Solution Manual for Business Essentials, 12th Edition

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Business EssentialsTwelfth EditionRonald J. EbertRicky W. GriffinInstructor’s Manual forBusiness EssentialsCarol Davis Wright

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1-1Chapter 1: The U.S. Business EnvironmentChapter OverviewMany students come to an introduction to business class not quite sure what it’s all about. Thecourse has something for everyone, from those who have been in the business world a while tothosejustgettingstarted.Asthebookunfolds,you’lldevelopan understandingof thefoundations of business and will be able to apply what you already know (or what you arestarting to learn) about business to many aspects of the course.This first chapter dives right into the world of business, explaining what business is, what itsmain goals and functions are, and how the external environments of business affect the successand failure of any organization. The chapter also:Defines the nature of U.S. business, describes the external environments of business, anddiscusses how these environments affect the success or failure of organizations.Describes global economic systems according to the means by which they control thefactors of production.Shows how markets, demand, and supply affect resource distribution in the United States.Discusses the elements of private enterprise and the degrees of competition in the U.S.economic system.Explains the importance of the economic environment to business and identifies thefactors used to evaluate the performance of an economic system.Learning Objectives1.Define the nature of U.S. business, describe the external environments of business, anddiscuss how these environments affect the success or failure of organizations.2.Describe the different types of global economic systems according to the means by whichthey control the factors of production.3.Show how markets, demand, and supply affect resource distribution in the United States,identify the elements of private enterprise, and explain the various degrees of competitionin the U.S. economic system.4.Explain the importance of the economic environment to business and identify the factorsused to evaluate the performance of an economic system.

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1-2LIST OF IN-CLASS ACTIVITIES:INSTRUCTOR’S CHOICEActivityDescriptionTime Limit1. Ice-Breaker: What Do YouKnow About Business?Studentsassesstheirlevelofknowledgeaboutbusinessandsettheir own learning goals for the class.20 min.2.SmallGroupDiscussion:Scanning the EnvironmentStudents considerhow parts of theexternalenvironmentaffectbusinesses and industries.25 min.3. Up for Debate: ComparingEconomic SystemsTeams of students discuss types ofeconomic systems.30 min.

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1-3CHAPTER OUTLINELearning Objective 1-1:Define the nature of U.S. business, describe the external environments of business anddiscuss how these environments affect the success or failure of organizations.Business and ProfitAbusinessis an organization that provides goods and services to earn profits.Profitsare thedifference between a business’s revenues and expenses.1.Consumer Choice and Demand:In a capitalistic system like that of the United States,consumers have freedom of choice. In turn, businesses must take into account consumerdemand as shown through wants and needs in their pursuit of profits.2.Opportunity and Enterprise:Opportunity involves goods or services that consumersneed or want, especially if no one else is supplying them or if existing businesses aredoing so inefficiently or incompletely.3.The Benefits of Business:Businesses produce most of the goods and services consumed,employ most working people, create new innovations, and provide opportunities for newbusinesses to serve as suppliers. Further, businesses contribute to the quality of life andthe standard of living in a society. Businesses provide incomes, taxes to supportgovernment, support to charities and community leadership.The External Environments of BusinessTheexternal environmentconsists of everything outside an organization’s boundaries thatmight affect it. Managers must understand their environment to understand how to operate andcompete within it. Businesses can also influence their environments. Six major dimensions of theexternal environment are:1.Domestic Business Environment.The domestic business environment refers to theenvironment in which a firm conducts its operations and derives its revenues. It includescustomers, suppliers, and competitors.2.Global Business Environment.The global business environment refers to the inter-nationalforces thataffecta business;variousfactors includinginternational tradeagreements, international economic conditions, and political unrest affect the globalenvironment at both the general and immediate levels. International market opportunities,suppliers, cultures, competitors, and currency values can impact any business.3.Technological Environment.The technological environment generally includes all theways by which firms create value for their constituents; technology includes humanknowledge, work methods, physical equipment, electronics and telecommunications, andvarious processing systems used to perform business activities.

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1-44.Political-Legal Environment.The political-legal environmentreflects the relationshipbetween business and government, usually in the form of government regulation ofbusiness.5.Sociocultural Environment.The sociocultural environment includes the customs, mores,values, and demographic characteristics of the society in which an organization functions.6.Economic Environment.The economic environment refers to relevant conditions thatexist in the economic system in which a company operates.Use In-Class Activity 1:Ice-Breaker: What Do You Know About Business?Time Limit:20 minutesUse In-Class Activity 2: Small Group Discussion: Scanning the EnvironmentTime Limit: 25 minutes

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1-5Learning Objective 1-2:Describe the different types of global economic systems according to the means by whichthey control the factors of production.Economic SystemAneconomic systemis a nation’s system for allocating its resources among its individualcitizens and organizations.A. Factors of ProductionA basic difference between economic systems is the way in which a system manages itsfactors of production, the resources that a country’s businesses use to produce goods andservices. Economists focus on five factors of production:1.Labor:The human resource element in businesses, labor includes the physical andintellectual contributions people make while engaged in economic production.2.Capital:The financial resources needed to operate an enterprise are known as capital.3.Entrepreneurs:An entrepreneuris an individual who accepts the risks and opportunitiesentailed in creating and operating a new business.4.Physical Resources:The tangible things that organizations use to conduct their businessare physical resources and can include raw materials, offices, production facilities,supplies, and computers.5.Information Resources:Businesses rely oninformation resources,such as marketforecasts, the specialized knowledge of people, and economic data.KEY TEACHING TIPSThe production of tangible goods once dominated most economic systems. But now, themostimportantfactorsofproductionareentrepreneurialskillsandinformationalresources. The more a country can create an environment that promotes entrepreneurshipand harnesses knowledge and information, the better off it will be.Remind students that inputs used to produce outputs are also calledfactors of production;theyincludephysicalresources,labor,capital,entrepreneurship,andinformationresources.QUICK QUESTIONSWhat are the factors of production used to produce orange juice?What are the factors of production used to produce an online video game?

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1-6Entrepreneurship involves tremendous risk-taking and is a welcome ingredient in a free-market system. What characteristics of our free-market system encourage risk taking?B. Types of Economic SystemsEconomic systems vary, depending on how the factors of production are managed.1.Planned Economies: These systems rely on partial or total government control of all ormostof the factors of production and allocation decisions. Withcommunism—ascurrently operating in North Korea—all sources of production are owned and operated bythe government.2.MarketEconomies:Producersandconsumerscontrolproductionandallocationdecisions through supply and demand. The political basis of a market economy iscapitalism,which allowstheprivateownershipof thefactorsof production andencourages entrepreneurship by offering profits as incentives. The economic basis is theoperation of demand and supply.3.Mixed Market Economies: This type of economy features characteristics of bothplanned and market economies; many countries are moving from planned systems tomixed market systems throughprivatization,which involves the transformation ofgovernment-controlledbusinessesintoprivately owned enterprises.In the partiallyplanned system calledsocialism,the government owns and operates selected majorindustries. Many Western European countries, including England and France, allow freemarket operations in most economic areas but keep government control of others, such ashealth care. The United States currently is wrestling with who should control health carefor the portion of the population that is not eligible (by age) for Medicare.KEY TEACHING TIPSRemind students that a government’s level of control distinguishes capitalism fromsocialism. If you have foreign students in your class, you may want them to say a bitabout the economic system in their native country.Remind students that aneconomic systemis defined by how it allocates factors ofproduction. In aplanned economy,the government owns and controls these factors; in amarket economy,producers/consumers buy and sell what they choose.Makesurestudentsunderstandthatamixed marketeconomyischaracterizedbygovernment ownership of major industries working alongside privately owned industries.Ask students to give their opinions about the health care system in the United States, andthe debates regarding restructuring it. In addition, you could ask students to research andreport on any new stories concerning the health care system that appear in publicationssuch as theWall Street Journal.It is never too early to get students to regularly read the

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1-7business news!Use In-Class Activity 3:Class Discussion: Up for Debate: Comparing Economic SystemsTime Limit: 30 MinutesQUICK QUESTIONSGive an example of a country with a planned economy. What makes this economyplanned?Give an example of a country with a market economy. How is the economic systemdifferent in this country?Do you think the government should be involved in supporting the health care insurancesystem in the U.S.? Why or why not?

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1-8Learning Objective 1-3Show how markets, demand, and supply affect resource distribution in the United States,identify the elements of private enterprise, and explain the various degrees of competitionin the U.S. economic system.The Economics of Market SystemsUnderstanding the complex nature of the U.S. economic system is essential to understanding theenvironment in which U.S. businesses operate. Market systems allow businesses the flexibility todecide what to produce, how much to produce, and what price to charge; customers are a drivingforce in market systems because they decide what to buy and at what price. Demand and supplyare the predominant forces that guide decisions about what to buy and what to sell.A. Demand and Supply in a Market EconomyBillions of exchanges take place every day between businesses and individuals; betweenbusinesses; and among individuals, businesses, and governments. Exchanges conducted inone area often affect exchanges elsewhere.1.The Laws of Demand and Supply:Demandis the willingness and ability of buyersto purchase a product;supplyis the willingness and ability of producers to offer a goodor service for sale. Thelaw of demandstates that buyers will purchase more of a productas its price drops; thelaw of supplystates that producers will offer more of a product forsale as its price increases.a.The Demand and Supply Schedule: Thedemandandsupply scheduleindicates howmuch of a product will be sold at various prices. Generally speaking, the moreconsumers are willing to pay for a good, the more producers are likely to divertresources to make more of the good. Conversely, as the price at which consumers arewilling to pay for a product falls, production becomes less profitable and producerscut back on production to divert resources to more profitable areas.b.Demand and Supply Curves: Ademand curveshows how many products will bedemanded at different prices; asupply curveshows how many products will besupplied at various prices. The point at which the curves intersect is themarket price(orequilibrium price).c.Surpluses and Shortages: With asurplus,the quantity supplied exceeds the quantitydemanded; quantity demanded exceeds quantity supplied with ashortage.Businessesshould seek the ideal combination of price charged and quantity supplied so as tomaximize profits, maintain goodwill among customers, and discourage competition.QUICK QUESTIONWhat isequilibrium price? What happens if incomes rise and demand increases? What happensif producers have a surplus and supply increases? Why should producers aim to meet, but notexceed, demand at the equilibrium price?

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1-9B. Private Enterprise and Competition in a Market EconomyIndividuals pursue their own interests with minimal government restriction in aprivateenterprisesystem; such a system requires:Private property rights—the ability of individuals to own resourcesFreedom of choice—the ability to choose where to work and what to buyProfits—the ability to take risk to earn profit, andCompetition—the ability to compete for customers and scarce resources. Competitionoccurs when two or more businesses vie for the same resources or customers.1.Degrees of Competition.Economists have identified four degrees of competition in aprivate enterprise system:a.Perfect Competition.Many small firms exist in an industry; no single firm ispowerful enough to influence price.b.Monopolistic Competition.Many sellers of all sizes, but also many buyers exist, sosellers focus on numerous differentiation strategies, such as brand names, design, andadvertising.c.Oligopoly.An industry has only a handful of sellers; market entry is difficult becauselarge capital investment is needed. Sellers tend to be large.d.Monopoly. An industry or market has only one producer; that producer enjoyscomplete control over price. Utility companies are natural monopolies, industries inwhich one company can most efficiently supply all needed goods or services.Duplicate facilities would be wasteful.KEY TEACHING TIPSRemind students thatperfect competitionis characterized by (a) many buyers, (b) manysellers, and (c) buyers and sellers who accept a going price.Remind students thatmonopolistic competitionis characterized by (a) many buyers, (b)many sellers, and (c) products that are differentiated.Reinforce thatoligopolyis characterized by (a) many buyers, (b) few sellers, (c) productsthat are quite similar, and (d) a change in price by one seller often meaning a change inprice by all sellers.Remind students that amonopolyis characterized by (a) many buyers, (b) only one seller,and (c) prices being set by the one seller.

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1-10QUICK QUESTIONWhich level of competition best describes the market in each of the following scenarios?oYour local Pizza Hut (monopolistic competition)oA local farmer selling apples for applesauce (perfect competition)oCell phone service (oligopoly)oApple store (monopolistic competition)oLocal utility/power company (monopoly)HOMEWORKVisit a Shopping Mall!Now is a good time to assign Application Exercise 9 from the end-of-chapter materials ashomework. This assignment asks students to visit a local shopping mall and determine thedegree of competition stores in the mall face in their immediate environment.At-Home Completion Time: 1 to 1.5 hours

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1-11Learning Objective 1-4Explain the importance of the economic environment to business and identify the factorsused to evaluate the performance of an economic system.Economic IndicatorsA. Economic IndicatorsThese statistics show whether an economic system is strengthening, weakening, or remainingstable.1.Economic Growth, Aggregate Output, and Standard of Living.The business cycle isthe pattern of short-term expansions and contractions in an economy; one important useof economic measures is to help governments and businesses understand where in thebusiness cycle they currently are.Aggregate outputis the total quantity of goods andservices produced by an economic system during a given period. Simply put, an increasein aggregate output is growth.Standard of livingrefers to the total quantity and qualityof goods and services that can be purchased with the currency used in an economicsystem; standard of living increases when the quantity of goods and services increases,and the economic system provides more of the goods and services people want.2.Gross Domestic Product (GDP):TheGDPis the total value of all goods and servicesproduced within a given period throughdomesticfactors of production; GDP is ameasurement of aggregate output. If GDP is going up, aggregate output is going up; ifaggregate output is going up, the nation is experiencing economic growth.Grossnational product (GNP)refers to the total value of all goods and services produced by anational economy within a given period regardless of where the factors of production arelocated.a.Real Growth Rate:Real growth depends on output increasing at a faster rate thanpopulation; the real growth rate in 2015 of the U.S. economic system was 2.4 percentwhile the population grew at a rate of 0.70 percent, thus indicating the real growthrate is modest.b.GDP per Capita:GDP per capita means GDP per person.GDP divided by totalpopulation equals GDP per capita.It is a better measure than GDP itself of theeconomic well-being of the average person.c.Real GDP:Real GDP means that GDP has been adjusted to account for changes incurrency values and price changes. Nominal GDP is GDP measured in current dollarsor with all components valued at current prices, with no adjustments made.d.Purchasing Power Parity:Purchasing power parityis the principle that exchangerates are set so that the prices of similar products in different countries are about thesame. It quantifies what people can actually buy with the financial resources allocatedto them by their respective economic systems; it gives a better sense of standards ofliving around the world.

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1-123.Productivity:Productivitycompares how much a system produces with the resourcesneeded to produce it; increases in productivity yield increases in the standard ofliving.a.Balance of Trade:A country’sbalance of trade is the economic value of all theproducts that it exports minus the economic value of its imported products. Apositivebalance results when the value of a country’s exportsis greater than its imports; thatis, more money is flowing into the country as a result of exporting. Anegativebalance results when a country imports more than it exports.b.National Debt:A country’snational debtis the amount of money that is owed bythe government to creditors.B. Economic StabilityStabilityresults when the amount of money available in an economic system and thequantity of goods and services produced in it are growing at about the same rate.1.Inflation. Inflation occurs when widespread price increases plague an economic system;the amount of money in the economic system exceeds the amount of actual output.Inflation can be measured by theconsumer price index (CPI),which weighs prices oftypical products purchased by consumers living in urban areas. Inflation rate equalsChange in price index/Initial price index of 100.2.Unemployment.Unemploymentis the level of joblessness among people activelyseeking work in an economic system; when unemployment is high, a surplus of availableworkers exists. When unemployment is low, there is a shortage of labor available forbusinesses to hire.Unemployment is sometimes a symptom of arecession,when aggregate output declines,or of adepression,a prolonged and deep recession. For example, during downturns inthe business cycle people in different sectors may lose their jobs at the same time. As aresult, overall income and spending may decline to the extent that businesses begin toimplement cost saving measures—including reduction in force (downsizing), leading tomore unemployment. In early 2010, during the Great Recession, unemployment in theU.S. was 10.2 percent. By November 2011, it was 8.7 percent. By the end of 2016, it was4.9 percent.3.Recession and Depression.Aggregate output is measured to determine whether aneconomy is going through a recession. Governments and economists define arecessionas a period during which aggregate output, as measured by real GDP, declines. The U.S.economy went into a recession in 2008 and many economists agree that we began toemerge in 2011. A prolonged and deep recession is adepression.C. Managing the U.S. EconomyThe government manages the U.S. economic system through both fiscal and monetarypolicies.Fiscal policiesmanage the collection and spending of revenues; changes in tax rates

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1-13can function as fiscal policies.Monetary policiesfocus on controlling the size of thenation’s money supply; the government can influence banks to lend money and can influencethe supply of money through stimulus packages.Stabilization policyis made up of bothfiscalandmonetarypolicies;thegoalistosmoothoutfluctuationsinoutputandunemployment and to stabilize prices.KEY TEACHING TIPSMake sure that students understand thatgross domestic productincludes only the valueof products producedwithin a nation’s borders;the figure includes the value of productsproduced by both domestic and foreign companies within those borders.Reinforce thatgross national productincludes the value of products produced by acountryregardless of where they are produced;this figure doesnotinclude the value ofproducts produced within the country by a foreign company.Emphasize that the government regulates the money supply and interest rates throughmonetary policy; the government influences money supply via taxation and spendingthroughfiscal policy.Make sure students understand thatinflationoccurs when overall price levels go upbecause too much money is floating around; as a result, purchasing power declines.HOMEWORKInterview a Business OwnerNow is a good time to assign Application Exercise 10 from the end-of-chapter materials in thetextbook. This assignment asks students to interview a business owner or senior manager and askthem how demand and supply affect their business, what essential factors of production are mostcentral to the firm’s operations, and how fluctuations in economic indicators affect theirbusiness.At-Home Completion Time: 1–2 hours

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1-14Learning Catalytics is a "bring your own device" student engagement, assessment, and classroomintelligence system. It allows instructors to engage students in class with realtime diagnostics.Students can use any modern, web-enabled device (smartphone, tablet, or laptop) to access it.FormoreinformationonusingLearningCatalyticsinyourcourse,contactyourPearson Representative.IN-CLASS ACTIVITIESIn-Class Activity 1: Ice-Breaker: What Do You Know About Business?Activity Overview:This activity helps students assess their level of knowledge about business and set their ownlearning goals for the class.Time Limit: 20 minutesWhat to Do:1.Ask each student to take out a piece of paper and divide it into two columns. In the firstcolumn, students should write the most important four or five things they currently knowabout business, and in the second column, the four or five things they would like to learn.Tell them that if they are having difficulty coming up with items to list, they should take alook at the table of contents in the text. It will give them some clues so that this task doesn’tfrustrate them. (5 minutes)2.Divide students into groups of three to five people and ask them to share their lists with eachother. As they listen, they can delete or add anything that seems relevant. (5 minutes)3.Ask them to switch groups, so that they are with all new people, and repeat the process ofsharing their lists. (5 minutes)4.Ask students to switch to a third group of all new people. With this group, the goal is tosynthesize their lists into one big idea of what they know, and one big idea of what they wantto learn. (5 minutes)Don’t Forget:This activity allows students to get to know each other as well as set expectations for the course.The underlying agenda is to get them talking to each other, setting the stage for activeparticipation throughout the class.Wrap-Up:Wrap up the discussion by having each group report back to the class. You may want to recordtheir responses and post them in the room for reference as you move through the course.

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1-15In-Class Activity 2: Small Group Discussion:Scanning the EnvironmentActivity Overview:This activity asks students to consider how various parts of the external environment affectbusinesses and industries.Time Limit: 25 minutesWhat to Do:1.For larger groups, divide the class into four-member groups; for smaller groups, divide theclass into two-member groups.2.Assign each group a specific industry (for example: automotive, airline, fast food, computer,apparel, or restaurant).3.Askeachgrouptoconsiderwhatvariablesfromthetechnological,political-legal,sociocultural,and economic environments affect theirassignedindustry.(15minutes)4.Ask a spokesperson from each group to share their input. (10 minutes)Don’t Forget:Remindstudents thatexternal environmental elements can changedramatically,affectingspecific industries differently over time. Remind them that changes can occur quickly or slowly.Wrap-Up:Wrap up the discussion by making sure that students understand that the nature of a specificbusiness within an industry and the types and quantities of products/services produced caninfluence the impact of external environmental variables.

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1-16In-Class Activity 3: Up for Debate:Comparing Economic SystemsActivity Overview:This activity gets students talking about how similar and different the U.S. economic system is toother systems.Time Limit: 30 minutesWhat to Do:1.Divide the class into small groups. Ask the groups to assume they have just overheard aclassmate say,“The United States is becoming more socialist everyday—with all thegovernment control.” Have each group list reasons why the statement could be true andreasons why the statement could be false. (15 minutes)2.Reassemble the class and discuss each group’s thoughts. (15 minutes)Don’t Forget:Remind students that a government’s level of control distinguishes capitalism from socialism. Ifyou have foreign students in your class, you may want them to say a bit about the economicsystem in their native country.Wrap-Up:Wrap up the discussion by reminding students that the U.S. economic system and a socialistsystem have many similarities and differences. For example, workers in socialist economiesoften work fewer hours, have longer vacations, and receive more health, education, and child-care benefits than do workers in capitalist economies. On the other hand, the federal governmentdoes control some basic services in the United States as well as various aspects of the marketthrough agencies such as the Food and Drug Administration and the Federal CommunicationCommission.

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1-17ANSWERS FOR END OF CHAPTER ACTIVITIESQUESTIONS FOR REVIEW1-1.What are the benefits of businesses? Can a business negatively affect society? Give oneexample of a business that is benefiting society and one example of a negative effect.The benefits of businesses are:businesses produce most of the goods and services consumed,employ most working people, create new innovations, and provide opportunities for newbusinesses to serve as suppliers. Further, businesses contribute to the quality of life and thestandard of living.A business can negatively affect society if it produces goods and services that harmconsumers or the environment.An example would be a company that uses a hazardouschemical in its production process and dumps the chemical into a nearby lake causing seriousillness.(Learning Objective 1, AACSB–reflective thinking)1-2. What are the factors of production? Is one factor more important than the others? If so,which one? Why?The five factors of production are labor, capital, entrepreneurs, physical resources, andinformation resources.Allfivefactors are crucial;however,theirrelativeimportancedepends on the product and industry. In the software development business, for example,labor and information resources are especially important, but the business couldn’t survivewithoutcapital and physical resources (computers), and it wouldn’t have been launchedwithout an entrepreneur.(Learning Objective 2–AACSB–application of knowledge)1-3. What is a demand curve? A supply curve? How are they related?The curve that describes the range of possible prices that a buyer will pay for a range ofquantities demanded by a buyer is thedemand curve. The curve that describes the range ofprices that a seller can charge for a range of quantities supplied by the seller is called thesupply curve.The point where the demand curve and the supply curve intersect is the point atwhich the intentions of buyers and sellers coincide. The price at this point is theequilibriumprice.(Learning Objective 3–AACSB–application of knowledge)1-4. Why is inflation both good and bad? How does the government try to control demand andsupply curves?Inflation is both good and bad because it can lead to a spiral of rising wages chasing risingprices, which decreases the standard of living. It is good because at moderate levels, it cansignal the beginning of a period of economic growth. Monetary policy, particularly theability to adjust interest rates, is government’s most powerful tool to control inflation.(Learning Objective 4–AACSB–application of knowledge)

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1-18QUESTIONS FOR ANALYSIS1-5. Identify and describe at least three factors in the external environment that affect collegeenrollment. Explain how each trend affects colleges and universities. Explain how eachfactor may affect college and university enrollment, either by bolstering it or reducing it.Answers will vary but students will probably discuss trends in birth and unemployment ratesas well wage rates.(Learning Objective 1–AACSB–application of knowledge)1-6. Give an example of a situation in which a surplus of a product led to decreased prices.Similarly, give an example of a situation in which a shortage led to increased prices. Whateventually happened in each case? Why?Answers will vary; however, any clearance sale illustrates the concept of surplus drivingdown prices. The classic example of a shortage is scalpers selling event tickets at inflatedprices. A specific example is Nike’s new releases of Air Jordan shoes, in very limitednumbers, creating heightened interest and intense demand initially. In both cases, the marketeventually determines a price at which all the supply can be sold.(Learning Objective 3–AACSB–application of knowledge)1-7. Explain how current economic indicators, such as inflation and unemployment, affect youpersonally. Explain how they may affect you as a manager.Answers will vary, but all students should include prices paid for consumer goods and theavailability of desirable jobs. Managers are affected by inflation because it tends to drive upwages and by unemployment because it affects their ability to find workers. Also, bothinflation and unemployment affect consumer and industrial demand, which play a key role inmanagement.(Learning Objective 4–AACSB–application of knowledge)1-8. How are the overall economic goals of stability and growth related? Can they bereconciled to each other? If so, how?A nation’s economic growth can be measured through its aggregate output, resulting standardof living, GDP, and productivity. Economic stability, on the other hand, refers to thecondition in which the amount of money available in an economic system and the quantity ofgoods and services produced in it are growing at the same rate. Growth is involved in both,thus resolving the apparent inconsistency.(Learning Objective 4–AACSB–reflectivethinking)APPLICATION EXERCISES1-9.Visit a Local Shopping Mall:Visit a local shopping mall or shopping area. List each storethat you see and determine what degree of competition it faces in its immediate environment.For example, if only one store in the mall sells shoes, that store represents a “local”monopoly. Note businesses that have direct competitors (for instance, two gas stations right

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1-19next to each other) and show how they compete with one another. Also consider why theymight have located right next to each other.Answers will vary, but students should focus on the criteria for competition discussed in thechapter.Forexample,businesseswith directcompetitors operatewithinmonopolisticcompetition; style, color, quality levels, and brand names often differentiate products. If onlya few sellers of a product exist, as in an oligopoly, products will be quite similar, and achange in price by one seller will mean a change in price by all sellers. Also, students shouldidentify areas of concentration of competitors, such as multiple fast-food providers in alimited geographic area, and should discuss probably cause for that, such as appeal to acommon demographic, convenience, traffic flow, and simple competitiveness.(LearningObjective 3–AACSB–application of knowledge)1-10.Interview a Business Owner:Interview a business owner or senior manager. Ask thisindividual to describe for you the following things: (1) how demand and supply affect thebusiness, (2) what essential factors of production are most central to the firm’s operations,and (3) how fluctuations in economic indicators affect his or her business.Answers will vary, but students should recognize that demand and supply affect everybusiness in some way. Typical factors of production cited in this answer include capital,labor, physical resources, information resources, and entrepreneurship. Economic indicatorsaffect businesses differently at different times, depending on whether they are manufacturersor retailers. Ultimately, price increases in an industry will affect the buying power ofconsumers, which will affect how much is produced and purchased.(Learning Objective 3–AACSB–application of knowledge)BUILDING A BUSINESS: CONTINUING TEAM EXERCISE 1-11 TO 1-14(Learning Objectives 2 and 3–AACSB–interpersonal relations and teamwork, analyticalthinking, application of knowledge)Groupsshouldconsiderdomesticbusinessenvironment,globalbusinessenvironment,technologicalenvironment,political-legalenvironment,socioculturalenvironment,andeconomic environment when identifying three trends that will create business opportunities.The student should answer the following questions:What is my product or service?Who are my customers?Where are my customers located?Is my business idea easily copied?If there are substitutes for my product or service, how can I make my product/servicestand out from competitors’ offerings?How can having competition benefit me?

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1-20TEAM EXERCISE: COMPETITION IN THE NEW MOBILE ECONOMY 1-15 TO 1-18(Learning Objective 3–AACSB–interpersonalrelations andteamwork,analyticalthinking, application of knowledge)1-15.What form of competition best characterizes this market? What characteristics did youidentify that led you to that conclusion?This market is best characterized as monopolistic competition: many sellers, many buyers,and differentiation required to attract buyers. In this scenario, differentiation might includethe quality of the coffee, quality of customer service, cleanliness of the shop, and evenlocation. However, students could argue for pure competition, since there is very little roomto differentiate one coffee shop from another, causing prices across the board to be fairlyuniform. In fact, retail coffee could be considered a commodity.1-16.Develop specific pricing strategies based on each of the following situations:•The average cup of coffee sells for $3 in your area. Right now you are selling 10,000 cups ofcoffee a month, and your fixed costs, including your own salary and that of your partner, areabout $30,000 per month.•The big chain store around the corner reduced their average sales price per cup to $2.80. As aresult, your business falls off by 25 percent.Scenario 1:Students should point out that the shop is running at break even, and that a pricedrop may increase demand, but if the market is in relative equilibrium, it is likely thatdecreasing price will result in an overall decrease in revenue. They may support this assertionmathematically with examples.Scenario 2:If volume drops by 25%, the company will experience losses, even if it makesup the drop by lowering prices.Students should be creative in their solutions, coming upwith different, non-price ways to differentiate the business from the chain stores in order tomake up the drop in volume.1-17.Discuss the role that various inducements other than price might play in affecting demandand supply in this market.Inducements will not directly increase overall demand. However, the initiative to take onlinepayments may reduce demand at other stores while increasing demand at the competitor.However, students may identify may be some inducements that cause tea drinkers to switchto coffee, or non-coffee drinkers to take up the habit.1-18.Is it always in a company’s best interest to feature the lowest prices?It is definitely not always in a company’s best interest to feature the lowest price. If that isthe only point of differentiation between a company’s product and its competitors’ offerings,then customers will perceive that price is the most important differentiation. That will lead toa price war, and, in the long run, no company can win. It is a much better strategy to informcustomers of why your product or service is worth paying a higher price.

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1-21EXERCISING YOUR ETHICS: GETTING CAUGHT OUT IN THE COLD(Learning Objective 2 and 3–AACSB–ethical understanding and reasoning, reflectivethinking)1-19. What are the roles of supply and demand in this scenario?Huma anticipates that the supply of heating oil will be higher this winter, resulting in theability to charge less than last winter. She also believes that demand will increase by offeringthe ability to lock in a price, as that price is lower than people paid in the past. Paying a fixedprice per gallon provides cost certainty to customers. Information resources are an importantfactor of production that leads to this recommendation.1-20. What are the underlying ethical issues?Underlying ethical issues revolve around generating maximum pricing versus generating anacceptable profit, while giving customers an even better deal than the locked in price of$2.40 per gallon.1-21. What would you do if you were actually faced with this situation?Answers will vary, but students should at least acknowledge the ethical issues.CASES:DOING BUSINESS IN THE GLOBAL MARKETPLACE(Learning Objectives 3 and 4–AACSB–application of knowledge, reflective thinking)1-22.Whatis the difference between a market economy and a planned economy?In a market economy, individual producers and consumers control production and allocationby creating combinations of supply and demand. A planned economy relies on a centralizedgovernment to control all or most factors of production and to make all or most productionand allocation decisions.1-23.Explain howmanagers of Alibaba, eBay, Amazon.com, and other online retailers mightview the concepts of supply and demand.Supply is the willingness and ability of producers to offer a good or service for sale. Demandis the willingness and ability of buyers to purchase a product. Retailers, whether online orwith physical locations, will attempt to match the supply of a product with the demand for aproduct, specifically at the equilibrium price. These online merchants may use informationresources to quickly react as market forces affect the demand or supply of products.1-24.What economic indicatorswould a business owner be most likely to watch, and why?The economic indicators most likely to be watched are: GDP, productivity, standard ofliving, and inflation. GDP measures economic growth; standard of living and productivity

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1-22impact the purchasing power of people; inflation can cause wages to rise, but can also lead toincreased prices, resulting in a decline in purchasing power.1-25.DoesJack Ma’s success increase or decrease your confidence in a capitalistic system basedon private enterprise?Since China currently is more of a mixed-market economy than a planned economy, itpossesses some attributes of a private enterprise system, though the level of governmentrestriction is higher than in a true market economy system. Student answers will varyregarding their level of confidence in a capitalistic system based on private enterprise as theyrealize how successful Jack Ma has been. They should address the elements of privateenterprise as well as the degrees of competition faced.1-26.Should there be more government intervention in the markets and business dealings? Whyor why not?What role would the government play in regulating various industries and markets? Therewill be much debate about whether there should be government intervention in specificindustries. Students should be asked if it is good for competition and society for thegovernment to intervene. The discussion should focus on the long run implications.GAME THEORY IN THE VIDEO GAME CONSOLE INDUSTRY(Learning Objectives 1 and 3–AACSB–application of knowledge, reflective thinking)1-27.Is it surprising that innovations, breakthroughs, and pricing strategies in the game consolemarket seem to be coordinated? Why, or why not?Students should focus on the competitive, social, technological, and economic factors thatwill affect the success or failure of products in the game console market. They shouldconsider why a competitor would change the pricing strategy. It should not be surprising thatthere seems to be coordination in this market. It is similar to the mobile phone market withwhich students are very familiar.1-28.How hard would it be for a new company to get started in the game console industry? Hasanyone tried, and if so, what was the result?What are the barriers to entry?The information provided indicates that it will be very difficult for a new company tosucceed, as the Ouya failed within two years of introduction. Barriers to entry include theability to produce and promote the product and develop enough games to attract attention.After so many years (since 2000), the three brands hold the entire market. There is no reasonto expect that to change soon.1-29.In terms of degrees of competition, how would you describe the market for gameconsoles? Do you think that this will change in the next five years? If so, how?Students should focus on the characteristics of the competitive structure and which best fitsthe video game market. Students should consider what alternatives are available now and

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1-23what alternatives may become available in the future. For example, can online gamecompetition become a viable competitor? What about virtual reality?1-30.In 2006, Nintendo broke new ground in the video industry with the introduction of theWii. Sony recently unveiled a virtual reality version of the PS4. If you were a member of theMicrosoft marketing and R&D (research and development) team, what advice would you begiving your teammates?Students will probably have varied responses depending on their perspective on the viabilityof virtual reality.1-31.Do you think that having only three manufacturers in this industry is positive ornegative? Why?Since these three manufacturers have controlled the market for so many years, students maynot consider it a negative to only have three choices.Similar to mobile phones, usersfrequently are very loyal to a certain brand.Once students have answered the questions, discuss their answers as a class. As studentsdiscuss their answers, make sure they touch on some of the following points. Technologicalchanges are frequent and sometimes market changing. How much does loyalty matter tousers? Do specific features help create loyalty and preference?1-32. Which game console do you think is superior? Why?Answers will vary depending on students’ experiences with the various consoles and theirown personal preferences for game play.

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2-1Chapter 2: Understanding Business Ethics and Social ResponsibilityChapter OverviewJust because others see something as ethical doesn’t mean youwill agree. There is not always ayes/no, right/wrong, black/white answer to everything. We all develop a personal code of ethicsthat we carry over into our jobs. Sometimes we decide what is ethical based on what isacceptable to others—even though the behavior may be unethical.This chapter presents a discussion of business ethics, the role of a formal code of ethics, as wellas business approaches to social responsibility. The chapter also discusses how the concept ofsocial responsibility applies both to environmental issues and to a firm’s relationships withcustomers, employees, and investors, and how issues of social responsibility and ethics affectsmall business.Learning Objectives2-1. Explain how individuals develop their personal codes of ethics and why ethics areimportant in the workplace.2-2. Distinguish social responsibility from ethics, identify organizational stakeholders, andcharacterize social consciousness today.2-3. Show how the concept of social responsibility applies both to environmental issues andto a firm’s relationships with customers, employees, and investors.2-4. Identifyfour general approaches to social responsibility and note the role of socialresponsibility in small business.2-5. Explainthe role of government in social responsibility in terms of how governments andbusinesses influence each other.OBJECTIVE 62-6.Discusshow businesses manage social responsibility in terms of both formal andinformal dimensions and how organizations can evaluate their social responsibility.

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2-2LIST OF IN-CLASS ACTIVITIES:INSTRUCTOR’S CHOICEActivityDescriptionTime Limit1. Ice-Breaker:What’s Ethicalin Business?Students share their views on businessethics.20 min.2.Class Discussion:EthicalJudgmentMakingStudentsdiscusshowethicalnormsaffect ethical judgments.15 min.3.Up for Debate: Can Ethics BeTaught?Students discuss varying opinions onethics training as a class.30 min.

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2-3CHAPTER OUTLINELearning Objective 2-1Explainhowindividualsdeveloptheir personalcodesofethicsandwhyethicsareimportant in the workplace.Ethics in the WorkplaceEthicsare beliefs about wrong and right or bad and good;ethical behaviorconforms toindividual beliefs and social norms about what is right and good.Business ethicsrefers to ethicalor unethical behaviors by employees in the context of their jobs.A. Individual EthicsEthics are based on individual beliefs and social concepts; thus, they vary by person,situation, and culture.1.The Law,andthe Real World.Societiesadoptformallaws thatreflectethicalstandards;however,real-worldsituationsaresometimesdifficulttointerpret.2.Individual Values and Morals.Individuals’ personal codes of ethics are determined bya combination of factors, beginning in childhood. Over time, peers and experiences thatcontribute to ethical beliefs and behavior influence individuals.B. Business and Managerial EthicsManagerial ethicsare the standards of behavior that guide individual managers in theirwork.1.Behavior Toward Employees.This category covers hiring and firing, wages andworking conditions, and privacy and respect.2.Behavior Toward the Organization.Conflict of interest, confidentiality, and honestyare ethical issues. Aconflict of interestoccurs when an activity may benefit theindividual to the detriment of the organization. Many organizations have policies thatforbid buyers and other personnel from accepting gifts from suppliers or customers, thusavoiding even the appearance of bribery. Padding expense accounts, and taking officesupplies for personal use are examples of problems in the honesty area.3.BehaviorTowardOtherEconomicAgents.Ethicsalsocomesintoplayintherelationship between the firm and a number of primary agents of interests, such ascustomers, suppliers, competitors, stockholders, dealers, and unions. In 2009, BernardMadoff’s Ponzi scheme (investment scam) cost hundreds of clients their life savings ashe led them to believe that their investments were safe. Cultural norms may indicate thatbehavior in one country is ethical, while in another country it is unethical. As an example,bribes may be a normal part of doing business in some countries, but illegal in othercountries.

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2-4C. Assessing Ethical Behavior1.A simple process that is often recommended when making ethical decisions is for theperson to (1) gather relevant factual information, (2) analyze the facts to determine themost appropriate moral values, and (3) make an ethical decision based on the rightness orwrongness of the proposed activity or policy. Although ethical judgments are not alwayseasy to make or even always agreed upon, this process does at least give a good startingpoint for an ethical decision making process.Ethicalnormsinclude:1.Utility:Does a particular act optimize the benefits to those who are affected by it?2.Rights:Does it respect the rights of all individuals involved?3.Justice:Is it consistent with what’s fair?4.Caring:Isit consistent with people’s responsibilities to each other?D. Company Practices and Business EthicsMany companies set up codes of conduct and develop clear ethical positions on how the firmand its employees will conduct business. The single most effective step a company can takeis to demonstrate top management support of ethical standards.1.Adopting Written Codes.Almost all major corporations have written codes of ethics.While business strategies and practices can change, an organization’s core principles andvalues should not.2.Instituting Ethics Programs.Ethical responses can be learned through experience;companiesmusttake theresponsibilityforeducatingemployees.Moreandmorecompanies, like Boeing and ExxonMobil, require managers to go through regular ethicstraining to remind them of the importance of ethical decision making and to update themon current laws and regulations.KEY TEACHING TIPRemind students thatindividual ethicsvary by person, situation, and culture. What is acceptableand unacceptable is broad enough that people may develop varying behaviors without violatinggeneral standards.QUICK QUESTIONSWhat people and experiences have helped shape your individual code of ethics?What are some examples of conflicts of interest?Use In-Class Activity 1:Ice-Breaker:What’s Ethical in Business?Time Limit: 20 minutesUse In-Class Activity 2:Class Discussion: Ethical Judgment MakingTime Limit: 15 minutes

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2-5Learning Objective 2-2:Distinguish social responsibility from ethics, identify organizational stakeholders, andcharacterize social consciousness today.Social ResponsibilitySocial responsibilityrefers to the overall way in which a business itself tries to balance itscommitments to relevant groups and individuals in its social environment.A.The Stakeholder Model of ResponsibilityMost companies strive to be ethically responsible to five main groups (organizationalstakeholders):1.Customers.Critical factors include charging fair prices, honoring warranties, meetingdelivery commitments, and standing behind product quality.2.Employees.Treating workers fairly, making them a part of the team, and respecting theirdignity and basic human needspromote a company’s reputation.3.Investors.Managers must follow proper accounting procedures, provide appropriateinformation to shareholders, and manage the organization to protect shareholder rightsand investments.4.Suppliers.Partnership arrangements with suppliers can enhance market image and firmreputation. Keeping suppliers informed about future plans, negotiating delivery schedulesandpricesthatareacceptabletobothfirmsbuildrelationshipswithsuppliers.5.Local and International Communities.Contributing to local and global programs has apositive impact on the community.B. Contemporary Social ConsciousnessViews toward social responsibility continue to evolve as managers work to meet the needs ofvarious stakeholders in their business practices.1.The concept of social responsibility has been developing since the days ofJohn D.Rockefeller, J.P. Morgan,andCornelius Vanderbilt.The concept of accountabilitywas developed.2.Unfortunately, the recent spate ofcorporate scandals(Enron, bailouts of banks, GM,and Chrysler) colors the public’s perception of business in negative hues. However, withgrowing concerns about climate change and calls for more sustainable business practices,many businesses at least appear to have again moved toward a more responsible approachto doing business. Firms are integrating socially conscious thinking into their productionplans and marketing efforts.

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2-6KEY TEACHING TIPRemind students that actions deemed unethical in the United States may be ethical in othercountries, and vice versa. For example, in some countries outside of the United States, bribing isacceptable and even expected in business.QUICK QUESTIONHow can companies benefit from adopting a written code of ethics?Use In-Class Activity 3:Up for Debate: Can Ethics Be Taught?Time Limit: 20 minutesHOMEWORKSocial ResponsibilityNow is a good time to assign Application Exercise 9 from the end-of-chapter materials ashomework. This assignment asks students to think about their own personal code of ethics andthe ethical framework they use to make decisions.At-Home Completion Time: 30 minutesKey Teaching Tip, especially for Online ClassesThe End of Chapter activity,Building Your Business Skills,To Lie or Not to Lie: That Is theQuestionis a good online assignment. Have students post their responses in Step 1 to the classdiscussion board. For Step 3, have students work as small virtual teams to draft a corporate codeof ethics. Let their fellow classmates critique and post comments.At-Home Completion Time: 30 minutes for individual assignments and 45 minutes forgroup project.

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