
The core purpose of the Fed is to influence the size When the economy contracts, the Fed typically in-
of the money supply—or the total amount of money creases the money supply. If more money is available, inter-
within the overall economy. Clearly, you know what est rates usually drop, encouraging businesses to expand
money is. But the formal definition of money is anything and consumers to spend. But when prices begin to rise, the
generally accepted as a medium of exchange, a measure Fed attempts to reduce the money supply. Ideally, if less
of value, or a means of money is available, interest rates will rise. This will reduce
payment. The two most spending, which should bring inflation under control.
money supply The total
amount of money within the commonly used defini- Specifically, the Fed uses three key tools to expand and con-
overall economy. tions of the money supply tract the money supply: open market operations, discount
are M1 and M2: rate changes, and reserve requirement changes.
money Anything generally
accepted as a medium of ■■ M1: All currency—
exchange, a measure of value, paper bills and metal Open Market Operations This is the Fed’s most
or a means of payment.
coins—plus checking frequently used tool. Open market operations in-
M1 money supply Includes accounts and traveler’s volve buying and selling government securities, which
all currency plus checking checks. include treasury bonds, notes, and bills. These securities
accounts and traveler’s checks. are the IOUs the government issues to finance its deficit
■■ M2: All of M1 plus spending.
M2 money supply Includes
all of M1 money supply plus most most savings accounts, How do open market operations work? When the
savings accounts, money market money market ac- economy is weak, the Fed buys government securities on
accounts, and certificates of counts, and certificates the open market. When the Fed pays the sellers of these
deposit. of deposit (low-risk securities, money previously held by the Fed is put into cir-
open market operations savings vehicles with a culation. This directly stimulates spending. In addition, any
The Federal Reserve function of fixed term, typically less of the additional funds supplied by the Fed that are depos-
buying and selling government than one year).
securities, which include treasury ited in banks will allow banks to make more loans, making
bonds, notes, and bills. By mid-2016, the M1 credit more readily available. This encourages even more
money supply totaled spending and further stimulates the economy.
Looking to Multiply Your Money? Look No Further
Than Your Local Bank!
Everyone knows that banks help people save money, but most 1933 Congress established the Federal Deposit Insurance
people don’t realize that banks actually create money. While the Corporation (FDIC). The FDIC insures deposits in banks and
process is complex, a simplified example illustrates the point. Say thrift institutions for up to $100,000 per customer, per bank. In
you deposit $5,000 in the bank. How much money do you have? the wake of the banking crisis, the FDIC temporarily increased its
Obviously, $5,000. Now imagine that your neighbor Anne goes coverage to $250,000 per depositor at the end of 2008. Since the
to the bank for a loan. In line with Federal Reserve requirements, FDIC began operations on January 1, 1934, no depositor has lost a
the bank must hold onto about 10% of its funds, so it loans Anne single cent of insured funds as a result of a bank failure.
$4,500. She uses the money to buy a used car from your neighbor
Jake, who deposits the $4,500 in the bank. How much money
does Jake have? Clearly, $4,500. How much money do you have?
Still, $5,000. Thanks to the banking system, our “money supply”
has increased from $5,000 to $9,500. Multiply this phenomenon
times millions of banking transactions, and you can see why cold,
Syda Productions/Shutterstock.com
hard cash accounts for only about 10% of the total U.S. M2 money
supply. But what happens if everyone goes to the bank at once
to withdraw their money? The banking system would clearly
collapse. And in fact, in 1930 and 1931, a run on the banks caused
wave after wave of devastating bank failures. Panicked customers
lost all their savings, ushering in the worst years of the Great
Depression. To restore public confidence in the banking system, in
When inflation is a concern, the Fed sells securities. discount rate, banks can obtain funds at a lower cost and
Buyers of the securities write checks to the Fed to pay for use these funds to make more loans to their own custom-
securities they bought, and the Fed withdraws these funds ers. With the cost of acquiring funds from the Fed lower,
from banks. With fewer funds, banks must cut back on the interest rates on bank loans also tend to fall. The result: busi-
loans they make, credit becomes tighter, and the money nesses and individuals are more likely to borrow money and
supply shrinks. This reduces spending and cools off the in- spend it, which stimulates the economy. Clearly, the Fed is
flationary pressures in the economy. most likely to reduce the discount rate during recessions.
Open market operations are set by the aptly named In fact, during the early months of the financial crisis, the
Federal Open Market Committee, which consists of the Fed cut the rate to less than 1%. The Fed kept the rate well
seven members of the Board of Governors and 5 of the 12 below 1% throughout the recovery, eventually nudging it
presidents of the Federal Reserve district banks. Each year, up at the end of 2015 and again at the end of 2016. If the
the Federal Open Market Committee holds eight regularly recovery continues, The Fed is expected to continue rais-
scheduled meetings to make decisions about open mar- ing rates slowly—very slowly. But in response to inflation—
ket operations, although they do hold additional meetings usually a sign of a rapidly
when the need arises. Both businesses and markets closely expanding economy—the Federal Deposit
watch Open Market Committee rate setting and outlook Fed usually increases the Insurance Corporation
statements in order to guide decision making. discount rate. In response, (FDIC) A federal agency
banks raise the interest rates that insures deposits in banks
and thrift institutions for up to
Discount Rate Changes Just as you can borrow they charge their custom- $250,000 per customer, per bank.
money from your bank, your bank can borrow funds from ers. Fewer businesses and
the Fed. And just as you must pay interest on your loan, individuals are willing to discount rate The rate of
interest that the Federal Reserve
your bank must pay interest on loans from the Fed. The take loans, which ultimately charges when it loans funds to
discount rate is the interest rate the Fed charges on slows down the economy banks.
its loans to commercial banks. When the Fed reduces the and reduces inflation.11
Reserve Requirement Changes The Fed requires
that all of its member banks hold funds, called “reserves,” “The U.S. economy is 70% based
equal to a stated percentage of the deposits held by on consumer spending.”
their customers. This percentage is called the reserve
requirement (or required reserve ratio). The reserve —T IME M AG A Z INE
requirement helps protect depositors who may want to
withdraw their money without notice. Currently, the re-
serve requirement stands at about 10%, depending on the
are willing to pay its fees. And as the government’s bank, the
size and type of a bank’s deposits. If the Fed increases the
Fed maintains the federal government’s checking account
reserve requirement, banks must hold more funds, mean-
and keeps the U.S. currency supply in good condition.
ing they will have fewer funds available to make loans.
This makes credit tighter and causes interest rates to rise.
If the Fed decreases the reserve requirement, some of the
funds that banks were required to hold become available 2-3 CAPITALISM: THE FREE
for loans. This increases the availability of credit and causes
interest rates to drop. Since changes in the reserve require-
MARKET SYSTEM
ment can have a dramatic impact on both the economy
It’s a simple fact—more clear now than ever before—no
and the financial health of individual banks, the Fed uses
one can get everything they want all of the time. We live in
this tool quite infrequently.
a world of finite resources, which means that societies
Other Fed Functions In addition to monetary must determine how to distribute resources among their
policy, the Fed has several other core functions, in- members. An economic system is a structure for allo-
cluding regulating financial institutions and pro- cating limited resources. Over time and around the globe,
viding banking services both for the government nations have instituted different economic systems. But a
and for banks. In its role as a regulator, the careful analysis suggests that no system is perfect,
Fed sets and enforces rules of conduct for which may explain why there isn’t one standard
banks and oversees mergers and acquisi- approach. The next sections of this chapter exam-
tions to ensure fairness and compliance ine each basic type of economic system and ex-
with government policy. The Fed will plore the trend toward mixed economies.
likely become even more proactive The economic system of the United States
regarding regulation in the wake is called capitalism, also known as a “private
of the financial crisis. In its role as enterprise system” or a “free market system.”
a banker for banks, the Fed coordi- Brought to prominence by Adam Smith in the
nates the check-clearing 1700s, capitalism is based on private own-
process for checks on ership, economic freedom, and fair com-
behalf of any banks that petition. One core capitalist principle is
the paramount importance of individu-
als, innovation, and hard work. In a capi-
reserve requirement A talist economy, individuals, businesses, or
rule set by the Fed, which specifies
nonprofit organizations privately own the
the minimum amount of reserves
(or funds) a bank must hold, vast majority of enterprises (with only a
small fraction owned by the government).
ck .co m
expressed as a percentage of the

bank’s deposits. These private-sector businesses are free to
ts/ Shut ter sto
economic system A make their own choices regarding every-

structure for allocating limited thing from what they will produce to how
He ar tla nd Ar
resources. much they will charge, to whom they will

capitalism An economic hire and fire. Correspondingly, individuals
system—also known as the are free to choose what they will buy,
private enterprise or free market Adam Smith (1723–1790) has how much they are willing to pay, and
system—based on private
ownership, economic freedom, often been called the “father of where they will work.
and fair competition. modern economics.” To thrive in a free enterprise sys-
tem, companies must offer value to
their customers—otherwise, their customers will choose
to go elsewhere. Businesses must also offer value to their
employees and suppliers in order to attract top-quality tal-
ent and supplies. As companies compete to attract the best
resources and offer the best values, quality goes up, prices
remain reasonable, and choices proliferate, raising the stan-
dard of living in the economy as a whole.
2-3a The Fundamental Rights of Capitalism

For capitalism to succeed, the system must ensure some fun-
ValeStock/Shutterstock.com
damental rights—or freedoms—to all of the people who live
within the economy.
■■ T he right to own a business and keep after-tax profits:
Remember that capitalism doesn’t guarantee that
anyone will actually earn profits. Nor does it promise Which of the four degrees of competition
that there won’t be taxes. But if you do earn profits,
does the soft drink market represent?
you get to keep your after-tax income and spend
it however you see fit (within the limits of the law,
of course). This right acts as a powerful motivator
for business owners in a capitalist economy; the
as deceptive advertising, predatory pricing, and
lower the tax rate, the higher the motivation. The
broken contracts—mar the free competitive environ-
U.S. government strives to maintain low tax rates
ment. The government’s role is to create a level playing
to preserve the after-tax profit incentive that plays
field by establishing regulations and monitoring the
such a pivotal role in the free enterprise system.
competition to ensure compliance.
■■ The right to private property: This means that indi-
viduals and private businesses can buy, sell, and
use property—which includes land, machines, and 2-3b Four Degrees of Competition
buildings—in any way that makes sense to them. This Although competition is essential for the free market sys-
right also includes the right to will property to family tem to function, not all competition works the same. Differ-
members. The only exceptions to private property ent industries experience different degrees of competition,
rights are minimal government restrictions designed ranging from pure competition to monopolies.
to protect the greater good. You can’t, for instance,
■■ Pure competition is a market structure with
use your home or business to produce cocaine,
many competitors selling virtually identical prod-
abuse children, or spew toxic smoke into the air.
ucts. Since customers can’t (or won’t) distinguish
■■ The right to free choice: Capitalism relies on economic one product from another, no single producer
freedom. People and businesses must be free to buy has any control over the price. And new produc-
(or not buy) according to their wishes. They must ers can easily enter and leave purely competitive
be free to choose where to work (or not work) and markets. In today’s U.S. economy, examples of pure
where to live (or not live). Freedom of choice directly competition have virtually disappeared. Agriculture
feeds competition, creating a compelling incentive for probably comes closest—corn is basically corn, for
business owners to offer the best goods and services example—but with the dramatic growth of huge
at the lowest prices. U.S. government trade policies corporate farms and the success of major agricul-
boost freedom of choice by encouraging a wide array tural cooperatives
of both domestic and foreign producers to compete such as Sunkist and
freely for our dollars. Sun-Maid, the num- pure competition A
ber of competitors market structure with many
■■ The right to fair competition: A capitalist system de-
competitors selling virtually
pends on fair competition among businesses to drive in agriculture has identical products. Barriers to
higher quality, lower prices, and more choices. Capital- dwindled, and new entry are quite low.
ism can’t achieve its potential if unfair practices—such farmers have trouble
entering the market. Not only that, segments of
the agriculture market—such as organic farms
and hormone-free dairies—have emerged with hit
products that command much higher prices than
the competition.
■■ Monopolistic competition is a market structure
with many competitors selling differentiated prod-
GongTo/Shutterstock.com
ucts. (Caution! Monopolistic competition is quite dif-
ferent from a monopoly, which we will cover shortly.)
Producers have some control over the price of their
wares, depending on the value that they offer their
customers. And new producers can fairly easily enter
categories marked by monopolistic competition.
In April 2016, the European Union filed
In fact, in monopolistic competition, a successful
antitrust charges against Google for forcing
product usually attracts new suppliers quite quickly.
manufacturers to load 11 undeletable apps
Examples of monopolistic competition include the
clothing industry and the restaurant business. onto their Android-based smartphones.
Think about the clothing business, for a moment, If Google is found guilty, it faces up to
in local terms. How many firms do you know that $7.5 billion in fines.
sell T-shirts? You could probably think of at least 50
without too much trouble. And the quality and price
are all over the board: designer T-shirts can sell for business, and network television. Breaking into a mar-
well over $100, but plenty of options go for less than ket characterized by oligopoly can be tough because
$10. How hard would it be to start your own T-shirt it typically requires a huge upfront investment.
business? Probably not hard at all. In fact, chances You could start making T-shirts in your kitchen, for
are strong that you know at least one person who instance, but you’d need a pretty expensive facility to
sells T-shirts on the side. In terms of product and start manufacturing cars. Oligopolies typically avoid
price variation, number of intense price competition, since they have nothing
firms, and ease of entry, to gain—every competitor simply makes less money.
monopolistic When price wars do flare up, the results can be devas-
competition the T-shirt business clearly
A market structure with many demonstrates the charac- tating for entire industries.
competitors selling differentiated teristics of monopolistic ■■ Monopoly is a market structure with just a single
products. Barriers to entry are low. competition. producer completely dominating the industry, leaving
oligopoly A market structure ■■ Oligopoly is a market
no room for any significant competitors. Monopolies
with only a handful of competitors usually aren’t good for anyone but the company that
selling products that can be structure with only a
handful of competitors has control, since without competition there isn’t any
similar or different. Barriers to
entry are typically high. selling products that incentive to hold down prices or increase quality and
can be similar or differ- choices. Because monopolies can harm the economy,
monopoly A market structure
ent. The retail gasoline most are illegal according to federal legislation such as
with one producer completely
dominating the industry, leaving business and the car the Sherman Antitrust Act of 1890 and the Clayton An-
no room for any significant
manufacturing indus- titrust Act of 1914. Microsoft is the latest example of an
competitors. Barriers to entry tend industry giant that ran afoul of antimonopoly laws due
to be virtually insurmountable. try, for instance, are
both oligopolies, even to its position and policies in the software business.
natural monopoly A Even though Microsoft is not an actual monopoly,
though gas stations of-
market structure with one it was convicted of “monopolistic practices” that under-
company as the supplier of a fer very similar products,
and car companies offer mined fair competition.
product because the nature of that
product makes a single supplier quite different models However, in a few instances, the government not
more efficient than multiple, only allows monopolies but actually encourages them.
and features. Other
competing ones. Most natural
monopolies are government examples of oligopoly This usually occurs when it would be too inefficient for
sanctioned and regulated. include the soft drink each competitor to build its own infrastructure to serve
industry, the computer the public. A natural monopoly arises. Public utilities
Exhibit 2.3
The Supply Curve and Demand Curve
22 22
20 20
ve
18 18
Cur
16 16
ply
14 14
Sup
Price per Pizza ($)
Price per Pizza ($)

12 12 De
m
10 10 an
d
8 8
Cu
rv
e
6 6
4 4
2 2
0 0
0 20 40 60 80 100 120 0 20 40 60 80 100 120
Quantity of Pizza Supplied per Day Quantity of Pizza Demanded per Day
(in Thousands) (in Thousands)
offer a clear example. Would it really make sense for even Supply Supply refers to the quantity of products that
a handful of competitors to pipe neighborhoods sepa- producers are willing to offer for sale at different market prices.
rately for water? Clearly, that’s not practical. Just imagine Since businesses seek to make as much profit as possible,
the chaos! Instead, the government has granted exclu- they are likely to produce more of a product that commands
sive rights—or monopolies—to individual companies for a higher market price and less of a product that commands a
limited geographic areas and then regulated them (with lower price. Think about it in terms of pizza. Assume it costs a
mixed results) to ensure that they don’t abuse the privilege. local restaurant about $5 to make a pizza. If the market price
In addition to natural monopolies, the government grants for pizza hits, say, $20, you can bet that restaurant will start
patents and copyrights, which create artificial monopoly cranking out pizza. But if the price drops to $6, the restaurant
situations (at least temporarily) to encourage innovation. has much less incentive to focus on pizza and will probably in-
vest its limited resources in cooking other more pricey dishes.
2-3c Supply and Demand: Fundamental The relationship between price and quantity from a
Principles of a Free Market System supplier standpoint can be shown on a graph called the
supply curve. The supply curve maps quantity on the x-
In a free market system, the continual interplay between axis (or horizontal axis) and price on the y-axis (or vertical axis).
buyers and sellers determines the selection of products and In most categories, as the
prices available in the economy. If a business makes some- price rises, the quantity pro-
thing that few people actually want, sales will be low, and supply The quantity of
duced rises correspondingly, products that producers are
the firm will typically yank the product from the market. yielding a graph that curves willing to offer for sale at different
Similarly, if the price of a product is too high, low sales will up as it moves to the right. market prices.
dictate a price cut. But if a new good or service becomes Exhibit 2.3 shows a p ossible supply curve The graphed
a hit, you can bet that similar offerings from other firms supply curve for pizza. relationship between price and
will pop up almost immediately (unless barriers—such as quantity from a supplier standpoint.
government-granted patents—prevent new entrants). The Demand Demand
demand The quantity of
concepts of supply and demand explain how the dynamic refers to the quantity of products that consumers are willing
interaction between buyers and sellers directly affects the products that consum- to buy at different market prices.
range of products and prices in the free market. ers are willing to buy at
different market prices. Since consumers generally
seek to get the products they need (or want) at Exhibit 2.4
the lowest possible prices, they tend to buy more
products with lower prices and fewer products Equilibrium
with higher prices. Pizza and tacos, for instance,
are both popular meals. But if pizza costs a lot less
than tacos, most people will get pizza more often
than tacos. Likewise, if the price of pizza were out of
hand, people would probably order tacos (or some
other option) more often, reserving their pizza-
eating for special occasions.
The relationship between price and quantity
from a demand standpoint can be shown on a
graph called the demand curve. Like the supply
curve, the demand curve maps quantity on the
x-axis and price on the y-axis. But different from the
supply curve, the demand curve for most goods
and services slopes downward as it moves to the
right, since the quantity demanded tends to drop as
prices rise. Exhibit 2.3 shows how a demand curve
for pizza could look.
Equilibrium Price It’s important to remember
that supply and demand don’t operate in a vacuum.
The constant interaction between the two forces helps
determine the market price in any given category. In
theory, market prices adjust toward the point where the
supply curve and the demand curve intersect (see 2-4a Socialism
Exhibit 2.4). The price associated with this point of Socialism is an economic system based on the prin-
intersection—the point where the quantity demanded ciple that the government should own and operate key
equals the quantity supplied—is called the equilibrium enterprises that directly affect public welfare, such as
price, and the quantity associated with this point is called utilities, telecommunications, and healthcare. Although
the “equilibrium quantity.” the official government goal is to run these enterprises
in the best interest of the overall public, inefficien-
cies and corruption often interfere with effectiveness.
2-4 PLANNED ECONOMIES: Socialist economies also tend to have higher taxes,
which are designed to distribute wealth more evenly
SOCIALISM AND COMMUNISM through society. Tax revenues typically fund services
that citizens in free enterprise systems would have to
In capitalist economies, pay for themselves in countries with lower tax rates. Ex-
demand curve The graphed private ownership is para- amples range from free childcare to free university edu-
relationship between price and
quantity from a customer demand mount. Individuals own cation, to free public healthcare systems. Critics of the
standpoint. businesses, and their per- recent government intervention in the U.S. economy
sonal fortunes depend on believe that the new moves have pushed us too far in a
equilibrium price The price
associated with the point at which their success in the free mar- socialist direction.
the quantity demanded of a product ket. But in planned econo- Most Western European countries—from Sweden to
equals the quantity supplied. mies, the government plays Germany, to the United Kingdom—developed powerful
socialism An economic system a more heavy-handed role socialist economies in the decades after World War II. But
based on the principle that the in controlling the economy. more recently, growth in these countries has languished.
government should own and operate The two key categories of Although many factors have contributed to the slow-
key enterprises that directly affect
public welfare. planned economies are down, the impact of high taxes on the profit incentive
socialism and communism. and lavish social programs on the work incentive has
Waste Not, Want Not
For years upon years, parents and grandparents have capacity capture.
counseled their children with this sage advice: “Waste not, As this trend grows,
want not.” Yet somewhat ironically, this age-old wisdom smart and dynamic
applies just as much to the on-demand economy, which businesses will
puts idle resources to work for the benefit of society. This need to use extraor-
growing trend has radically changed consumer expecta- dinary creativity
tions in regards to sustainability. According to trendspotting to reengineer
experts, younger consumers increasingly expect the their approach to
companies they buy from to create new sources of value sustainability—
photocritical/Shutterstock.com
and to eliminate wasted resources in creative ways. The all while deliv-
reason: “When you can pay to use cars by the minute, access ering ongoing
office space by the hour, eat your food cooked by your profitability.12
neighbors and more, then ‘traditional’ business processes
suddenly start to look even more wasteful.” Trendwatching.
com calls the upending of existing processes to reduce waste
clearly played a role. Potential entrepreneurs may migrate end of the 1980s, it was replaced with democracy and
to countries that let them keep more of their profits, and the free market. Over the past two decades, China has
workers with abundant benefits may find themselves also introduced significant free market reforms across
losing motivation. In late 2010, many of these economies much of the country, fueling a torrid growth rate that
imposed stiff austerity measures to control government has only recently begun to slow. And in the 1990s, Viet-
spending, eliminating some public benefits many took nam launched free market reforms, stimulating rapid,
for granted. sustained growth. The remaining communist eco-
nomic systems—North Korea and Cuba—continue to
2-4b Communism falter, their people facing drastic shortages and even
starvation.
Communism is an economic and political system
that calls for public ownership of virtually all enter-
prises, under the direction of a strong central gov-
ernment. The communist concept was the brainchild
of political philosopher Karl Marx, who outlined its
2-5 MIXED ECONOMIES:
core principles in his 1848 Communist Manifesto. The THE STORY OF THE FUTURE
communism that Marx envisioned was supposed
to dramatically improve the lot of the worker at the In today’s world, pure economies—market or planned—
expense of the super-rich. are practically nonexistent, since each would fall far
But countries that adopted communism in the short of meeting the needs of its citizens. A pure market
1900s—most notably the former Soviet Union, China, economy would make in-
Cuba, North Korea, and Vietnam—did not thrive. Most sufficient provision for the communism An economic
imposed authoritarian governments that suspended old, the young, the sick, and political system that calls for
individual rights and choices. People were unable to and the environment. A public ownership of virtually all
make even basic choices such as where to work or pure planned economy enterprises, under the direction
of a strong central government.
what to buy. Without the free market to establish what would not create enough
to produce, crippling shortages and surpluses devel- value to support its people mixed economies
over the long term. Instead, Economies that embody
oped. Corruption infected every level of government.
elements of both planned
Under enormous pressure from their own people and most of today’s nations and market-based economic
the rest of the world, communism began to collapse have mixed economies, systems.
across the Soviet Union and its satellite nations. At the falling somewhere along
Big Brother Is Watching . . . or Is He?
One of the underlying principles of communism and socialism with flowers. These results suggest that self-interest may be
is that most people are willing to sacrifice self-interest for the more natural and comfortable than fairness for most people.
good of the overall society. That may be true, but a new study We’re happy to be generous, but only when we think someone
suggests that may only be true if other people are watching. is watching—even if that someone is just a cutout picture of
Researchers at the psychology department of a major university a face with observant eyes. Our deep-seated interest in our
recently ran an experiment whereby they changed the price list own well-being over everyone else’s may be one reason why
at an honor system–based coffee bar in the faculty and staff socialism and communism haven’t created as much wealth over
break room. The prices themselves remained unchanged, but the long term as free enterprise has.13
each week the photocopied picture above the prices varied
rangizzz/Shutterstock.com
between flowers and the eyes of real faces. The faces changed,
but the eyes on the faces always looked directly at the observer.
During the weeks with faces on the list, staff members paid
nearly three times as much for their drinks as during the weeks
a spectrum that ranges from pure planned at one ex- have begun moving toward the market end of the
treme to pure market at the other. spectrum. Government-owned businesses have
Even the United States—one of the most mar- converted to private ownership via a process
ket-oriented economies in the world—does called privatization. Socialist governments
not have a pure market economy. The vari- have reduced red tape, cracked down on
ous departments of the government own corruption, and created new laws to pro-
a number of major enterprises, including tect economic rights. Extravagant human
the postal service, schools, parks, librar- services—from free healthcare to edu-
ies, entire systems of universities, and cation subsidies—have shrunk. And far-
the military. In fact, the federal govern- reaching tax reform has created new
ment is the nation’s largest employer, incentives for both domestic and foreign
providing jobs for more than 4 million investment in once-stagnant planned
Americans. And—although the govern- economies.15
ment does not directly operate firms in Unfortunately, the price of eco-
the financial sector—the federal gov- nomic restructuring has been a fair
ernment has become part owner in amount of social turmoil in many
a number of financial institutions as nations undergoing market reforms.
part of the recent bailouts. The gov- Countries from France to China have
ernment also intervenes extensively experienced sometimes violent
in the free market by creating regu- demonstrations in response to so-
lations that stimulate competition cial and employment program cut-
and protect both consumers and backs. Change is challenging,
Ekaterina Bykova/Shutterstock.com
workers. Regulations are likely to especially when it redefines

become stronger in the wake of economic winners and losers.
the economic crisis.14 But countries that have taken
Over the past 30 years, strides toward the market end
most economies of the world of the spectrum—from small
players such as the Czech Re-
public, to large players such as
Karl Marx (1818–1883) was a Prussian- China—have seen the payoff
privatization The process of
converting government-owned born theorist who helped develop the in rejuvenated growth rates
businesses to private ownership. political ideology of communism. that have raised the standard
of living for millions of people.
What in the World Happened to Capitalism?
In the late 1800s and early 1900s, millions of peasants from get poorer” under capitalism. Do these downbeat percep-
around the world set sail for the United States in search of tions really matter? They certainly do for the people who hold
the American Dream. Inspired by rumors that the streets in them, and some experts believe that a widespread loss of
U.S. cities were paved with gold, these poor villagers poured faith in business can actually lead to destructive regulation,
through Ellis Island and spread across the country to build ultimately undermining the country’s ability to create wealth.
better lives for themselves and their families. Sometime So are Americans ready to ditch capitalism? The meteoric
between then and now, however, the American Dream lost rise of democratic socialist Bernie Sanders during the 2016
its shine. In an international survey of 10,000 adults, only presidential election suggests that perhaps many are. For
14% agreed with the statement that “the next generation will the time being, however, this survey indicates that most
probably be richer, safer, and healthier than the last,” while Americans agree with this paraphrased Winston Churchill
52% disagreed. Americans’ survey answers were among the quote: “Capitalism is the worst economic system, except for all
most pessimistic in the survey, which also found that 55% the others.”16
of Americans believe that “the rich get richer” and “the poor
2-6 EVALUATING ECONOMIC since they don’t include any illegal activities—such as
paying undocumented nannies and gardeners, or selling
PERFORMANCE: WHAT’S illegal drugs—which can represent a significant portion
of some countries’ production. The GDP also ignores
WORKING? legal goods that are not reported to avoid taxation,
plus output produced within households.17 Check out
Clearly, economic systems are complex—very complex. Chapter 3 for a survey of the world’s key economies
So you probably won’t be surprised to learn that no according to total GDP and GDP growth rate.
single measure captures all the dimensions of economic
performance. To get the full picture, you need to under-
stand a range of terms and measures, including gross 2-6b Employment Level
domestic product, employment level, the business cycle,
The overall level of employment is another key element
inflation rate, and productivity.
of economic health. When people have jobs, they have
money, which allows them to spend and invest, fuel-
2-6a Gross Domestic Product
ing economic growth. Most nations track employment
Real gross domestic product, or GDP, measures levels largely through the unemployment rate,
the total value of all final goods and services produced which includes everyone age 16 and older who
within a nation’s physical boundaries over a given pe- doesn’t have a job and is actively seeking one. The U.S.
riod of time, adjusted for inflation. (Nominal GDP does unemployment rate climbed precipitously through
not include an inflation adjustment.) All domestic pro- the Great Recession, rising from 5.8% in 2008 to 9.3%
duction is included in the GDP, even when the producer in 2009, then dropping to
is foreign-owned. The U.S. GDP, for instance, includes 8.1% in 2012 as the econ-
gross domestic product
the value of Hyundai Sonatas built in Alabama, even omy began its glacially (GDP) The total value of all final
though Hyundai is a Korean firm. Likewise, the Indo- slow turnaround. Unem- goods and services produced
nesian GDP includes the value of Gap clothing manu- ployment didn’t move within a nation’s physical
below 8% until Septem- boundaries over a given period
factured in Indonesian factories, even though Gap is an
of time.
American firm. ber of 2012, and then it
GDP is a vital measure of economic health. Business dropped slowly through- unemployment rate The
percentage of people in the
people, economists, and political leaders use GDP to out 2013 to end the year at
labor force over age 16 who do
measure the economic performance of individual na- an annual average of 7.4% not have jobs and are actively
tions and to compare the growth among nations. Inter- as the recovery began to seeking employment.
estingly, GDP levels tend to be somewhat understated take hold. Unemployment
continued dropping, hitting 4.7% in December 2016.
But unfortunately, about half of the 8 million jobs lost Raising a child born in 2015 from
during the recession were middle-income jobs, and
birth to age 17 costs about $233,610
about half of the new jobs created since have been in
low-wage sectors of the economy, leading to stagnant (not including college!)—almost
household incomes.18 $14,000 every year.
Interestingly, some unemployment is actually
— U . S . D E PA R T M E N T O F A G R I C U LT U R E
good—it reflects your freedom to change jobs. If you
have an awful boss, for instance, you may just quit. If
you quit, are you unemployed? Of course you are. Are
you glad? You probably are, and in normal times, the
chances are good that you’ll find another position that’s best guesses stand to make fortunes, but bad bets can
a better fit for you. This type of job loss is called frictional be financially devastating. The two key phases of the
unemployment, and it tends to be ultimately positive. business cycle are contraction and expansion, shown in
Structural unemployment, on the other hand, is usually Exhibit 2.5.
longer term. This category encompasses people who ■ Contraction is a period of economic downturn,
don’t have jobs because the economy no longer needs marked by rising unemployment. Businesses
their skills. In the United States, growing numbers of cut back on production, and consumers shift
workers in the past decade have found themselves vic- their buying patterns to more basic products
tims of structural unemployment as manufacturing jobs and fewer luxuries. The economic “feel-good
have moved overseas. Often their only option is expen- factor” simply disappears. Economists declare
sive retraining. Two other categories of unemployment an official recession when GDP decreases for
are cyclical, which involves layoffs during recessions, two consecutive quarters. A depression is
and seasonal, which involves job loss related to the time an especially deep and long-lasting recession.
of year. In some areas of the country, construction and Fortunately, economies seldom spiral into severe
agricultural workers are seasonally unemployed, but the depressions, thanks in large part to proactive
best example may be the department-store Santa who intervention from the government.
has a job only during the holiday season!
The last depression in the United States was the
Great Depression of the 1930s. Whether a downturn
2-6c The Business is mild or severe, the very bottom of the contraction
Cycle is called the “trough,” as shown in Exhibit 2.5.
business cycle The periodic
contraction and expansion that The business cycle ■■ Recovery is a period of rising economic growth
occur over time in virtually every is the periodic contrac- and increasing employment following a contraction.
economy. Businesses begin to expand. Consumers start to regain
tion and expansion that
contraction A period of occur over time in virtu- confidence, and spending begins to rise. The recovery
economic downturn, marked by
ally every economy. But is essentially the transition period between contrac-
rising unemployment and falling tion and expansion.
business production. the word “cycle” may be a
little misleading, since it ■■ Expansion is a period of robust economic growth
recession An economic
implies that the economy and high employment. Businesses expand to
downturn marked by a decrease
in the GDP for two consecutive contracts and expands capitalize on emerging opportunities. Consumers
quarters. in a predictable pattern. are optimistic and confident, which fuels purchas-
depression An especially In reality, the phases of ing, which fuels production, which fuels further
deep and long-lasting recession. the cycle are different hiring. As Exhibit 2.5 demonstrates, the height of
each time they happen, economic growth is called the peak of the expan-
recovery A period of
rising economic growth and
and—despite the efforts sion. The U.S. economy had the longest growth
employment. of countless experts—no spurt on record during the ten-year period from
one can accurately predict 1991 to 2001. After a relatively mild slowdown in
expansion A period of robust
economic growth and high when changes will oc- 2001–2002, the U.S. economy again expanded for
employment. cur or how long they will several years before it plunged into a full-blown
last. Those who make the recession in 2008.19
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BUSN 11 BRIEF CONTENTS

Personal Finance Appendix 328

Appendix 1: Labor Unions and Collective Bargaining

Brief Contents iii

3 The World Marketplace:

Business without Borders 38

THE BUSINESS 3-2 Key Reasons for International Trade

ENVIRONMENT 3-4 Seizing the Opportunity: Strategies for Reaching

4 Business Ethics and Social

Responsibility: Doing Well

1 Business Now: Change 4-3 Ethics: Multiple Touchpoints 61

7 Small Business and 9 Finance: Acquiring and Using

13 Distribution and Pricing: Right

Place, Right Price 236

16 Managing Information and

Monkey Business Images/Shutterstock

14 Management, Motivation, 17 Operations Management:

15 Human Resource Personal Finance Appendix 328

Chuck ­ Williams at [email protected], and Marce Kelly

1-3 Discuss the role of nonprofit organizations in the economy

1-1 BUSINESS NOW: MOVING AT BREAKNECK SPEED

2 PART ONE: The Business Environment

CHAPTER 1: Business Now: Change Is the Only Constant 3

Joking aside, millennials now represent both

4 PART ONE: The Business Environment

CHAPTER 1: Business Now: Change Is the Only Constant 5

Hulton Collection/Hulton Archive/Getty Images

Henry Ford’s assembly line began operation

Another key element of the U.S. economic environ-

ment is legislation that supports enforceable contracts.

For instance, if you contract a baker to supply your health

granted, but in a number of developing countries—which

1-5b The Competitive Environment Mercedes-Benz Porsche 118%

1-5c The Workforce Advantage 1-5d The Technological Environment

Hawaii population, and Hispanics comprise about 47% of

14 PART ONE: The Business Environment

CHAPTER 1: Business Now: Change Is the Only Constant 15

THE BIG PICTURE

16 PART ONE: The Business Environment

CHAPTER 1: Business Now: Change Is the Only Constant 17

2-6 Discuss key terms and tools to evaluate economic performance

2-1 ECONOMICS: NAVIGATING A CRISIS

THE BUSINESS 3-2 Key Reasons for International Trade

ENVIRONMENT 3-4 Seizing the Opportunity: Strategies for Reaching

1 Business Now: Change 4-3 Ethics: Multiple Touchpoints 61

Chuck Williams at [email protected], and Marce Kelly

2-3a The Fundamental Rights of Capitalism