Fundamentals of Business and Economics This chapter will help you understand the demanding environment in which Apple and all other businesses now function, from the basic laws of supply and demand to the influence of government agencies in the business arena. You'll learn how the U.S. economy got to where it is today and explore the challenges you'll face in today's global marketplace. © Prentice Hall, 2007 Excellence in Business, 3e

Excellence in Business, 3e Why Study Business? Learn what it takes to run a business Build your business vocabulary Develop your workplace skills Learn about a various occupations Appreciate today’s business careers In this course you’ll learn what it takes to run a business. As you progress though this course, you’ll begin to look at things from the eyes of an employee or a manager instead of a consumer. You’ll develop a fundamental business vocabulary that will help you keep up with the latest news and make more informed decisions. By participating in classroom discussions and completing the chapter exercises, you’ll gain some valuable critical-thinking, problem-solving, team-building, and communication skills that you can use on the job and throughout your life. Should you decide to pursue a career in business, this course will introduce you to a variety of jobs in fields such as accounting, economics, human resources, management, finance, marketing, and so on. You’ll see how people who work in these business functions contribute to the success of a company as a whole. You’ll gain insight into the types of skills and knowledge these jobs require. And most important, you’ll discover that a career in business today is fascinating, challenging, and often quite rewarding. © Prentice Hall, 2007 Excellence in Business, 3e

Excellence in Business, 3e What is a Business? Knowledge For-Profit Goods Services Job creation Tax-base Investments Non-Profit Education Libraries Museums Social services Charities Resources Capital A business is a profit-seeking activity that provides goods and services that satisfy consumers’ needs. The driving force behind most businesses is the prospect of earning a profit—what remains after all expenses have been deducted from business revenue. Still, not every organization exists to earn a profit. Nonprofit organizations exist to provide society with a social or educational service. Although nonprofit organizations do not have a profit motive, they must operate efficiently and effectively to achieve their goals. Thus, the business opportunities, challenges, and activities discussed throughout this textbook apply to both profit-seeking and nonprofit organizations. Entrepreneurs © Prentice Hall, 2007 Excellence in Business, 3e

Categories of Business Producing Goods Providing Services Most businesses can be classified into two broad categories: goods-producing businesses and service businesses. Goods-producing businesses produce tangible goods by engaging in activities such as manufacturing, construction, mining, and agriculture. It’s difficult to start a goods-producing business without substantial investments in buildings, machinery, and equipment. Most goods-producing businesses are capital-intensive businesses; they generally require large amounts of money or equipment to get started and to operate. Service businesses produce intangible products and include those whose principal product is finance, insurance, transportation, utilities, wholesale and retail trade, banking, entertainment, health care, repairs, or information. Most service businesses are labor-intensive businesses. That is, they rely more on human resources than buildings, machinery and equipment to prosper. Capital Intensive Labor Intensive © Prentice Hall, 2007 Excellence in Business, 3e

Excellence in Business, 3e Service Sector Growth More disposable income Lifestyle and demographic changes Complex goods and technologies Need for professional advice Low barriers to entry Services have always played an important role in the U.S. economy. For more than 60 years, they accounted for half of all U.S. employment. In the mid-1980s services became the engine of growth for the U.S. economy. Today the service sector accounts for 70 to 80 percent of U.S. economic output. This trend will likely continue into the foreseeable future, with service businesses creating the vast majority of new jobs. The growth in the service sector is attributable to five key factors: Consumers have more disposable income. The 76 million baby boomers in the United States (born between 1946 and 1964) are in their peak earning years. Services target changing demographic patterns and lifestyle trends. The United States has more elderly people, more single people living alone, more two-career households, and more single parents than ever before. These trends create opportunities for service companies. Services are needed to support complex goods and new technology. Computers, home entertainment centers, recreational vehicles, and security systems are examples of products that require specialized installation, repair, user training, or extensive support services. Companies are increasingly seeking professional advice. To compete in the global economy, many firms turn to consultants and professional advisors for help as they seek ways to cut costs, refine their business processes, expand overseas, and engage in electronic commerce. Barriers to entry are low for service businesses. Capital-intensive businesses generally have high barriers to entry, which means that conditions exist that make entry into these businesses extremely difficult. By contrast, the barriers to entry for most service companies are low. © Prentice Hall, 2007 Excellence in Business, 3e

Excellence in Business, 3e What is Economics? Microeconomics Macroeconomics Economics is the study of how a society uses its scarce resources to produce and distribute goods and services. The study of economic behavior among consumers, businesses, and industries who collectively determine the quantity of goods and services demanded and supplied at different prices is commonly referred to as microeconomics. By contrast, the study a country’s larger economic issues, such as how firms compete, the effect of government policies, and how an economy maintains and allocates its scarce resources, is commonly referred to as macroeconomics. The role that individuals and government play in allocating a society’s resources depends on the society’s economic system, the basic set of rules for allocating a society’s resources to satisfy its citizens’ needs. Economic System © Prentice Hall, 2007 Excellence in Business, 3e

Excellence in Business, 3e Factors of Production Resources Capital Entrepreneurs Knowledge The resources that societies use to produce goods and services are called factors of production. To maximize a company’s profit, businesses use five factors of production in the most efficient way possible: Natural resources – things that are useful in their natural state, such as land, forests, minerals, and water. Human resources – anyone who works to produce goods and services. Capital – resources that a business needs to produce goods and services. Entrepreneurs – innovative businesspeople who are willing to take the risks involved in creating and operating new businesses. Knowledge – the collective intelligence of an organization. © Prentice Hall, 2007 Excellence in Business, 3e

Excellence in Business, 3e Economic Systems Capitalism Mixed Socialism Communism Privatization Free-Market System Planned The role that individuals and government play in allocating a society’s resources depend on the society’s economic system, the basic set of rules for allocating a society’s resources to satisfy its citizens’ needs. Two main economic systems exist today: free-market systems and planned systems. In a free-market system, individuals are free to decide what products to produce, how to produce them, whom to sell them to, and at what price to sell them. Capitalism is the term used to describe the free-market system. In modern practice, however, the government sometimes intervenes in free-market systems to influence prices and wages or to change the way resources are allocated. This practice of limited intervention is called mixed capitalism. In a planned system, governments control all or part of the allocation of resources and limit the freedom of choice. The planned system that allows individuals the least degree of economic freedom is communism. Private ownership is restricted. Resource allocation is handled through centralized planning by government officials. Socialism involves a relatively high degree of government planning and some government ownership of land and resources. However, government involvement is limited to industries considered vital to the common welfare. Several socialist and communist economies are moving toward free-market systems. They are privatizing some of their government-owned enterprises by selling them to privately held firms. © Prentice Hall, 2007 Excellence in Business, 3e

The Forces of Supply and Demand Microeconomics The Forces of Supply and Demand At the heart of every business transaction is an exchange between a buyer and a seller. The buyer wants or needs a particular service or good and is willing to pay the seller in order to obtain it. The seller is willing to participate in the transaction because of the anticipated financial gains from selling the service or good. In a free-market system, the marketplace (composed of individuals, firms, and industries) and the forces of demand and supply determine the quantity of goods and services produced and the prices at which they are sold. Demand is the quantity of a good or service that consumers will buy at a given time at various prices. Supply is quantity of a good or service that the producers will provide on a particular date. Both work together to impose a kind of order on the free-market system. © Prentice Hall, 2007 Excellence in Business, 3e

Excellence in Business, 3e Understanding Demand Advertising and Promotion Spending Consumer Income Consumer Preferences Price of Substitute Products Complementary Goods Expectations About Future Prices Higher Lower Price Demand Consider the airline industry. When the economy is robust, consumers are willing to spend more on discretionary travel. When the economy falters, they cut back on such discretionary spending. Airlines can respond to changes in consumer demand by reducing ticket prices or by offering promotions. But other factors besides price influence consumer demand, including the following:  Consumer income Consumer preferences (such as increased safety or reduced travel time for the airline industry) The price of substitute products (such as rail or automobile travel or videoconferencing for the airline industry) The price of complimentary goods (such as hotel accommodations or restaurant dining for the airline industry) Advertising and promotional expenditures Consumer expectations about future prices Lower Higher © Prentice Hall, 2007 Excellence in Business, 3e

Demand Curve for Airline Tickets A demand curve is a graph showing the relationship between the amount of product that buyers will purchase at various prices. (Demand curves are not necessarily curved; they may be straight lines.) To draw the graph, we assume that all variables except price remain constant. Demand curves typically slope downward, which means that lower prices generally attract larger purchases. For instance, when airlines reduce their ticket prices, the demand for airline travel generally rises. The graph above shows a possible demand curve for the monthly number of economy tickets (seats) for an airline’s Chicago to Denver route at different prices. © Prentice Hall, 2007 Excellence in Business, 3e

Expected Shifts in Demand Curve Consumer Income Consumer Preferences Price of Substitutes Price of Complementary Goods Advertising-Promotion Consumer Expectations Number of Buyers Variable Shifts Right When: Increases More Favorable Decreases Optimistic Shifts Left When: Less Favorable Pessimistic It is important to understand that there is a difference between changes in the quantity demanded at various prices and changes in overall demand. A change in quantity demanded, such as the change that occurs at different airline ticket prices for a market, is simply movement along the demand curve. A change in overall demand resulting from changes in a number of variables besides price produces an entirely new demand curve. The table above highlights the expected movement of the new demand curve as key variables change. © Prentice Hall, 2007 Excellence in Business, 3e

Demand Curve for Airline Tickets Looking back at our airline example, if consumer concerns for travel safety increase or the consumer income decreases, we would expect our original demand curve for airline tickets to drop at every price. As the graph above shows, such an overall drop in demand would result in a new demand curve for airline ticket sales for the same Chicago to Denver route. The new demand curve shifts to the left of the original demand curve depicted in slide 11. If conditions change and overall demand increase beyond the original demand depicted in slide 11, the new demand curve would shift to the right of the original demand curve. © Prentice Hall, 2007 Excellence in Business, 3e

Excellence in Business, 3e Understanding Supply Goods and Services Supply Price Variables Higher More Less Lower Demand alone is not enough to explain how a company operating in a free-market system sets its prices or production levels. In general, a firm’s willingness to produce and sell a good or service increases as the price it can charge and its profit potential per item increase. In other words, as the price goes up, the quantity supplied generally goes up. The depiction of the relationship between prices and quantities that sellers will offer for sale, regardless of demand, is called a supply curve. Movement along the supply curve typically slopes upward. So as prices rise, the quantity sellers are willing to supply also rises. Similarly, as prices decline, the quantity sellers are willing to supply declines. © Prentice Hall, 2007 Excellence in Business, 3e

Supply Curve for Airline Tickets The depiction of the relationship between prices and quantities that sellers will offer for sale, regardless of demand, is called a supply curve. Movement along the supply curve typically slopes upward. So as prices rise, the quantity sellers are willing to supply also rises. As prices decline, the quantity sellers are willing to supply declines. The graph above shows a possible supply curve for the monthly number of economy tickets (seats) supplied on an airline’s Chicago to Denver route at different prices. The graph shows that increasing prices for economy tickets on that route should increase the number of tickets (seats) an airline is willing to provide for that route, as the airlines are motivated by the possibility of earning growing profits. © Prentice Hall, 2007 Excellence in Business, 3e

Expected Shifts in Supply Curve Costs of Inputs Number of Competitors New Technology Suppliers Expect That Future Sales Prices Variable Shifts Right When: Decreases Production Costs Will Decline Shifts Left When: Increases Will Increase As with demand, several factors affect a seller’s willingness and ability to provide goods and services at various prices. These variables include the cost of inputs (for example, pilot wages, fuel, and planes for the airlines), the number of competitors in the marketplace, and advancements in technology that allow companies to operate more efficiently. A change in any of these variables can shift the entire supply curve, either increasing or decreasing the amount available at every price, as the table above suggests. © Prentice Hall, 2007 Excellence in Business, 3e

Supply Curve for Airline Tickets For example, if the cost of fuel rises, airlines may respond by cutting back the number of economy seats assigned to its routes, shifting the supply curve to the left (see graph above). But if new technologies allow the airline to save fuel or reduce the costs of training pilots, airlines may increase the number of economy seats assigned to its routes. Such increase in supply would shift the supply curve to the right. © Prentice Hall, 2007 Excellence in Business, 3e

How Demand and Supply Interact click above title for web link In the real world, variables that affect demand and supply do not change independently. Instead, they change simultaneously and continually. Exhibit 1.9 shows the interaction of both supply and demand curves for monthly airline economy tickets (seats) on a single graph. The two curves intersect at the point market E, or $250. This price is known as the equilibrium price. At that price the airline is willing to sell 3000 round-trip economy tickets and consumers are willing to buy 3000 economy tickets for its Chicago to Denver route. In other words, the quantity supplied and the quantity demanded are in balance. As variables affecting supply and demand change, so will the equilibrium price. For example, increased concerns about passenger safety or longer lines at airport security checkpoints could encourage travelers to make alternate economic choices such as automobile travel or videoconferencing, and thus reduce the demand for air travel at every price. Suppliers might respond to such reduction in demand by either reducing the number of flights offered or reducing ticket prices in order to restore the equilibrium level. © Prentice Hall, 2007 Excellence in Business, 3e

Issues for the Entire Economy Macroeconomics Issues for the Entire Economy In the previous section we discussed a variety of individual factors that affect the forces of supply and demand simultaneously. In this section we will expand on that discussion by showing how a number of larger economic forces also influence market behavior and ultimately affect supply and demand. These issues include how firms and industries compete in an economic system and the role government plays in fostering competition, regulating industries, protecting stakeholders, and contributing to economic stability. © Prentice Hall, 2007 Excellence in Business, 3e

Free-Market Competition Pure Competition Monopolistic Oligopoly Monopoly In a free-market system, customers are free to buy whatever and wherever they please. Therefore, companies must compete with rivals for potential customers. Competition is the situation in which two or more suppliers of a product are rivals in the pursuit of the same customers. In theory, the ideal type of competition is pure competition, which is characterized by three conditions: a marketplace of multiple buyers and sellers; a product or service with nearly identical features such as wheat or cotton; and low barriers to entry (that is, the ability to easily enter and exit the marketplace). When these three conditions exist, no single firm or group of firms in an industry becomes large enough to influence prices and thereby distort the workings of the free-market system. By contrast, in a monopoly there is only one producer of a product in a given market, and thus the producer is able to determine the price. A situation in which an industry (such as commercial aircraft manufacturing) is dominated by only a few producers (in this case Boeing and Airbus Industries) is called an oligopoly. Between pure competition and monopoly lie varying degrees of competitive power. Most of the competition in advanced free-market economic systems is monopolistic competition, in which a large number of sellers (none of which dominates the market) offer products that can be distinguished from competing products in at least some small way. Competition is the situation in which two or more suppliers of a product are rivals in the pursuit of the same customers. The ideal type of competition is pure competition, which is characterized by three conditions: a marketplace of multiple buyers and sellers; a product or service with nearly identical features such as wheat or cotton; and low barriers of entry. When these three conditions exist, no single firm or group of firms in an industry becomes large enough to influence prices and thereby distort the workings of the free-market system. By contrast, in a monopoly there is only one producer of a product in a given market, and thus the producer is able to determine the price. A situation in which an industry is dominated by only a few producers is called an oligopoly. Between pure competition and monopoly lie a number of firms with varying degrees of competitive power. Most of the competition in advanced free-market economic systems is monopolistic competition, in which a large number of sellers (none of which dominates the market) offer products that can be distinguished from competing products in at least some small way. © Prentice Hall, 2007 Excellence in Business, 3e

Competitive Advantage Excellence in Business, 3e Price Speed Quality Service Innovation When markets become filled with competitors and products start to look alike, companies must use price, speed, quality, service, or innovation to gain a competitive advantage—something that sets one company apart from its rivals and makes its products more appealing to consumers. © Prentice Hall, 2007 Excellence in Business, 3e

Excellence in Business, 3e The Role of Government Fostering competition Regulating industries Deregulating industries Protecting stakeholders’ rights Contributing to economic stability Although the free-market system generally works well, it’s far from perfect. If left unchecked, the economic forces that make capitalism succeed may also create severe problems for some groups or individuals. To correct these types of problems, the government serves four major economic roles: it enacts laws and creates regulations to foster competition; it regulates and deregulates certain industries; it protects stakeholders’ rights; and it intervenes to contribute to economic stability. © Prentice Hall, 2007 Excellence in Business, 3e

Fostering Competition Antitrust Legislation Mergers and Acquisitions Because competition generally benefits the U.S. economy, the U.S. federal government and state and local governments create thousands of new laws and regulations every year to preserve competition and ensure that no single enterprise becomes too powerful. Antitrust laws limit what businesses can and cannot do to ensure that all competitors have an equal chance of producing a product, reaching the market, and making a profit. Some of the earliest government moves in this arena produced such landmark pieces of legislation as the Sherman Antitrust Act, the Clayton Antitrust Act, and the Federal Trade Commission Act. To preserve competition, the government may also stipulate requirements companies must meet to gain approval of a proposed merger or acquisition. If the government thinks a proposed merger or acquisition might restrain competition, it may deny approval altogether. © Prentice Hall, 2007 Excellence in Business, 3e

Regulating and Deregulating Industries Fair Competition Business Ethics Government Regulation Free Competition Sometimes the government imposes regulations on specific industries to ensure fair competition, ethical business practices, safe working conditions, or general public safety. In a regulated industry, close government control is substituted for free competition, and competition is either limited or eliminated. In extreme cases, regulators may even decide who can enter an industry, what customers they must serve, and how much they can charge. For years, the telecommunications, airline, banking, and electric utility industries fell under strict government control. However, the trend over the past few decades has been to open up competition in regulated industries by removing or relaxing existing regulations. Hopes are that such deregulation will allow new industry competitors to enter the market, create more choices for consumers, and keep prices in check. But the debate is ongoing about whether deregulation achieves these goals. Working Conditions Public Safety © Prentice Hall, 2007 Excellence in Business, 3e

Protecting Stakeholders Agency or Commission Areas of Responsibility Consumer Product Safety Commission (CPSC) Safety of consumer products Environmental Protection Agency (EPA) Environmental protection Equal Employment Opportunity Commission (EEOC) Employment discrimination Federal Communications Commission (FCC) Telephone, telegraph, radio, television In addition to fostering competition, another important role the government plays is to protect the stakeholders of a business. Businesses have many stakeholders—groups that are affected by (or that affect) a business’s operations, including colleagues, employees, supervisors, investors, customers, suppliers, and society at large. In the course of serving one or more of these stakeholders, a business may sometimes neglect the interests of other stakeholders in the process. To protect consumers, employees, shareholders, and the environment from the potentially harmful actions of business, the government has established several regulatory agencies. Consumer Product Safety Commission: Regulates and protects the public from unreasonable risks of injury from consumer products. Environmental Protection Agency: Develops and enforces standards to protect the environment. Equal Employment Opportunity Commission: Protects and resolves discriminatory employment practices. Federal Aviation Administration: Sets rules for the commercial airline industry. Federal Communications Commission: Overseas communication by telephone, telegraph, radio and television. Federal Energy Regulatory Commission: Regulates rates and sales of electric power and gas. Federal Aviation Administration (FAA) Commercial airline industry Federal Energy Regulatory Commission (FERC) Electric power and natural gas © Prentice Hall, 2007 Excellence in Business, 3e

Protecting Stakeholders Agency or Commission Areas of Responsibility Federal Highway Administration (FHA) Vehicle safety requirements Federal Trade Commission (FTC) Business practices and advertising Food and Drug Administration (FDA) Foods, drugs, medical devices, cosmetics Interstate Commerce Commission (ICC) Interstate transportation Federal Highway Administration: Regulates vehicle safety requirements. Federal Trade Commission: Enforces laws and guidelines regarding unfair business practices and acts to stop false and deceptive advertising and labeling. Food and Drug Administration: Enforces laws and regulations to prevent distribution of harmful foods, drugs, medical devices, and cosmetics. Interstate Commerce Commission: Regulates and oversees carriers engaged in transportation between states: railroads, bus lines, trucking companies, oil pipelines, and waterways. Occupational Safety and Health Administration: Promotes worker safety and health. Securities and Exchange Commission: Protects investors and maintains the integrity of the securities markets. Occupational Safety and Health Administration (OSHA) Safety and health of workers Securities and Exchange Commission (SEC) Investors and securities markets © Prentice Hall, 2007 Excellence in Business, 3e

Contributing to Economic Stability Expansion Recovery Fiscal Policy Business Cycle Business Cycle Monetary Policy A nation’s economy never stays exactly the same size. Economic expansion occurs when the economy is growing and people are spending more money. Consumer purchases stimulate businesses to produce more goods and services, which it turn stimulates employment. Economic contraction occurs when such spending declines. Business cuts back on production, employees are laid off, and the economy as a whole slows down. If the period of downward swing is severe, the nation may enter into a recession, traditionally defined as two consecutive quarters of decline in real gross domestic product. When a downward swing or recession is over, the economy enters into a period of recovery: Companies buy more, factories produce more, employment is high, and workers spend their earnings. These recurrent up-and-down swings are known as the business cycle. In an attempt to avoid hardship and to foster economic stability, the government can levy new taxes or adjust the current tax rates, raise or lower interest rates, and regulate the total amount of money circulating in our economy. These government actions have two facets: monetary policy and fiscal policy. Monetary policy involves adjusting the nation’s money supply by increasing or decreasing interest rates to help control inflation. Fiscal policy involves changes in the government’s revenues and expenditures to stimulate or dampen the economy. Recession Revenue and Spending Interest Rates Economic Contraction © Prentice Hall, 2007 Excellence in Business, 3e

Major Economic Indicators Housing Starts Durable-Goods Orders Interest Rates Unemployment Statistics Economists monitor the performance of the economy by watching a variety of indicators. Unemployment statistics, for example, signal future changes in consumer spending. When unemployment rises, people have less money to spend, and the economy suffers. Housing starts, another leading indicator, show where several industries are headed. Housing is very sensitive to interest rate changes. If mortgage rates are high, fewer people can afford to build new homes. When housing starts drop, builders stop hiring, and may even lay off workers. Meanwhile, orders fall for plumbing fixtures, carpets, and appliances, so manufacturers decrease production and workers’ hours. These cutbacks ripple through the economy and lead to slower income and job growth, and weaker consumer spending. Another leading indicator is durable-goods orders, or orders for goods that typically last more than three years (which can mean everything from desk chairs to airplanes). A rise in durable-goods orders is a positive indicator that business spending is turning around. Besides unemployment data, housing starts, and durable-goods orders, economists closely monitor a nation’s price changes and output. © Prentice Hall, 2007 Excellence in Business, 3e

Measuring Price Changes Inflation Deflation Consumer Price Index (CPI) Purchasing Power Price changes, especially price increases, are another important economic indicator. In a period of rising prices, the purchasing power of a dollar erodes, which means that you can purchase fewer things with today’s dollar than you could in a prior period. Price increases tend to lead to wage increases, which in turn add pressures for higher prices, setting a vicious cycle in motion. Inflation is a steady rise in the prices of goods and services throughout the economy. When the inflation rate begins to decline, economists use the term disinflation. Deflation, on the other hand, is the sustained fall in the general price level for goods and services. It is the opposite of inflation; that is, purchasing power increases because a dollar held today will buy more tomorrow. In a deflationary period, investors postpone major purchases in anticipation of lower prices in the future. The consumer price index (CPI) measures the rate of inflation by comparing the change in prices of a representative basket of goods and services such as clothing, food, housing, and utilities over time. A numerical weight is assigned to each item in the representative basket to adjust for each item’s relative importance in the marketplace. The CPI has always been a hot topic because it is used by the government to index Social Security payments, and it is widely used by businesses in private contracts to calculate cost-of-living increases. But, like most economic indicators, the CPI is far from perfect. © Prentice Hall, 2007 Excellence in Business, 3e

Measuring National Output Dollar Value Gross Domestic Product (GDP) Gross National Product (GNP) Final Goods and Services Yes Yes Domestic Businesses Yes Yes The broadest measure of an economy’s health is the gross domestic product (GDP). The GDP measures a country’s output--its production, distribution, and use of goods and services--by computing the sum of all goods and services produced for final use in a market during a specified period (usually a year). The goods may be produced by either domestic or foreign companies as long as these companies are located within a nation’s boundaries. A less popular measure of a country’s output is the gross national product (GNP). This measure excludes the value of production from foreign-owned businesses within a nation’s boundaries (such as Honda U.S.), but it includes receipts from the overseas operations of domestic companies-such as McDonald’s in Switzerland. Put another way, GNP considers who is responsible for the production; GDP considers where the production occurs. Foreign-Owned Businesses Yes No Overseas Operations No Yes © Prentice Hall, 2007 Excellence in Business, 3e

Ten Economic Performance Indicators Prime Interest Rate Housing Starts Labor Productivity Rate Rate of Inflation Consumer Price Index Unemployment Rate Durable-Goods Orders Balance of Trade Producer Price Index Gross Domestic Product The table above summarizes the common indicators used to measure a nation’s economic performance. Prime interest rate: Lowest rate that banks charge preferred borrowers on short-term loans. Unemployment rate: Percentage of a nation’s workforce employed at any given time. Housing starts: Number of building permits issued by private housing units. Durable-goods orders: New orders for goods that last more than three years. Labor productivity rate: Rate of increase or decrease in the average output level per worker. Balance of trade: Total value of a country’s exports minus the total value of its imports, over a specific time. Inflation rate: Percentage increase in goods or services over a period of time. Producer price index: Monthly index that measures changes in wholesale prices. Consumer price index: Monthly index that measures changes in consumer prices of a fixed basket of goods and services. Gross domestic product: Dollar value of all final goods and services produced by businesses located within a nation’s borders. By any objective measure, the U.S. economy was in a period of economic contraction as it ushered in the new millennium. But a look into the country’s economic history shows that U.S. growth has been a series of ups and downs. © Prentice Hall, 2007 Excellence in Business, 3e

Excellence in Business, 3e U.S. Economic Growth Age of Industrialization (1900-1944) Postwar Golden Era (1945-1969) Turbulent Years (1970-1979) Rise of Global Competition (1980-1989) New Economy and Beyond (1990 to Today) During the nineteenth century, new technology gave birth to the factory and the industrial revolution. By the early 1920s, labor unions and big business struggled for power. The diverse U.S. market meant that businesses did not have to expand overseas. In 1929 the U.S. stock market crashed, ushering in the Great Depression. By 1941, one in 10 workers remained unemployed. The U.S. government strengthened as people lost confidence in the power of business. That same year the United States entered World War II. The postwar reconstruction, which started in 1945, revived the economy and renewed the trend toward large-scale enterprises. The G.I. Bill of Rights opened advanced education to the working classes. The middle class grew and prospered. By 1950 the birthrate had jumped, and the baby boom was on. Stimulated by a boom in world demand and an expansive political climate, the United States prospered throughout the 1960s. But once Europe and Japan had recovered from the war, they began challenging U.S. industries. In the early 1970s, inflation depressed demand and U.S. economic growth began to slump. In 1973 the price of a barrel of oil skyrocketed from $3 to $11, which helped sustain higher prices. The U.S. economy got hit again in 1979 (oil jumped from $13 to $23 per barrel), resulting in galloping inflation and sky-high interest rates. Exports from Asia began to pour into the United States, and the United States entered an era of diminishing growth. During the 1980s, global competition slowly crept up on the United States. To regain a competitive edge, many U.S. companies restructured their operations. Some corporations merged with others to produce economies of scale; others splintered into smaller fragments to focus on a single industry or a narrower customer base. The tough times of the 1970s planted the seeds for entrepreneurship of the early 1980s. The microprocessor was embraced by new businesses that challenged the status quo. In the early 1990s, the U.S. economy went into recession, many companies went bankrupt, and unemployment soared. However, manufacturing improvements helped move the United States from a position of near-terminal decline to renewed world dominance. For a good part of the 1990s the new economy became synonymous with rapid growth, plentiful jobs, and investment opportunities. But by the turn of the century, the tech sector that had led the economy upward led it right back down. An abrupt economic slowdown ushered in the tenth recession since World War II. The Big Bust vaporized corporate profits, scorched investment portfolios, and laid waste to technology sectors. The economic downturn forced companies to focus on serving customers and producing profits. And it fueled a wave of corporate layoffs. Heightened concerns for the safety of U.S. citizens and the drive to improve the ethical practices of businesspeople are just a few of the challenges facing business today. © Prentice Hall, 2007 Excellence in Business, 3e

Challenges of Globalization Quality products and services Changing needs of customers Managing a small business Globalization and workforce diversity Ethics and social responsibility Technology and electronic commerce Globalization—the increasing tendency of the world to act as one market instead of a series of national ones—opens new markets for a company’s goods and services. But at the same time it creates tougher competition and a raft of new challenges for businesses: Producing quality products and services that satisfy customer’s changing needs. Today’s customer is well-informed and has many product choices. Starting and managing a small business in today’s competitive environment. Starting a new business or managing a small company in today’s global economy requires creativity and a willingness to exploit new opportunities. Thinking globally and committing to a culturally diverse workforce. Globalization opens new markets for a company’s goods, increases competition, and changes the composition of the workforce into one that is more diverse in race, gender, age, physical and mental abilities, lifestyle, culture, education, ideas, and background. Behaving in an ethically and socially responsible manner. As businesses become more complex through global expansion and technological change, they must deal with an increasing number of ethical and social issues. Keeping pace with technology and electronic commerce. Technology is reshaping the world. The Internet and innovations in computerization and telecommunication have made it possible for people anywhere in the world to exchange information and goods. © Prentice Hall, 2007 Excellence in Business, 3e