Economic Considerations English Through Content Applied Economics

Economic Considerations
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Thomas Krai
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ECONOMIC CONSIDERATIONS
English Through Content: Applied Economics
Thomas Krai, Editor
First published in 1994

Second printing in 1996
by the Materials Development and Review Branch
English Language Programs Division
United States information Agency
Washington, DC
This printing published in 2006

by the Office of English Language Programs
Bureau of Educational and Cultural Affairs
United States Department of State
Washington, DC
Office of English Language Programs

Bureau of Educational and Cultural Affairs
United States Department of State
Washington, DC
http://englishprograms.state.gov/
F O R E W O R D
FOREWORD to the Third Printing
The materials reproduced in this publication are excerpts from the Junior Achievement
textbook Applied Economics, and are provided courtesy of JA Worldwide™, (Junior
Achievement), the world’s largest organization dedicated to educating young people
about business, economics, and free enterprise. JA programs are taught by volunteers in
class and after school at locations throughout the United States and in 96 countries.
Founded in 1919, Junior Achievement has provided quality economic programs to
more than 60 million young people. JA programs span grades K-12, and focus on seven
key content areas: business, citizenship, economics, entrepreneurship, ethics/character,
financial literacy, and career development. JAs nearly 214,000 classroom volunteers
around the world come from all walks of life to reach students in inner cities, suburbs,
and rural areas. These dedicated individuals are the backbone of the organization.
For more information about JA Worldwide programs, visit JA online at www.ja.org or
address mail to: Vice President of Product Development, JA Worldwide Headquarters,
One Education Way, Colorado Springs, CO 80906.
The abbreviated material in this publication is intended to acquaint English students
to the language of business and does not constitute a full JA program.
Pamela Casteel
Junior Achievement Worldwide
FOREWORD to the First Printing
The materials reproduced in this publication are excerpts from the Junior Achievement
Applied Economics textbook and are provided courtesy of Junior Achievement
International, headquartered in Colorado Springs, Colorado, USA. Junior Achievement
is the world’s oldest, largest, and fastest-growing economic education organization.
Founded in 1919, Junior Achievement has provided quality economic programs to
more than 20 million young people thanks to the dedication and voluntary support
of business and education leaders. The abbreviated material in this publication is
intended to acquaint English students to the language of business but does not
constitute a full Junior Achievement program. Applied Economics is a full-semester
course on the fundamentals of market economics for high school and university
students and is accompanied by hands-on entrepreneurship activities; business and
management computer simulations, and regular contact with a volunteer business
consultant in the classroom as a mentor and role model. As of July 1994, there
are Junior Achievement programs in economics available for kindergarten through
12th grade as well as after-school programs in more than 80 countries. For more
information about Junior Achievement programs, please contact: Junior Achievement
International, 2780 Janitell Road, Colorado Springs, CO 80906, Tel: (719)540-6300,
Fax: (719) 540-6303.
Samuel Taylor
Junior Achievement International
Hi
A C K N O W L E D G M E N T S
ACKOWLEDGMENTS for the Third Printing
This third printing of Economic Considerations has new photographs, graphics,

and statistics. Many thanks go to Marsha Ford, David Hamill, Joann Stern, and
Patricia Sullivan for their contributions.
October 2006
ACKOWLEDGMENTS for the First Printing
APPLIED ECONOMICS: TEXT, 3rd edition and APPLIED ECONOMICS: STUDY GUIDE,
3rd edition. Copyright Third Edition July 1990. Junior Achievement Inc. Colorado
Springs, Colorado USA.
The text of this publication, or any part thereof, may not be reproduced or transmitted
in any form or by any means, electronic or mechanical, including photocopying,
recording, storing in any information retrieval system, or otherwise, without prior
written permission of the publisher.
Special thanks are due to Marguerite Ann Snow and Kathleen Krai for reviewing the
manuscript and providing useful suggestions on language-related activities. Thanks
also go to Shalita Jones for her help in preparing the manuscript and to Cynthia
Lacovey and Cynthia Malecki for their assistance in obtaining the photographs and
illustrations for use in the text.
iv
T O T H E T E A C H E R
ECONOMIC CONSIDERATIONS is a content-based text for advanced level students of

English as a foreign language. Language enhancement activities have been added
to the readings and exercises taken from the Junior Achievement program Applied
Economics to accommodate the needs of learners of English. While authentic
language has been maintained, a vocabulary study section has been added to each
chapter treating both the technical and subtechnical terms that are used in the
readings. Group work activities have been developed to give students the opportunity
to practice their communicative skills both in speaking and in writing.
Collaborating with a partner or working as a member of a small group, students

will consider different topics in economics while improving their vocabulary and
their reading, speaking and writing skills in English. Working together, they will be
asked to interpret graphs and tables and to react to or find solutions for a variety of
problem situations set forth in the readings.
A bibliography provides suggestions for further reading in economics. A glossary of

terms taken from the field of economics and international trade is included at the
end of the text.
ECONOMIC CONSIDERATIONS is intended to serve as a supplementary text for

advanced level EFL courses in Business English. Various chapters or activities within
a chapter may be used to complement or extend the focus of the main textbook. With
careful lesson planning, ECONOMIC CONSIDERATIONS can be integrated into an
on-going course for business students to broaden their perspective of economics and
to increase their communicative skills in English.
Thomas Krai
v
A creative economy is thefuel o f magnificence.
— R alph W aldo E merson
Don't opposeforces, use them.

— Buckminster Fuller
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T A B L E O F C O N T E N T S
Chapter 1
What is Economics?................................................................... 1
Chapter 2
Supply, Demand and Market Price..................................... 13
Chapter 3
The Entrepreneur in Market Economies.......................... 33
Chapter 4
Production and Marketing .................................................... 51
Chapter 5
The Role of Labor in B usiness............................................. 63
Chapter 6
The Role of Government in Market Econom ies........... 79
Chapter 7
The Global Econom y....................................................................101
Bibliography.................................................................................... 123
Glossary..............................................................................................125
vii
©Corel Photos
A wise man should have money in his head, but not in his heart. — J onathan S wift
C H A P T E R 1
W hat is E conomics?
GETTING STARTED
Working in groups of four, consider the issues below. After you have reached some
conclusions, share your ideas with the whole class.
1. The dictionary defines economics as “the study of the production of wealth and
the consumption of goods and services in a society.” List five economic issues
relating to production and consumption that your national or local government
has to deal with today.
2. John Maynard Keynes, one of the most influential economists of the twentieth
century said, “The ideas of economists and political philosophers, both when
they are right and when they are wrong, are more powerful than is commonly
understood. Indeed the world is ruled by little else.”
What do you think Keynes meant by this statement? Do you agree or disagree?
Give reasons to support your opinion.
VOCABULARY STUDY
The italicized words in the sentences below are found in this chapter. Study the
sentences. Then identify the part of speech and write your own definition for the
word on the line provided.
EXAMPLE.
He acquired his wealth in the steel industry,
acquire ( V 1 GAIN POSSESSION OF_________________
1. The government will allocate more of its budget to health care,

allocate ( )_________________________________________________________
2. An alternative to putting one’s savings into a bank is investing in stocks and bonds,
alternative ( )____________________________________________________
3. A high tax was placed upon luxury commodities.

commodities ( )___________________________________________________
1
4. Consumption of alcohol seems to decline during late middle-age.
consumption ( )____________________________________________________
5. The government enacted a law to control the sales of guns,

enact ( )_____________________________________________________________
6. After Mary lost her job, she had toforego some of the luxuries she had grown
accustomed to.
forego ( )____________________________________________________________
7. Food and shelter make up ourfundam ental needs,

fundamental ( )____________________________________________________
8. When bad weather is threatening, people tend to hoard food because they are
afraid the supermarkets will be unable to get in new supplies.
hoard ( )____________________________________________________________
9. As an added incentive, the car dealer offered a special service agreement,

incentive ( )________________________________________________________
10. The teacher’s intervention prevented the two boys from getting into a fight,
intervention ( )_____________________________________________________
11. They optimized their profits by reinvesting them in the company,

optimize ( )_________________________________________________________
12. The telephone company is prom oting a new service for its customers,
promote ( )_________________________________________________________
13. A basic knowledge of economics is relevant to everyone,

relevant ( )__________________________________________________________
14. Since the floods last summer, there has been a scarcity of grain products on
the market.
scarcity ( )__________________________________________________________
In each set of words, cross out the word that does not have a similar meaning to
the first. Compare your answers with another student. Discuss why the words
are similar.
1. acquire get obtain question
2. allocate assign attract set aside
3. alternative change option possibility
4. commodity item market product
2 Chapter 1
5. consumption manufacture purchase use of
of items of items items
6. enact establish represent specify
7. forego precede renounce sacrifice
8. fundamental basic essential secondary
9. hoard accumulate exchange save
10. incentive encouragement occurrence stimulus
11. intervention familiarity imposition interference
12. optimize make efficient make necessary make useful
13. promote publicize obstruct advocate
14. relevant applicable dependable fitting
15. scarcity gap lack terror
ORGANIZING OUR THOUGHTS

In groups of four, discuss the following questions and report back to the entire class
on your major conclusions.
1. Why should everyone understand basic economics?
2. Economics has been called “the study of scarcity and choice.” How does this
relate to your budget for the week? How does this relate to your nation’s budget?
3. How do different economic systems solve the problem of scarcity? Give spe
cific examples.
What is Economics? 3
ACTIVITY 1
Scan the following reading for answers to the questions below:
1. What two groups are discussed?
2. How were they different from each other?
3. What is a “favorable balance of trade”?
4. What is “laissezfaire” and with which group is the term associated?
The First Modern Economists
(1) The Mercantilists. Between the 16th and 18th centuries, the major countries
of Europe believed in the economic theory of mercantilism. Mercantilists argued
that nations should behave as if they were merchants competing with one another
for profit. Accordingly, governments should support industry by enacting laws
designed to keep labor and other production costs low, and exports high. In this
way the nation could achieve what was called a “favorable balance o f trade. ”
(2) “Favorable balance of trade” described a situation in which exports exceeded

imports. The excess, which was like profits to a merchant, would result in an
increase in the nation’s supply of gold or silver. And, as most people agreed
in those days, the true measure of a nation’s wealth was its hoard of gold or
silver.
(3) To achieve favorable trade balances, the major European powers sought to
acquire colonies. Colonies, it was thought, could provide the “mother country”
with cheap labor, raw materials and a market for its manufactured goods,
(4) In an effort to attain these goals in their American colonies, the British, for
example, enacted the Navigation Acts. The Navigation Acts protected British
industry by prohibiting the colonies from producing certain goods like hats,
woolen products and wrought iron. The laws also listed certain “enumerated
articles” (mostly raw materials) which could not be sold to buyers in countries
other than England.
(5) Resentment towards the Navigation Acts was so great that they are regarded as
one of the principal causes of the Revolutionary War.
(6) Today there are people who still argue that their country should promote a
“favorable balance of trade,” that their national government should do what
it can to restrict imports and promote exports. For that reason, they are often
described as neo-mercantilists or “new” mercantilists.
4 Chapter 1
George Washington, a strong opponent o f the British government’s mercantilist policies,
was a leader o f the American Revolution and commander in ch ief o f the Continental Army.
©Library of Congress
(7) The Physiocrats. For one group of 18th-century French philosophers and
economists, the suggestion that nations should go out of their way to protect
business and industry made no sense at all. These were the physiocrats.
(8) The physiocrats argued that the products of agriculture and other natural
resources were the true source of wealth. Since these were God-given, it made
little sense for government to go out of its way to help business and industry
increase profits. For similar reasons, they opposed government efforts to promote
a “favorable balance of trade.”
(9) In other words, since real wealth came from the land, it followed that the wisest
thing government could do would be to keep its hands off business and let
nature take its course. This idea was expressed in the slogan “laissezfaire, ” (let
people do as they choose).
(10) Interestingly, the 200-year-old argument between those favoring regulation of

the economy and those supporting la issezfa ire is still with us. Whether the
problem involves individuals (like those living in poverty and unemployment)
or institutions (such as a rising tide of business or bank failures), there are
those who find the solution in government intervention, and others who favor
“laissezfaire, " letting natural economic forces take their course.
What is Econom ics? 5

QUESTIONS FOR UNDERSTANDING
Working with a partner do the following tasks. Share your ideas with the whole class.
1. Write a definition for each of the two groups of economists discussed in the
article.
2. Identify the neo-m ercantilists.
3. Can you name any individuals or groups of people in your country or abroad
who could be described as neo-m ercantilists?
4. In the United States today, opinion about economic policy continues to be

divided into two schools of thought similar to those described in the article. Is
this true for your country? Provide examples to support your opinion.
6 Chapter 1
ACTIVITY 2
Before you read the following article, skim through it quickly and underline two
sentences that convey the main ideas.
Supermarket Economics
(1) Supermarkets offer valuable economic lessons. The modern supermarket

illustrates in a small way how the market system operates in the economy as a
whole. Each supermarket has tens of thousands of items of various sizes and
brands. Store owners and managers compete for the customers’ dollars by trying
to offer the best service and the greatest variety of goods possible at prices their
customers are willing to pay. The modern supermarket provides everything from
basic foods to gourmet items from any place in the world. Customers can shop
in the supermarket’s deli or make their own lunch at a soup-and-salad bar.
Supermarkets also sell cosmetics, toys, small appliances and even videos of
recent movies. They attempt to maintain a bright and cheerful atmosphere that
will make shopping pleasant for large numbers of customers.
(2) Information about consumer preferences in this huge mix of products is

generated by a simple procedure. Consumers take their selection to the checkout
line. Checkout clerks enter information about the sale on the store’s computer
by passing the product’s bar code across a scanner.
(3) The store responds to differing consumer preferences for health, economy,
convenience, and vanity by stocking the goods consumers prefer. Products that
fail to satisfy are replaced by more attractive products. “Winners” are selected
and the “losers” gradually lose shelf space. Ultimately producers either improve
their products or pass from the scene. The consumer is really king. The market
registers their preferences and reconciles supply with demand.

Working with a partner, answer the following questions:
1. The market generates information about wants and provides incentives to pay
attention to consumers’ preferences.
a. How does the market generate information about preferences?
b. What are the “incentives” referred to in question 1?
2. Why is “self-interest” significant to the operation of a market system?

Store owners com petefor customers by offering the greatest variety o f good at prices
consumers w ill pay. Goods thatfa il to satisfy are gradually replaced. ©Corbis
3. The article states that “...losers gradually lose shelf space. Ultimately producers
either improve their products or pass from the scene.”
a. Who are the “losers?”
b. Explain the meaning of the second sentence in question 3.
8 Chapter 1
ACTIVITY 3
Scan the following article to define the terms below:
opportunity costs
money cost
production cost
foregone earnings
Compare your definitions with a partner. Then share them with the whole class.
Read the article carefully and complete the discussion questions that follow.
Opportunity Costs
(1) Economists are concerned with how we make choices in a world of scarce
resources. Individuals, families, business firms and governments all must make
decisions about how best to allocate the limited resources at their command.
(2) When resources are limited, choices are limited as well. This means that
the decision to have one thing is, at the same time, the decision not to have
something else. Suppose, for example, that a government chose to pay for an
increase in the size of its air force with the money it saved by building fewer
schools. In that instance an increase in defense was paid for by a reduction in
the number of schools.
(3) The opportunity cost of any decision is the value of the next best alternative
that is given up. It is the relevant cost to use when trying to make the best
(optimizing) decision. This is true whether the decision relates to consumption,
production, or investment.
(4) Even though we usually think of the money cost of producing something, the
opportunity cost provides a much more sensible way of measuring economic cost.
If more resources (labor, plastic, steel, etc.) are used to increase the production
of computers, then the production of something else that requires those same
resources (such as stereos) must be cut back.
(5) If every computer requires the same resources as two stereos, then the opportunity
cost of producing a computer is two stereos. It makes sense to evaluate the cost
in terms of what we don’t get because we’re producing computers.
(6) In fact, the concepts of money cost and opportunity cost are very closely tied
together in a market economy. In general, a good that has a high opportunity
cost will also have a high money cost. This is because price is one way to
allocate resources among competing uses. Let’s think of some of the ways that
opportunity costs play fundamental roles in our lives. Many high school students
consider going to college for four years after graduating from high school. What
is the cost of acquiring a college education?

(7) Obviously, the cost of tuition, the cost of books and other supplies, and the cost
of living in a dorm represent the money cost of going to college. The other uses
this money might have been put to represent its opportunity costs. But what else
is a cost of going to college? If a student did not go to college, then he or she
would most likely find a job instead.
(8) The money that those who choose college might have earned during their years
of study is described by economists as foregone earnings. Foregone earnings
represent another, very important cost of a college education. Thus, the
opportunity cost of going to college is the goods and services represented by the
money cost of the education, plus the value of the foregone earnings.
(9) Another example of this concept can be seen in the opportunity cost of capital. Let
us assume that a manufacturing firm is considering the addition of microwave
ovens to its product line. What will it cost to produce them?
(10) In addition to materials and labor costs, the firm must also consider the return
it might receive if, instead of using those funds to manufacture microwaves,
it put the money into U.S. Treasury bonds or some other safe investment (its
opportunity cost). Let us assume, for example, that the firm could earn 10
percent on the money simply by investing it in government bonds. That being
the case, the complete cost of production would have to include both production
costs and the opportunity cost of the firm’s capital.

Discuss the following questions in groups of four.
1. Having read the article carefully, look at the definition you wrote earlier for
opportunity cost. If you are not completely satisfied with that definition, write
another at this time.
2. What was the opportunity cost of your last major purchase? What was the
opportunity cost of a decision you made to spend your time a particular way?
3. What is the opportunity cost involved in a decision to continue schooling after

graduation From high school?
4. What is the opportunity cost involved in a decision to forego schooling in favor

of entering the world of work immediately after graduating from high school?
10 Chapter 1
5. The firm referred to in the last two paragraphs of the reading estimated that
it would have to invest US$500,000 in order to produce microwave ovens.
Production costs would add another US$200,000 annually, The firm estimates
that it could sell about US$225,000 worth of ovens each year. Would it be wise
for the firm to manufacture the microwave ovens? Explain your answer.

ACTIVITY 4
A national budget allocates funding for social services and national defense. It is
common for policymakers to debate how much money should go to guns (national
defense) and how much to butter (social programs).
The following activity portrays in graph-form these opposing concerns for the
Kingdom of Ecomania (fictitious).
Working with a partner, examine the graph and discuss the questions that follow.
Kingdom o f Ecomania
Production-Possibilities Frontier
1 2 3 4 5 6 7
Guns (thousands)
1. What is the maximum quantity of butter that can be produced in Ecomania in

a single year?
2. If Ecomania produces 6,000 tons of butter, how many guns can it produce?
3. What is the opportunity cost in guns if Ecomania produces 6,000 tons of butter?
4. What information, missing in this graph, would you need before deciding on the
best production combination for Ecomania?
12 Chapter 1
C H A P T E R 2
S upply, D emand and

M arket P rice
Shifting consumer preferences result in a change o f products available on the market.

©AP/WideWorld Photos
GETTING STARTED
A market economy is one that relies upon buyers and producers to determine
production, consumption, investment and savings. Working in groups of four,
complete the tasks below and share your ideas with the whole class.
1. Think of three examples of new products that have come on the market in your
country because of consumer demand. As these products have been on the
market, have they become more expensive or less expensive?
2. Think of three products or services that have gone off the market or become
difficult to obtain in your country because of declining demand.
13
VOCABULARY STUDY
The italicized words in the sentences below will be found in this chapter. Study the
sentences. Then in the list that follows, match the words with their meanings.
1. Their investments were not attuned to their future goals.
2. The workers conceded on salary increases in order to retain their retirement

benefits.
3. With the closing of several of its branch offices, the economic problems of the
company were quite conspicuous.
4. If production costs remain constant and the market demand increases, the
company can count on higher profits.
5. Sociologists tend to be more interested in contemporary problems than they

are in the past.
6. Since conventional approaches were not proving successful, the company was
experimenting with a completely new strategy.
7. Parents of college-aged children find their savings dim inishing because of the
high cost of university education today.
8. The introduction of high quality, low cost foreign goods into the local market
upset the equilibrium of the economy.
9. With recent court decisions guaranteeing their rights, that interest group is
exerting more political influence.
10. The research division of the сотщхгуJu n ctio n s as a laboratory.
11. Following a long, successful career, she looked forward to her retirement and
more time for leisure.
12. Though single-owner businesses remained profitable, their influence upon the
economic policies of the city was marginal.
13. People can live successful lives if they learn how to maximize their potential
and not let their weaknesses get in the way.
14. Unfavorable reports on the new product stifled consumer interest.
15. When interest rates at the banks are low, people have the tendency to spend
their money rather than to put it into savings.
16. Though he graduated at the top of his class, he never fulfilled his potential as
a lawyer.
14 Chapter 2
1. attuned a. borderline
2. concede b. exercise influence
3. conspicuous c. possibility, promise (n)
4. constant d. decrease,lessen
5. contemporary e. yield, give up
6. conventional f. operate
7. diminishing g- increase to greatest amount
8. equilibrium h. in accord
9. exert i inclination, likelihood
10. function j- ordinary, usual
11. leisure k. of the same time
12. marginal 1. unchanging, at the same level
13. maximize m. easily seen
14. stifle n. equal balance
15, tendency 0. free time
16. potential P- prevent; suppress
With a partner, write original sentences using each of the sixteen words.

In groups of four, discuss possible answers
to the questions below and report back to
the whole class on the ideas exchanged by
your group.
1. What affects the demand for goods and

services in a market economy?
2. What affects the supply of a particular

good or service?
3. How do demand and supply interact to

determine prices?
4. How do profits, economic self-interest and

other incentives keep a market economy
growing? Give specific examples
Videotapes and cell phones are two o f the many

products that are affected by consumer demand.
©Creatas
Supply, Demand and M arket Price 15

ACTIVITY 1
Scan the next article for the answers to the following questions:
1. With which group are Adam Smith’s ideas most in agreement: the mercantilists
or the physiocrats?
2. What is another term for Smith’s invisible hand? How does it operate in a
nation’s economy?
Read the article carefully and complete the exercise that follows.
ADAM SMITH AND THE WEALTH OF NATIONS
(1) 1776, the year that Americans associate with the signing of the Declaration
of independence, also marked the publication in England of one of the most
influential books of our time, The Wealth o f Nations. Written by Adam Smith, it
earned the author the title “The father of economics.”
(2) Smith objected to the principal economic beliefs of his day. He differed with
the physiocrats who argued that land was the only source of wealth. He also
disagreed with the mercantilists who measured the wealth of a nation by its
money supply, and who called for government regulation of the economy in
order to promote a “favorable balance of trade.”
(3) In Smith’s view, a nation’s wealth was dependent upon production, not
agriculture atone. How much it produced, he believed, depended upon how well
it combined labor and the other factors of production. The more efficient the
combination, the greater the output, and the greater the nation’s wealth.
(4) The heart of Smith’s economic philosophy was his belief that the economy
would work best if left to function on its own without government regulation.
In those circumstances, self-interest would lead business firms to produce
only those products that consumers wanted, and to produce them at the lowest
possible cost. They would do this, not as a means of benefitting society, but in
an effort to outperform their competitors and gain the greatest profit. But all
this self interest would benefit society as a whole by providing it with more and
better goods and services, at the lowest prices.
(5) To explain why all society benefits when the economy is free of regulation, Smith
used the metaphor of the “invisible hand” :
“Every individual is continually exerting himself to find the most advanta

geous employment for whatever capital he can command. It is his own
advantage, and not that of society, which he has in m ind,... but he is in
this, as in many other cases, led by an invisible hand to promote an end
which was no part of his intention, for the pursuit of his own advantage
16 Chapter 2
According to Adam Smith, the division o f
labor and the use o f machinery increases
output. ©DigitalStock
necessarily leads him to prefer that employment

which is most advantageous to society.”
The “invisible hand” was Smith’s name for the

economic forces that we today would call supply and
demand, or the marketplace. He sharply disagreed
with the mercantilists who, in their quest for a,
“favorable balance of trade,” called for regulation of
the economy.
( 6 ) Instead, Smith agreed with the physiocrats and

their policy of “laissez faire,” letting individuals
and businesses function without interference from
government regulation or private monopolies. In that
way, the “invisible hand” would be free to guide the
economy and maximize production.
( 7) The Wealth o f Nations goes on to describe the principal

elements of the economic system. In a famous section,
Smith turned to the pin industry to demonstrate how the division of labor and
the use of machinery increased output.
“One man draws out the wire, another straights it, a third cuts it, a fourth
points it, a fifth grinds it at the top for receiving the head, to make the head
requires two or three distinct operations....”
(8) Although modern technology has improved the methods by which pins are
produced, the principles pertaining to the division of labor remain unchanged.
(9) Similarly, other sections dealing with the factors of production, money and
international trade are as meaningful today as when they were first written.
Smith’s The Wealth o f Nations contains some of the best descriptions of the
principles upon which the economic system of the United States is based.
Look back at the text and identify what the following words refer to. The first item
is already done for you.
1. it (paragraph Л THE WEALTH OF NATIONS
2. who (paragraph 2)
3. it (paragraph 3)
4. combination (paragraph 3)
5. In those circumstances (paragraph 4)
6. them (paragraph 4)
7. it (paragraph 4)
8. this (paragraph 5)
9. their (paragraph 5)
10. they (paragraph 9)
Supply, Demand and M arket Price 17

ACTIVITY 2
Working with a partner, read the description of tables and graphs below and answer
the questions that follow.
Understanding Supply and Demand Tables and Graphs
Economists often use tables andgraphs to illustrate and explain their work.
Tables. A table is an orderly arrangement of facts and figures. Information is

arranged horizontally (or across) in rows, and vertically (up and down) in columns.
The following is an example of a table:
Demand Schedule for Corn, March 29, 199
At a Additional Total
price per buyer demands demanded
Buyer bushel (thousands) (thousands)
I US$3.50 80 80
2 3.25 20 100
3 3.00 20 120
4 2.75 20 140
5 2.50 20 160
6 2.25 20 180
7 2.00 20 200
This kind of table is called a “demand schedule.” It tells us how many bushels of
corn buyers would take, at a variety of prices, at a particular point in time.
At a price of US$3.50 per bushel, for example, one buyer would be willing to buy
80.000 bushels. If the price were US$3.25 per bushel, however, a second buyer
would step into the market and buy 20,000 bushels. This, plus the 80,000 bushels
demanded by the first buyer, brings the total to 100,000 bushels at that price.
(Naturally, the first buyer would also be willing to pay US$3.25 instead of US$3.50
for the bushel).
If the price were US$3.00 a bushel, another buyer would step in and take another
20.000 bushels. At that price, the total number of bushels demanded would be
120 , 000 .
How many bushels of corn would be demanded at US$2.50 per bushel?

How many at US$2.00 per bushel?
18 Chapter 2
The supply side of the same corn market is summarized in the following table.
Supply Schedule for Corn, March 29, 199_
Price per Additional Total

bushel seller offers supplied
Seller (US Dollars) (thousands) (thousands)
1 3.50 20 200
2 3.25 20 180
5 3.00 20 160
4 2.75 20 140
5 2.50 20 120
6 2.25 40 100
7 2.00 60 60
As you can see, the table summarizes the relationship between price and the sup
ply of corn.
How many bushels of corn would be offered for sale at US$2.00 per bushel?
At US$3.50 per bushel?
At US$2.75 per bushel?
Supply, Demand and Market Price 19

Graphs. A graph is a diagram that shows relationships.
Illustrating Supply and Demand With a Graph

$4.00
$3.75
$3.50
$3.25
A
$3.00
$2.75
$2.50
В
$2.25
c
$2.00
20 40 60 80 100 120 140 160 180 200 220
The bottom line, or horizontal axis, represents the quantity (number of items) that
would be demanded. The side, or vertical axis, represents the price. If you examine
the graph carefully, you will see that the dots represent total demand at the prices
in the demand schedule above.
Connect the dots and label the line “D” to complete the graph.
Lines on a line graph are called curves. Since what you have drawn describes the
demand for something, it is called a demand curve.
Notice that the demand curve slopes downward from left to right. This shows us that
the number of items demanded is greater at a lower price than at a higher price.
The supply curve is drawn in the same way.
Using the information contained in the su p p ly schedule, plot the total

quantity that will be supplied at each price on the graph above.
Connect the points to complete the supply curve. Label the curve “S .”
Can you explain why the supply curve slopes upward, from left to right?
Finding The Market Price. The supply and demand curves tell us what buyers and
sellers were willing to do in the corn market. They do not tell us the market price.
That is the price at what which the corn would actually sell. By finding the point
where supply and demand curves intersect (cross), we can determine the market
price-the price where buyers will purchase all that producers are willing to sell.
Label the point where the supply and demand curve intersect “M .”
20 Chapter 2
If you completed the graph correctly, you found the market (or equilibrium) price to
be US$2.75 for 140,000 bushels of corn.

In groups of four discuss the following problems. Share your answers with the
whole class.
1. Which buyers purchased the corn?
2. Which of the sellers sold the corn?
3. Were any buyers unable to buy corn? Any sellers? Explain your answers.

ACTIVITY 3
Before you read the article carefully, scan through it to find the answers to the
following questions.
1. What product is used to demonstrate the principle of supply and demand?
2. What is the specific market that is discussed?
Supply and Demand Revisited
(1) As we have already learned from the textbook, we can represent the decisions of
buyers with the demand curve and the decisions of sellers with the supply curve.
(2) The Demand Curve. This curve shows the relationship between the price of
a good or service and the quantity consumers will buy, at a specific time, and
holding everything else constant. Demand curves usually slope downward from
left to right. This means that consumers are more willing and able to buy larger
quantities of goods and services at relatively lower prices. This can be explained
by the principles of dim inishing m arginal utility. After consuming a certain
amount people get less and less satisfaction from each additional purchase. For
example, the first ice cream cone consumed at the baseball game is great: the
second is good; the third one is fair; the fourth one was “too much” ; and the
fifth one made you sick. Clearly we would not choose to pay as much to feel sick
(the fifth cone) as we would pay to feet great (the first cone).
(3) Believe it or not, at some point the principle of dim inishing marginal utility
applies to almost everything we consume. As I buy more clothes I get better
wear from the clothes I own, my wardrobe becomes more flexible, and my
“satisfaction” or “utility” may increase. But sooner or later, the utility of having
additional clothes will diminish. For example, you don’t get your money’s worth
because you seldom wear certain outfits. Because of diminishing marginal
utility, the demand curve for a commodity will show that more will be demanded
only at lower prices.
(4) The Supply Curve. The supply curve shows the relationship between the price
of a good or service and how much sellers will offer for sale at a specified time
and holding everything else constant. In general, supply curves slope upward
from left to right. This means that at relatively high prices, businesses will
naturally want to produce and sell more. At lower prices less will be produced
and supplied. For example, suppose we are making ice cream in our kitchen to
sell at Friday’s baseball game. With the available kitchen equipment we are
able to store ingredients used (the cream, etc.) and freeze 20 gallons of finished
ice cream. But we want to produce more. In order to do so we have to find
additional storage space. We could buy dry ice and pack the ice cream and the
ice in a big metal tub purchased from the hardware store. This would allow us to
increase production to, say, 40 gallons. But the last 20 gallons now cost more to
22 Chapter 2
produce than the first 20 gallons did because we had to buy the ice and the tub
in addition to the cream. Because it costs more to increase production, if we hold
everything else constant (such as the size of the refrigerator), economists say
that the marginal cost of production will tend to increase after some point.
(5) It is easy to see why the supply curve slopes upward. You produce ice cream to
make a profit from sales. Since it costs more per unit to produce more than 20
gallons, you will find it profitable to produce the additional 20 gallons only if
the selling price goes up. Thus, supply increases only as price increases.
(6) Equilibrium Price and Quan

Equilibrium Price and Quantity tity. Now we see that buyers and
sellers are in conflict: Buyers will
Price per Cone only purchase more at lower
prices, while sellers will only
sell more at higher prices. Can
they reach an agreement?
(7) Yes. Their agreement is called the

equilibrium price and quantity.
It is that price-and-quantity com
bination of the good in question
at which there is no tendency to
change unless something else
changes. In the example above,
Gallons of Ice Cream it is the price of ice cream pro
duced and sold, from which
there is no tendency to change
unless something else changes.
(8) Is any and every price we see an equilibrium price? No. The difference between
equilibrium and nonequilibrium prices is that equilibrium prices will remain
unchanged as long as nothing else changes, while nonequilibrium prices will
change even when nothing else changes.
(9) The graph shows how much ice cream you will supply and demand at each price.
Is US$.75 per ice cream cone an equilibrium price? According to the supply
curve, at US$.75 you would produce and supply 40 gallons of ice cream and
still make a profit. Even though the cost per cone is higher when we produce
40 gallons, US$.75 is even higher. You will not be able to sell all 40 gallons,
however, because the baseball crowd will buy only 10 gallons, leaving an excess
quantity supplied of 30 gallons.
(10) To get consumers to buy some of this excess supply from you, you must reduce
the price. When you lower the price, more people will want to buy ice cream
from you. Nevertheless, you will probably decide to produce fewer gallons next
week to avoid increasing your marginal costs o f production. (Look at how the
quantity offered for sale changes as price declines. What is the connection

with increasing marginal cost? Hint: Everything is working in reverse here.)
Seventy-five cents is a nonequilibrium price because there is excess supply,
which produces a tendency to change price and quantity even though nothing
else has changed.
(11) Suppose you go back to the game next week and try to sell ice cream at US$.25
a cone. Is US$.25 an equilibrium price? Well, at US$.25 you can only produce
10 gallons of ice cream and make a profit (again, because of the increasing
marginal cost of producing more). But, as shown by the demand curve, the
baseball crowd will want to buy 40 gallons at a price of US$.25. The result is
an excess quantity demanded of 30 gallons. There will be some people who will
want to buy at that price who will be unable to because you will run out of ice
cream. You now know that next week you can sell more than 10 gallons and at
a price higher than US$.25. Thus, US$.25 is not an equilibrium price.
(12) What is the equilibrium price and quantity that will not change unless
something else changes? We know the equilibrium price is greater than US$.25
and less that US$.75, and we know the equilibrium quantity is greater than 10
gallons and less than 40 gallons. We also know that price declines when there
is excess supply and rises when there is excess demand, even when nothing
else changes. So the equilibrium price and quantity must be at that point at
which there is no excess supply or demand. It is where supply equals demand.
This occurs at a price of US$.50. At that price you will profitably supply 25
gallons, and the crowd will demand 25 gallons. There is no excess. You sell all
you want to sell; the crowd buys all it wants to buy; and there is no tendency
for either price or quantity to change. Next week and forever you will come to
the stadium and sell 25 gallons of ice cream for US$.50 a cone—that is, unless
something else changes.
Q U E S T IO N S F O R U N D E R S T A N D IN G
Working with a partner, do the following tasks.
1. Write a definition for the following terms:
a. diminishing marginal utility
b. marginal costs o f production
c. equilibrium price and quantity
2. In the final sentence of the article, the author says that the equilibrium of price
and quantity will remain the same forever “unless something else changes.”
Identify what specific changes might alter the equilibrium?
3. If you were to rewrite this article for your country, what product and what market
would be more appropriate for you to use to demonstrate supply and demand?
24 Chapter 2
ACTIVITY 4
Complete the following activity with a partner.
More Problems in Supply, Demand and Market Price
In interpreting demand curves, it is necessary to understand the concept of elas

ticity. Elasticity describes how price changes affect the quantity demanded. If a
price change has little effect on the quantity demanded, demand is inelastic. If
the price change directly effects on the quantity demanded, we say the demand
is elastic.
1. The supply and demand for lettuce.
Price
Quantity (Crates or Bushels)
a. Label the demand curve “D,” the supply curve “S .”
b. What is the equilibrium price?
c. Why does the price of lettuce fluctuate in the grocery store?
d. Illustrate on the graph what happens when farmers have a bumper lettuce
crop. How does the price change? The quantity sold?
e. Is lettuce an elastic or inelastic good? Explain.
f. What other foods are affected by the price of lettuce? Why?

2. The supply and dem and for designer perfume.
a. Label the demand curve “D ,” the supply curve “S .”
b. What is the market price?_________ Label it “M” on the graph.
c. If perfume were selling for US$12.00 a bottle, what would be the quantity
demanded?____________ What would be the quantity supplied?___________
d. If perfume were selling for US$30.00 a bottle, What would be the quantity
demanded? ___________________
What would be the quantity supplied? ________________
e. If the cost of producing perfume were to increase, what would happen to

the price and quantity sold? Show this change on the graph. Label the new
supply curve “S I ” and the new price “M l.”
F. If tastes change and consumers desire more of the product, show what
would happen in the marketplace. Draw a new demand curve and label it
“D2.” Label the new market price “М2.”
26 Chapter 2
3. Plotting supply and dem and curves.
Use the grid below to plot the supply and demand curve for corn based on the
following data:
At a price of Buyers will take Sellers will offer

(per bushel) (thousands) (thousands)
US$.50 425 25
.75 350 80
1.00 295 155
1.25 250 175
1.50 215 215
1.75 170 240
2.00 115 275
2.25 70 310
2.50 45 325
Price
0 100 200 300 400 500

Quantity
a. What would the market price be at the equilibrium point?
b. How many bushels would be sold at that point?_________
c. Draw new supply and demand curves showing the direction they will shift
for each of the following hypothetical events. Label them C l, C2, and C3.
C l. Last week the Surgeon General of the United States announced that
eating corn protects you from the common cold.
C2. Suppose that the Surgeon General had announced that eating corn will
turn the whites of your eyes yellow.
C3. A strange plant disease ruined a large portion of the nation’s corn crop.

ACTIVITY 5
Scan the following article for the answers to the questions below.
1. In what way is the economist Say similar to the astronomer Ptolemy?
2. In which centuries did Say live?
3. What was Say’s nationality?
4. What connection did Say have with Adam Smith?
Read the article carefully and discuss the questions that follow.
Jean Baptiste Say (1767-1832)

Say’s Law of Markets
(1) For hundreds of years, the science of astronomy was frozen by the widely
believed theories of the second century Greek astronomer, Ptolemy. According
to Ptolem aic theory, the Earth was the center of the universe. It was not until
the 16th century that Europeans, accepting the work of Galileo and Copernicus,
were persuaded that the Earth, and all the other planets, rotated around the
sun. In much the same way, the doctrine known as Sa y's Law stifled advances
in the study of economics for well over 100 years.
(2) An admirer of Adam Smith, John Baptiste Say’s Treatise on Political Economy
(1803) helped to introduce The Wealth o f Nations to his native France. In the
course of explaining Smith’s theories and the role of markets in satisfying
human wants, the author developed what came to be known as Say’s Law.
According to Say’s law, “production creates its own demand.” In other words,
people produce and sell goods and services in order to buy the things they want.
If buyers no longer want certain products, sellers will stop producing them, and
shift into something that is in demand.
(3) Now, if only those goods and services actually in demand are produced, and
the income received from the sale of those products is ultimately used by
managers and workers to buy the things they want and need, it follows that
supply created its own demand. In other words: there could be no such thing
as overproduction, or long term unemployment. Temporary overproduction and
unemployment, yes. Long term, never.
(4) The onset of the Great Depression of the 1930s, with its widespread unem
ployment and overproduction that dragged on for years, finally put Say’s law
to rest. Although some economists continued to agree with Say that “in the
long run,” the market would bring supply, demand, and employment into bal
ance, most agreed with the British economist J.M. Keynes who pointed out
28 Chapter 2
lines seemed w ithout end. L ib r a r y o f C o n g r e s s
During the Great Depression, unem ploym ent
that “in the long run we are all d ead.” B y th a t he m e a n t p r e s s in g p r o b l e m s

require immediate attention. We can't w ait for lo n g -te rm s o lu t io n s .
QUESTIONS FOR U N D E R ST A N D IN G
In groups of four, consider the following questions; th en sh a re y o u r id e a s w i t h t h e
whole class.
1. What is Say’s Law? Give a specific exam ple o f S a y ’s L a w d r a w in g fr o m y o u r

country’s experiences?
2. The Great Depression revealed somec proDiems

nrohlomc in
ir. S a y s L
т aw . W h a t w ere th e y ?
Supply, Demand and M arket Price

ACTIVITY 6
Form into groups of four. Two members of the group will be responsible for reading
the selection about Thorstein Veblen and the other two will read about Frank Knight.
After the two subgroups have finished the reading, join together as a group of four
and complete the questions that follow the two articles.
Thorstein Veblen and Frank Knight

Critic and Defender of the Market System
THORSTEIN VEBLEN (1857-1929)

(1) In 1899 conventional wisdom of the economists of that day was jolted with the
publication of Veblen’s The Theory o f the Leisure Class. A professor of economics
at the University of Chicago, Veblen said much about contemporary economics
and social behavior that angered and upset his colleagues.
(2) In what may be his most famous contribution, Veblen challenged the assumptions
built into the laws of supply and demand. One of these assumptions was that of
“consumer sovereignty.” Veblen questioned the assertion that the consumer was
a king who demanded and received the best goods and services at the lowest
prices. Instead, he argued, consumers were subject to all kinds of social and
psychological pressures that led them to make some very unwise decisions.
(5) To illustrate, he coined the term conspicuous consumption to describe the ten
dency of the “leisure class” (the wealthy) to buy goods and services simply to
impress others. This, in turn, led middle class consumers, and even the poor,
to imitate the wealthy by buying goods for similar purposes. When that
occurred, it was possible for the law of demand to be reversed. Quantity
demanded increased at a high price rather than at a low one. For example, the
demand for a 1-ounce bottle of an unknown brand of perfume priced at US$1
was likely to be less than the same perfume selling for US$15 an ounce.
(4) As for the other side of the market, Veblen argued that the desire for profits
drove business interests into doing unscrupulous things, Some of these includ
ed efforts to eliminate competition, restrict output, build ever larger combina
tions of existing firms, and separate those who owned America’s corporations
from those who managed them. This, he predicted, would result in wasted
resources and the inability of the economy to reach its full potential. From
these observations, Veblen concluded that laissez-faire capitalism was proba
bly destined to be replaced in the long run with a system more attuned to the
needs of the people.
30 Chapter 2
FRANK KNIGHT (1885-1972)
(1) A professor of economics at the University of Chicago, Frank Knight advocated free
enterprise and laissez faire politics. Knight pointed out that except for the basic
necessities of life the purchase of anything could be described as “conspicuous
consumption.” Since, he noted, even Veblen would have conceded that people
need more than the bare necessities, who was to say which purchases were
reasonable? Should the government or some other higher authority decide what
would be offered for sale? Of course not, Knight concluded, consumer demand
ought to determine what goods and services would be provided.
(2) Turning to the supply side of the market, Knight defended profits as the driving
force behind business. The quest for profit would move business to produce
whatever the economy wanted. Meanwhile, the inescapable punishment of
financial loss awaited those firms who failed to meet the market’s demands. In
his famous work, R isk, Uncertainty and Profit (1921), Knight answered critics
who, like Veblen, had questioned the legitimacy of profits.
(3) Profits, he said, were the reward earned by business for accepting the uncer
tainties of the market. In this he distinguished between risk (which can be pre
dicted and against which one can be insured) and the uncertainty of events
that cannot be predicted. Everyone, for example, faces the risk of illness and
can be insured against it. But sweater manufacturers can never know with cer
tainty that the styles that they are producing today will still be in demand
when they appear in the stores six months from now. Therefore, those manu
facturers who guess correctly are entitled to the rewards they earn.
(4) Meanwhile, those who produced the wrong style or color will be motivated to do
better next season or face ruin.
(5) Economists and others still debate the issues raised by Thorstein Veblen’s
challenges to the market system and Frank Knight’s responses to them. But
don’t take our word for it. Pick up today’s paper or news magazine, and see
for yourself.

In groups of four, the students who have read about Veblen and the students who
have read about Knight will complete the following questions together.
1. Look at the statements below and determine if they refer to Veblen or Knight or
both of them.
a. Supported laissezfaire economics

b. Taught Economics at the University of Chicago
c. Predicted the separation of ownership from management of business
organizations
d. Coined the term the “leisure class”
e. Believed business profits were earned in return for accepting the uncertain
ties of the market
f. Opposed laissezfaire economics
g. Believed consumers made unwise choices
h. Supported the consumer’s right to determine what should be on the market
i. Found acceptance by most economists of his day
j. Believed that people in business could gain profits by giving consumers
what they wanted
k. Believed that people in business could gain profits by limiting production
l. His ideas are still influential today
2. The two students who have read about Veblen will explain to the other students
what he meant by “conspicuous consumption.” Collectively consider whether it
is a factor in today’s economy? Provide evidence to support your opinion.
3. The two students who have read about Knight will explain to the others what
distinction he made between risk and uncertainty. Collectively consider how a
business might limit risk or uncertainty and prevent financial loss?
32 Chapter 2
C H A P T E R 3
T he E ntrepreneur in
M arket E conomies
Ted Turner, President and Chairman o f the

Board o f Turner Broadcasting
System/Founder o f CNN, is a modern day
counterpart to entrepreneurs like Carnegie,
Rockefeller and Ford. ©AP/WideWorld Photos
GETTING STARTED
In groups of four, discuss the following questions.
1. Would you like to own your own business? Why or why not? If so, would you
prefer to buy an existing business or start one yourself? Explain.
2. What product or service would you provide?
3. Where would you want to locate the business and for what reasons?
33
VOCABULARY STUDY
The italicized words in the sentences below are found in this chapter. Study the
sentences. Then identify the part of speech and write your own definition for the
word on the line provided.
1. Considering the fact that Joan has an aggressive personality, it is not surprising
that she is the newspaper’s leading reporter.
aggressive ( )________________________________________________________________
2. She coaxed her husband to take a week off from work for what would be their
first vacation in two years.
coax ( )________________________________________________________________________
3. Nothing too unusual for me! I’m quite conventional in my tastes,

conventional ( )______________________________________________________________
4. This winter’s record snowfall has depleted the city’s supply of salt for melting
the ice from the roads.
deplete ( )_____________________________________________________________________
5. After careful consideration, we discarded that idea and kept to our original plans,
discard ( )____________________________________________________________________
6. The team always has strong players and dominates the league,
dominate ( )__________________________________________________________________
7. They began to exploit the mineral resources of the country by setting up a

number of new mines.
exploit ( )_____________________________________________________________________
S. The telephone at work was ringing incessantly and I felt like I was going crazy,
incessantly ( )________________________________________________________________
9. My insurance gives me limited liability in case someone has an accident while

inside my home.
liability ( )____________________________________________________________________
10. We tried to minim ize his disappointment by taking him out to lunch,
minimize ( )__________________________________________________________________
11. I found the desk clerk’s behavior offensive so I complained to the manager,
offensive ( )__________________________________________________________________
12. The first patrons to enter the store on Saturday morning will receive a small gift,
patrons ( )____________________________________________________________________
13. We revamped our proposal and were awarded the contract.

revamp ( )____________________________________________________________________
34 Chapter 3
14. With the closing of that branch, its responsibilities will be shuffled, to the three
remaining branches.
shuffle ( )___________________________________________________________________
15. Knowing the company’s poor performance record, I look on their new proposal
with great skepticism.
skepticism ( )______________________________________________________________
16. He knew the stock market was highly speculative, but still he was shocked at
the extent of his losses.
speculative ( )______________________________________________________________
17. They stimulated my interest in company stock when they reported on its
recent profits.
stimulate ( )________________________________________________________________
18. Inventors and successful corporate leaders differ from most people in that they
are usually visionaries.
visionary ( )________________________________________________________________
In each set of words, cross out the word that does not have a similar meaning
to the first. Compare your answers with another student. Discuss why the words
are similar.
1. aggressive angry energetic forceful

2. coax compel persuade urge
3. conventional agreeable customary widely accepted
4. deplete decrease empty leave
5. discard dismiss retain throw out
6. dominate control house master
7. exploit destroy promote utilize
8. incessantly constantly illegally without end
9. liability disadvantage obligation promise
10. minimize cancel discount reduce
11 . offensive attacking courageous insulting
12 . patron client rival user
13. revamp patch up reveal revise
14. shuffle change confuse intermix
15. skepticism assistance doubt questioning
16. speculative risky settled uncertain
17 . stimulate arouse criticize encourage
18. visionary dreamer guardian prophet
The Entrepreneur in Market Economies 35

л
An entrepreneur like B ill Gates has visionary imagination and the ability to persevere
in times o f difficulty. ©StockDisc

1. W orking with a partner, read the follow ing statem ents and underline the key
words that describe the qualities o f an entrepreneur.
There are two things that entrepreneurs have that others do not. One is a kind
off visionary imagination to spot a commercial opportunity where others sim ply
do not see it. And the second is the ability to persevere in theface o f skepticism
or criticism even thefear o f failure.
George Sm ith, Harvard University
Entrepreneurs perform the fu n ction o f creative destruction. They rethink

conventional assum ptions and discard those that no longer apply. They reform
or revolutionize the pattern o f production by exploiting an invention or an
untried technological possibility fo r production, by opening up a new source o f
supplyfor materials or a new outletfo r products, by reorganizing industry.
Joseph Schumpeter, Harvard University
2. Drawing upon some o f the key words and phrases used above to describe
entrepreneurs, write a definition o f an entrepreneur with your partner. Share
this definition with the whole class.
3. W orking in groups o f four, identify the challenges and rewards o f entrepreneur-

ship. Do you think it is preferable to be solely responsible for a business or to
share responsibility with a partner or within a corporate structure? Share this
inform ation with the whole class.
36 Chapter 3
ACTIVITY I
Before you read the next article, think about its title—Against All Odds: Barbara
Proctor, Millionaire—and using your imagination, write a short character sketch
about Barbara Proctor telling about her background, her interests and the dreams
that inspired her. Describe some of the experiences she has had in her life. After
you have completed Barbara Proctor’s story, share your paragraph with three other
students. Then read the article. You may be surprised at the similarities between
what you wrote and the real life of Barbara Proctor.
Against All Odds: Barbara Proctor, Millionaire
(1) “The spirit of enterprise is sparked by small business people with big ideas—
people like Barbara Proctor, who rose from a ghetto to build a multimillion dollar
agency in Chicago.” Thus did President Ronald Reagan describe Barbara Proctor
in his 1984 State of the Union Address. Proctor & Gardner is one of the leading
advertising agencies in the United States. It specializes in the black consumer
market and handles more than US$12 million in business annually. How did a
black woman lift herself out of poverty to excel in a career dominated by men?
(2) Barbara Proctor was born in Asheville, North Carolina, in 1932. Her parents
never married, and Barbara was left in the care of her grandmother. “If there
ever was a guiding force in my life it was my grandmother,” Barbara explained.
“She is the one who taught me to accept your circumstances, because it is
only by accepting them that you can deal with them." Barbara lived with her
grandmother in a shack that had no water and no electricity. Her grandmother,
who worked as a maid, was determined to see Barbara achieve her goal in life.
(3) With the help of a scholarship and savings from summer jobs, Barbara graduated
from Talladega College in Alabama. But success did not come easy. After a short
career in the record business, Barbara worked for several advertising agencies
in Chicago. The highest position she reached was copy supervisor. She was fired
from that job when she refused to write a television commercial she considered
offensive to blacks.
(4) She had her own ideas about running an advertising agency. In 1970 she received
an US$80,000 loan from the Small Business Administration that enabled her to
open her own company. She called her agency Proctor & Gardner because, she
explained, “clients assumed a Mr. Gardner was sitting back there manning the
shop with everything under control.” There was, of course, no Mr. Gardner.
(5) Starting with a few employees and working out of an office above a pizza
store, Barbara worked incessantly to achieve her goals. Her single-mindedness
combined with her enormous creative abilities to guarantee her success. She
signed up large companies interested in advertising aimed at blacks. Before long
her staff grew to 30 employees, and her clients included Sears, Roebuck & Co.,
Alberto-Culver Company and Kraft Foods.

(6) Today she is considered one of America’s outstanding businesswomen. Her
innovative marketing and creative concepts have been widely recognized. Her
awards include Achievement in the Business World of Black Women, Women’s
Day Advertising Merit Award, and Dynamic Woman of the Year. United Airlines
Magazine called her “one of the most courageous people in the ad business, who
is constantly tackling new challenges.”

1. What obstacles did Barbara have to overcome? What personal qualities did she
possess to overcome such obstacles?
2. Barbara Proctor has stated that she would not accept any client whose product
demeans blacks or women. Should personal convictions influence business
decisions? Explain your answer.
Oprah Winfrey’s creative abilities and vision o f thefuture

have contributed to her success. ©AP/WideWorld Photos
38 Chapter 3
ACTIVITY 2
Working independently, complete the following survey. Then join with three other
students and discuss your ratings.
ENTREPRENEURIAL SKILL SURVEY
Do you have the personal characteristics that might help you become a successful
entrepreneur? Read each question on the Rating Scale below. Place a check mark
(✓ ) on the line at the point where you believe successful entrepreneurs would
rate themselves.
Repeat the exercise for yourself by placing an “X ” closest to the point that best
describes you. The check mark need not be placed directly over one of the suggested
answers if your rating lies somewhere between two answers. Be honest with
yourself.
How do the two ratings compare?
Rating Scale for Entrepreneurial Skills
Areyou a
self-starter? ____________________________________________________________________________
I do things on my If someone gets Easy does it.
own. Nobody has to me started, I can I don’t work hard
tell me to get going. keep going all right. unless I have to.
How do yo u fe el
about other
people? ____________________________________________________________________________
I like people. I I have a few good Most people
get along with friends and that bother me.
anybody. is enough.
Can yo u take
responsibility?____________________________________________________________________________
I like to take I’ll take over I do not want to
charge and be but I’d rather be in charge,
responsible. not.
How good an
organizer
areyo u ? ____________________________________________________________________________
I like everything If things get too I just take
planned. Usually complicated, I things as they
I am the boss. lose interest. occur.

How good a
worker are
you?
I can keep going I’ll work hard I can’t see that
as long as neces for a time, but hard work gets
sary. I like when I’ve had you anywhere.
working hard. enough, I’ll stop.
Can yo u make
decisions?
I can make up my if I have to make I don’t like to be
mind in a hurry decisions fast, I the one to decide
and my decisions regret them later. things. I might
are usually good. make mistakes.
Can yo u stick
with it?
Once I decide I usually finish If a job isn’t
to do something I what I start. going right, I
don’t stop. give up.
Can yo u keep
records?
Since they are I can, but it’s I would rather hire
necessary, I’ll more important to someone to keep
keep records. get the work done. records.
40 Chapter 3
ACTIVITY 3
Work with a partner to complete this activity.
Interpreting Statistical Data About Business Organizations
Pie-shaped wedges are often used in graphs to compare the size of one thing to
another. Pie graphs (or circle graphs as they are also called) do this by representing
measurements by the size of the “slice.”
The table below summarizes: 1) the number of proprietorships, partnerships, and

corporations in the United States in a particular year, and 2) their total receipts.
Number and Total Receipts by Type of Business
Number Receipts
(thousands) Percent (billions) Percent
Proprietorships 18,296 72.0 1,030 5.0
Partnerships 2,242 8.0 2,669 12.0
Corporations 5,267 20.0 18,849 83.0
Total 26,435 100.0 22,548 100.0
Source: Statistical Abstract o f the United States, 2006
Now let’s see what this information would look like if we illustrated it with pie graphs.
Examine the tables and pie charts below and answer the questions that follow.
Number of Business Total Receipts

TASKS FOR UNDERSTANDING
1. Rank order the business types in terms of their number.
2. Rank order the business types in terms of the total value of their receipts.
3. Compare the information contained in the table with that contained in the,
graphs. Which gives you the most accurate information? Which is easiest to
understand? Explain.
4. What other kind of graph might have been used to illustrate the information
contained in the table?
5. Using the information in the tables, which form of business organization is most
likely to be a small business? Which would most likely be a large business?
6. Explain why 72 percent of the business organizations in the United States

receive only 5 percent of total business revenue in America.
7. Using your “thinking cap,” explain how it is possible for 20 percent of all
businesses to earn 83 percent of all receipts.
42 Chapter 3
ACTIVITY 4
The following activity can be done as homework with two students working together.
Once you have collected and analyzed the data together, share your work with the
whole class.
Classifying Types of Local Businesses
Classify several businesses in your community as sole proprietorships, partnerships,

or corporations. List each business on the appropriate line. Select 10 businesses,
including at least one of each type. The commercial section of your local phone book
or advertisements in a local newspaper may provide some hints.
Sole Proprietorships:
Partnerships:
Corporations:
1. How were the sole proprietorships similar? How were they different?
2. How were the corporations similar? How were they different?

R isk is unavoidable in business, but steps can be taken to reduce its impact. ©PhotoDisc
ACTIVITY 5
Scan the next article to answer the follow ing questions. Then discuss your answers
with a partner.
1. W hat are the two types o f business risks? Write a short definition for each.
2. W hat is liability insurance?
3. W hat is business interruption insurance?
Read the article and complete the questions that follow.
R isk M a n a g e m e n t an d In su ran ce
(I) Stories like the follow ing are reported alm ost every day:
The Blue Star Printing Company went out o f business last week. The company
had been losing money steadilyfor the last twoyears, and company management
thought it best to close its doors.
A court directed one o f the nation’s largest-oil companies to pay $360 million to
clean up the toxic waste it had left in one o f its dump sites.
Hurricane Rebecca damaged threefo o r s o f Dowling’s Department Store. Tom

Hamilton, president and CEO o f Dowling’s, announced that it would be three
weeks before the store could reopen.
Laura Kirkwood was awarded $75,000 in damages as a result o f her su it against

Mike Angelo’s Paint and Wallpaper, Inc. Mrs. Kirkwood had injured her elbow
after slipping on the ice outside the store entrance.
44 Chapter 3
(2) The risk of financial loss or injury is unavoidable in business. While there is
nothing that anyone can do to eliminate all risks, there are things that can be
done to reduce their costs.
(3) Business risks can be divided into two categories: speculative risk and pure risk.
(4) Speculative risks are those that could result in a loss or a profit. Suppose a shoe
manufacturer decided to produce a line of shoes decorated with bells. This will
involve a risk because no one knows for sure whether the new style will sell. If
the public thinks that bells on shoes are silly, the company will lose money. But,
if management is correct, and the style takes off, the company stands to make
a lot of money. It is the nature of business in a free enterprise system to accept
speculative risks in the hope of earning profits.
(5) Pure risks, on the other hand, are those in which there is only the possibility of
loss. For example, every business faces the risk of fire or theft. These are pure
risks, because if they occur, there is no way the business will profit from them.
But business can take steps to minimize the costs associated with pure risks.
(6) Risk Management. The process of identifying and minimizing risk is called risk
management. Risk management is one of the more important responsibilities of
those who direct or manage business enterprises, and it involves one or more of
the following strategies:
• Risk avoidance. Risk avoidance involves removing specific risks. Hotels with
swimming pools run the risk that one of their guests may accidentally
drown. Management can avoid that possibility by closing down existing
pools, or choosing not to install one where none exists.
• Risk reduction. Risk reduction involves precautions to prevent a loss from

taking place. Hiring lifeguards would be a way to reduce the hotel’s risks
in having a swimming pool.
• Risk assumption. Risk assumption, often described as “self insurance,” refers

to the “assumption” that a particular risk will occur. Funds are set aside to pay
for likely losses. Rather than buying insurance, an office park with a lawn
sprinkler system might set aside money to repair pipes broken in a freeze.
• Risk transfer. Some (but not all) risks can be transferred to an insurance
company. The most popular kinds of coverage include liability, property, and
business interruption insurance.
(7) Types of Business Insurance
• Liability insurance. Liability insurance covers losses due to property damage

or personal injury caused by the company’s personnel or property.
A patron broke his tooth on a piece of china in the mashed potatoes on

the “Blue Plate Special” at Louis’ Cafe. Louis’ insurance company paid
the customer’s dental bill.

(8) • Property insurance. Property insurance covers the firm for losses resulting
from the theft or destruction of their property.
ABC Vending Inc. lost US$25,000 in melted candy bars when its air
conditioning system failed.
Ajax Auto Parts discovered US$75,000 missing from its bank account.
The funds had been stolen by one of its bookkeepers.
Star Brite Cleaners paid US$1,275 to repair its front display window
after a summer storm.
Property insurance would have reimbursed each of these firms for their losses.
(9) • Business interruption insurance. Fires or natural disasters not only

destroy property but may also make it impossible to continue operating
until the damage has been repaired. Most businesses cannot afford to go
for long periods without operating because they need to pay for their fixed
expenses. Business interruption insurance pays the expenses of firms that
are temporarily shut down as the result of a fire or other disaster.

In groups of four, discuss the following problems. Share your conclusions with the
whole class.
1. You are thinking about starting a bicycle messenger service in a big city. As part
of your planning you want to evaluate the risks involved.
a. What are some of the “speculative risks”?
b. What are some of the “pure risks”?
c. What steps can you take to minimize your risks?
2. You have just been put in charge of risk management for the Crack-the-Whip
Roller Rink. Your first job is to prepare a risk management plan for the board
of directors.
a. What risks can be avoided?
b. What risks can be reduced? How?
c. Can any risks be assumed?
d. What kinds of insurance does the company need?
46 Chapter 3
ACTIVITY 6
Scan the next article for the answers to the following questions. Once you have
found the answers share them with the whole class.
1. What are venture capitalists?
2. What state is cited for its actions to promote business growth?
3. Look at the table at the end of the article. Do cable TV installers rank with the
fastest growing or fastest declining jobs?
4. Look again at the table. What category do receptionists fall under?
Read the article and complete the questions that follow.
Billions o f dollars tofinance new businesses are generated through the Stock Market. ©DigitalVision
New Business and Job Creation
(1) One of five Americans leaves his or her job each year. One in ten Americans
changes occupations each year, and many will have four to five careers in a
lifetime. While most job switching probably occurs early in one’s career, we
live in a rapidly changing world where new jobs and careers are being created
every day. The personal questions involved in finding and keeping a job are
likely to be a regular part of life.
The Entrepreneur in Market Econom ies 47

(2) Financing New Businesses. The number of new businesses and the amount
of money necessary for them to operate and expand is staggering. There are
1.5 million new enterprises formed each year. Approximately half of these
incorporate. If each of the 1.3 million new firms requires US$25,000 of financial
capital to begin, over US$30 billion is needed to finance the start-ups each year.
Another half a million firms need an additional US$100,000 to continue to grow.
Capital requirements for these firms total roughly US$80 billion dollars.
(3) Where do these funds come from? Business people called “venture capitalists,”
who specialize in investing in new firms, provide about US$2 billion a year. One
quarter of the capital comes from overseas. Stock markets, where new common
stock is sold, provide an additional US$ 15-20 billion. Banks and other financial
institutions will also provide funds. A large portion of funds needed for start-up
and expansion, however, comes from entrepreneurs risking their personal sav
ings or property. This may mean taking a second mortgage on a house, deplet
ing savings and retirement funds, and coaxing investors (primarily friends,
neighbors, and family) to make loans or buy ownership in the new firm.
(4) State Financing of New Businesses. States interested in stimulating economic

growth compete for jobs and new businesses in a variety of ways. They provide
tax incentives and special funds to lure foreign or domestic companies to move
to their state. They advertise and market their strengths to convince businesses
to relocate in their state. They emphasize the quality of their schools, roads and
highways, the availability of skilled workers, and their clean air and beautiful
scenery — whatever businesses will find attractive. Governors will even travel
to other countries in an effort to secure new investment.
(5) Michigan provides a good example of the variety of things a state can do to
stimulate economic growth. Between 1979 and 1983, Michigan had lost
283,000 manufacturing jobs. For four years running, the state had the highest
unemployment rate in the nation. Its budget was in deficit, and it had to bor
row from the Japanese to keep the public schools open. Out of this crisis came
a commitment to rebuild basic manufacturing by relying on the skilled labor
force of the state.
(6) Under the leadership of its governor, Michigan tried to assist old businesses to
retrain workers or restructure their operations. It also became one of the most
aggressive states in its assistance of start-up businesses. Its reforms included
an overhaul of the regulations governing franchise businesses, state social
security laws, and workers’ compensation. In addition, a 1983 law allowed the
state to invest 5 percent of a US$15 billion public employee pension fund in new
businesses. As a result, the state could encourage start-up businesses through
a variety of state loans—even to businesses that could not get bank loans.
(7) As a result of this effort, established firms are reorganizing, new firms are
moving to the state and Michigan’s economy is improving dramatically. For
example, a fiberglass boat builder converted to making fiberglass coffins. A new
firm began to manufacture tape drives for microcomputers and now employs 450
workers. In addition, 245 firms have been advised by the Modernization Service
of the state government on ways to revamp operations and retrain workers.
48 Chapter 3
(8) What jobs Are Available? The creation of new businesses and new jobs can
mean new opportunities for you. What types of jobs are growing in importance
in your community? What jobs are fading in importance? National statistics
indicate the service sector is providing the lion’s share of new jobs. Opportunities
are available in medical care, retailing, and business services such as law,
consulting and accounting. The Bureau of Labor Statistics estimates that the
fastest growing jobs will be in the areas of high-skill service occupations such as
engineering, medical technology, computer programming and systems analysis.
The table that follows provides some information about the fastest growing and
the fastest declining jobs in America.
Fastest Growing and Declining jobs

Fastest Growing jobs % Change Fastest Declining jobs % Change
2004-2014 2004-2014
Home health aides 56.0 Farmers and ranchers -14.5
Network systems and data 54.6 Stock clerks and -7.3
communications analysts order fillers
Medical Assistants 52.1 Sewing machine -36.5
operators
Physician assistants 49.6 File clerks -36.3
Computer software engi 48.4 Order clerks -21.4
neers, applications
Physical therapist 44.2 Mail clerks and mail -37.1
assistants machine operators,
Dental hygienists 43.3 except postal service
Computer software engi 43.0 Computer operators -32.6
neers, systems software
Dental assistants 42.7 Secretaries, except legal, -2.5
medical, and executive
Personal and 41.0 Cutting, punching, and -17.2
home care aides press machine setters,
operators, and tenders,
metal and plastic
Network and computer 38.4 Telemarketers -10.0
systems administrators Word processors and -15.3
Database administrators 40 typists
Credit authorizers, -41.2
checkers, and clerks
Source: Statistical Abstract, 2005
The Entrepreneur in Market Econom ies 49

Crowing occupations are those in thefields o f medicine and heath, data analysis, and
software engineering. ©PhotoDisc

Discuss the following questions in groups of four.
1. Should state, provincial, and/or national governments try to attract new firms
and jobs by giving special tax incentives or benefits to new businesses? How
will established businesses feel about the incentives provided to new firms?
2. Why do people want new business in their community? Are there people in your
community who argue against growth and economic development? What are
some of the costs of economic growth?
3. If you were planning to immigrate to the United States, how might the list of
growing and declining occupations affect your career goals?
50 Chapter 3
C H A P T E R 4
P roduction and M arketing
A tradefair, such as FOSE, the largest U.S. government-centric technology conference and
exposition, shown above gives the government a chance to see and compare new products.
Courtesy of PostNewsweek Tech Media
GETTING STARTED
Marketing includes all activities that bring the buyer of a product and the seller of
that product together. Working with a partner, list those activities that a manufacturer
must perform in order to:
1. produce a product that the public will want to buy;

2. give the public access to the product; and
3. motivate the public to buy the product.
Compare your list with two other students. Then share this information with the
whole class.
51
VOCABULARY STUDY
The italicized words in the sentences below appear in this chapter. Study the
sentences. Then write the word class and your own definition for the word in the
space provided.
1. With accessories such as a CD player, radio and a rear windshield wiper, the car
will be considerably more expensive than the list price.
accessory ( )__________________________________________________________________________
2. He attributes his success to the support he received from his wife,

attribute ( )____________________________________________________________________________
3. An important component of the computer is its disc drive.

component ( )_________________________________________________________________________
4. The new features on next year’s model are in conformance with industry guidelines,
conformance ( )_______________________________________________________________________
5. The car was not working well because its fuel injection system was defective.
defective ( )___________________________________________________________________________
6. Children oftenfan tasize about the future and imagine a life more similar to a
fairy tale or a Hollywood movie.
fantasize ( )___________________________________________________________________________
7. Divorce rates have increased greatly in recent years and the longevity of any
marriage is uncertain.
longevity ( )___________________________________________________________________________
8. If people perceive the quality of a product to be poor, they will not buy it.
perceive ( )____________________________________________________________________________
9. Movies like The Lord o f the Rings, Harry Potter, and Star Wars have enjoyed
phenomenal success.
phenomenal ( )_______________________________________________________________________
10. Olympic athletes were featured in Nike’s sales promotion of its new line of
sports shoes.
promotion ( )__________________________________________________________________________
11. Airlines build a good reputation by providing good service, on-time arrivals and
safe flying.
reputation ( )__________________________________________________________________________
12. Living in a big city may be exciting, but the trade-off is the high cost of living
and crime.
trade-off ( )___________________________________________________________________________
Write original sentences using each of the above italicized words.
52 Chapter 4
O R G A N IZ IN G O U R T H O U G H T S
In groups of four, discuss the questions below. Share your thoughts with the
whole class.
1. How do changes in production affect living standards?
2. How can productivity and product quality be improved?
3. What is the role of marketing in business?
4. How do consumers benefit from competition?
Production and Marketing 53

ACTIVITY 1
Before you read the next article, join with a partner to consider the following
questions. Then share your ideas with the whole class.
1. How would you answer the question asked in the title of the article?
2. When you think of quality items, what brand names come to mind? Why?
3. What are some quality items that your country produces?
Read the article and discuss the questions that follow.
What is Quality?
(1) In recent years the Japanese have demonstrated to the world that one of the
best ways to improve productivity is to improve product quality. Adopting the
philosophy and ideas of an American, W Edwards Deming, the Japanese have
proven that “doing it right the first time” improves product quality, lowers
production costs and maintains their competitive position in the market.
(2) In a famous study in 1980, a manager of Hewlett-Packard’s Data Systems

Division tested 300,000 computer chips from six manufacturers, three from
Japan and three from the U.S. The failure rate per 1,000 was zero for the
Japanese chips and between 11 and 19 for the U.S. chips. After 1,000 hours of
use, the failure rate was two per 1,000 for the Japanese chips and 27 for the U.S.
chips. Is there any doubt that attention to “quality” has helped the Japanese
enter and become a major force in the computer chip market? The Japanese
have had similar successes in other industries. In fact, fewer than 1 percent of
products produced by Japanese manufacturing firms are discarded as defective.
The American average is 4 percent.
(3) The Japanese experience has proven that management strategies can contribute to
improving quality and productivity. Hewlett-Packard reports that their decision to
reduce product failure rates by tenfold during the 1980s was the key starting point
in their effort to increase productivity and lower costs. The Hewlett-Packard man
agement discovered that productivity increased when their employees had the latest
information and when they were able to participate in production decisions.
(4) David Garvin, a professor at the Harvard Business School, has identified eight
dimensions of quality.
(5) Performance. The quietness of a car’s ride; the resistance of cosmetics to

smudging; the clarity of the picture, sound and color for a TV set; low energy
consumption of appliances; the sound from a stereo system.
(6) Features. The colors, patterns and fabrics that are available in furniture, towels,
sheets, drapes, etc.; the different cycles and options available on washers, dryers,
54 Chapter 4
microwaves, refrigerators, etc.; The adjustments available on a stereo to improve
the sound or on a camera to allow for different types of shots, lenses and tripods.
(7) Reliability. Dependability of a product or service to perform properly over

time. How often does the photocopy machine need repairs and what does it
cost? Automobile reliability is one of the most desired attributes for anyone
purchasing his or her own car.
(8) Conformance. How the product meets desired standards and tolerances such
as size, consistency of color, etc. Does the product reach its customers on time?
This is particularly important for businesses whose products are used in the
assembly of other larger products. Automobile suppliers who provide parts for
automobiles rolling off an assembly line must meet certain standards, quality
and tolerances to sell their parts to the manufacturers.
(9) Durability. How long a product will last under various conditions. Light bulbs
and batteries are sold and advertised on their longevity. How many hours will
the light burn? In some cases companies will provide a lifetime guarantee.
(10) Serviceability. The ease of repair or maintenance of a product. Many firms now
have toll free “hot lines” for consumers to use if they have questions or need
repairs. These hotlines are designed to reduce dissatisfaction and maintain
good customer relations. “Downtime” for a copier or computer must be
minimized. Can the company guarantee service in six hours? Farmers cannot
afford downtime during harvest season. Can the manufacturer guarantee
delivery of any part in 24 or 48 hours?
(11) Aesthetics. How a product looks, feels, sounds, tastes and smells. The design
of the product is important. Consider the Timex “Ironman” watch designed
for athletes competing in the triathlon. It has a “macho” look with oversized
buttons and large logos that are attractive to more than just the triathlon
athlete. The Ironman is one of the hottest selling watches around. Timex is
now coming out with a Victory watch for sailors and anyone else who wishes
to fantasize about sailing. Is fantasy part of aesthetics?
(12) Perceived Quality. The reputation of the product, its name and label. Japanese
products now have a general aura of high quality. Yet how many of the products
are fully made and assembled in Japan? Could some of the component parts
come from South Korea, Taiwan or Singapore? The Japanese product could ac
tually be made in America, such as Honda in Ohio and Mitsubishi televisions
in California. Is the quality as high for an American-made Honda as a Japa
nese-made Honda? J.D. Power & Associates, who conducts market research on
customer satisfaction with automobiles, has reported a difference in perceived
quality between Japanese-made Hondas and American-made Hondas.
(13) Trade-offs exist among these eight dimensions of quality. In addition, companies
can seldom pursue all eight quality dimensions at the same time. Management
has to make decisions based on a strategy for marketing its product in a
competitive environment.
Production and M arketing 55

When designing new model cars, a company gives consideration to styling, performance and
reliability. Courtesy of General Motors

In groups of four, discuss the following questions and share your answers with the
whole class.
1. Think about the last major purchase you or a member of your family made. How
much were you influenced by the ‘Attributes of Quality” described above? Which
attributes were most important?
2. Quality is not just a concern for the manufacturing sector. What are the attributes
of high quality service?
3. Watch for television commercials that emphasize quality. What attributes of

quality are usually advertised? Are the advertisements believable?
56 Chapter 4
ACTIVITY 2
Making Business Decisions
Assume that you are the president of a company. It produces SAFETY-PAC, a

combination emergency repair and first aid kit suitable for carrying in the glove
compartment of an automobile.
1. What information will you need in order to decide how many units of SAFETY-
PACs to produce?
2. Your company can produce as many as 500 SAFETY-PACs in a week. Why might
you choose to produce fewer than that number?
3. Study the table below to determine how many kits you should produce.
Units Total Total Net

At a produced fixed + variable = Total Total Profit
Price of and sold costs costs Cost Sales (Loss)
US$10 25 US$50 US$75 US$125 US$250 US$125
8 35 50 100 150
7 50 50 160 210
6 70 50 210 260
5 90 50 250 300
4 100 50 300 350
a. Complete the chart by computing Total Sales and Net Profit at each price.
b. At what level of production is your company’s net profit the greatest?
c. Ordinarily, you would stop production at the level at which you maximized
your profits. Why is this so? Under what circumstances might you continue
production beyond that point?
d. How might improvements in productivity or marketing strategies change the

table above?
Production and Marketing 57

ACTIVITY 3
Scan the following article to answer the questions below
1. What are the leading American manufacturers of sports shoes?
2. What people make up the market for sports shoes?
Read the article carefully and complete the questions that follow.
Competing for Your Feet

or
“Defecting” the Competition
(1) At a Sporting Goods Manufacturers’ Association trade show, Reebok International,

Ltd. presented its newest line of athletic shoes. Amid blaring rock music, bright
lights and video productions, Reebok displayed shoes with plastic tubes in the
sole that “return energy to the wearer,” shoes that can be inflated to increase
ankle support, and shoes with a special “honeycomb padding” used in the seats
of the space shuttle.
(2) Reebok entered the athletic shoe business in the early 1980s and had such
phenomenal success selling fashionable athletic shoes that today its revenues
exceed US$1.79 billion. Reebok’s main competition in the sprint for your
“sneaker” dollar is Nike. Each controls approximately a quarter of the market
with the remainder divided among well known companies like L.A. Gear,
Converse, Adidas, and Reds.
(3) Nike built its reputation among athletes by providing quality shoes for specific
sports like basketball, tennis and running. It continues to market to serious
athletes with ads that show Michael Jordan in Nike shoes hanging in the air
above a basketball hoop and an exhausted marathon runner wearing Nike
shoes. But Nike and the other athletic shoe manufacturers are concentrating
just as much on accessories like neoprene windsurfing suits, jogging outfits
and color-coordinated tennis shorts and tops. Nike even changes the colors of
its products with the seasons to attract fashion-conscious buyers.
(4) Americans spent over US$4 billion for athletic shoes in 1989, and the experts
predict the trend will continue into the 1990s. What’s interesting is that most
of these shoes were purchased by people who will never slam-dunk or run a
marathon. Nike, Reebok and the other companies are selling fashionable and
comfortable shoes to thousands of young people in America and around the
world who think the shoes and the other apparel make them look good and
feel great.
58 Chapter 4
Magazine adsfo r athletic shoes. Courtesy of Famous Footwear ©2006

In groups of four, discuss the questions below; then share your ideas with the
whole class.
1. Based on the information above, what is the structure of the athletic shoe
market? Explain your answer.
2. In the 1950s a pair of canvas sneakers or tennis shoes were inexpensive “play
shoes” for children. Fashion-conscious teens or adults would not have worn
athletic shoes unless they were playing basketball, tennis or some other sport.
What strategies have Nike, Reebok, and the other companies developed to
change this?
3. Some critics argue that it is unethical for companies like Nike or Reebok to
advertise expensive athletic shoes to young people who cannot afford such
luxuries. What do you think? Why?

AL'1'iVl'l'Y T
Analyzing Market Variables
A. Each of the events listed below will affect the market for particular goods
or services. Working with a partner, match the letter of the “effect” with the
events listed.
A. Supply will increase

Б. Supply will decrease
C. Demand will increase
D. Demand will decrease
___ a. Cost of obtaining oil for making plastics decreases.
___ b. The yo-yo fad comes to an end.
___ c. An advertising campaign for basketball shoes is effective.
___ d. Personal income tax increase reduces available income for purchasing
stereos, TVs and other major appliances.
___ e. Government subsidy helps local carpet manufacturers.
___ f. New robots lower production costs for automobiles.
___ g. Drought ruins the rice crop.
60 Chapter 4
В. Predicting the effect of price increase on market demand.
On page 25, we learned that the demand for a product or service is described
as elastic if a price increase results in a drop in sales. A product or service has
inelastic demand when a change in price has no effect upon sales.
Look at the list of consumer goods and services below. In the blank on the left,
indicate whether the item has essentially an elastic demand (E) or an inelastic
demand (I). Indicate the most important reason for your classification from the
list below in the blank on the right.
A. Necessity D. Few available substitutes

B. Luxury E. Easy to delay purchase
C. Many available substitutes F. Difficult to delay purchase
Elasticity Reason
automobile repair ____
pack of cola ____
pizza ____
10-speed bicycle ____
cosmetic plastic surgery ____
loaf of bread ____
bus service ____
surfer T-shirt ____
air conditioning ____
fried chicken (fast food) ____
computer ____
dental service ____
In groups of four, compare your answers and try to come up with a group
consensus. Then share your group’s answers with the whole class.

ACTIVITY 5
Working in groups of four, analyze the chart below; then share your ideas with the
whole class.
Competition in Selected Industries
The table below presents approximate figures for select American industries. Examine
the profile of industries and answer the questions below.
Production Shipments of Large Manufacturers
Concentration Ratio
Number of (% of Value of 4 %of Value of
Industry Companies Largest Firms) 50 Largest
Motor Vehicle Parts
& Accessories 1,200 60 90
Computer Software 200 10 75
Printing 10,000 12 35
Wood Furniture 3,000 10 40
Wine 150 40 90
Dresses 5,000 7 22
1. Which are the least competitive industries in the above list?
2. In your opinion, what accounts for the lack of competition in these industries?
3. Which are the most competitive industries in the list?
4. In your opinion, what accounts for the high degree of competition in these
industries?
5. “It is not the number of firms in an industry that makes it an oligopoly, but
rather the percentage of output of sales accounted for by a few large companies.”
Explain this statement.
62 Chapter 4
C H A P T E R 5
T h e R o le o f L a b o r in B u s in e s s
The workforce o f today differs greatlyfrom that o f thirty y e a r s ago. ©Comstock Images
GETTING STARTED
In groups of four, describe how the work force has changed in your country in the
last twenty five years. What factors have contributed to those changes? How have
these changes affected your life and culture?
63
VOCABULARY STUDY
The italicized words in the sentences below are used in this chapter. Study the sen
tences. Then identify the part of speech and write your own definition of each word.
1. The company would be late in filling this month’s orders because of the high
level of absenteeism among its employees.
absenteeism ( )______________________________________________________________
2. Ending their partnership as well as their marriage, they became adversaries in

the fashion industry.
adversary ( )_________________________________________________________________
3. In filing a lawsuit against the corporation, she charged her supervisor with
sexual harassment.
charge ( )_____________________________________________________________________
4. Three companies dominate the automobile industry in the United States,

dominate ( )__________________________________________________________________
5. After years of success, the company began to fa lter, and the value of its
stock declined.
falter ( )_______________________________________________________________________
6. Generally speaking, employee benefitsfo ste r higher morale and improved pro
ductivity among workers.
foster ( )______________________________________________________________________
7. Before launching a new line of cosmetics, the company conducted a large-

scale market study.
launch ( )_____________________________________________________________________
8. Buying Blue-chip stock is regarded a secure investment.

regard ( )_____________________________________________________________________
9. Seniority was the basis for determining assignments: those most recently
hired got the working hours no one else wanted.
seniority ( )___________________________________________________________________
10. There is a high turnover of employees at the company because the salaries are
so low.
turnover( )___________________________________________________________________
Working with a partner, write sentences using each of the italicized words.
64 Chapter 5
IDIOMS
Study the idioms below. Then look at the situations that follow and determine which
idiom applies. Write the number in the blank provided.
1. To air complaints/grievances: To complain; to make one’s unhappiness pub

lic knowledge
The employees aired their grievances about the poor working conditions.
2. To break one’s neck/back: To work very hard
I broke my back to get into work today only to learn the president closed down
operations because of the heavy snow and icy roads.
3. Competitive edge: Advantage over one’s competitors
The company’s strong research and development unit gives it a competitive

edge over the others.
4. Company town: A town or city whose primary source of employment is a sin

gle corporation
Being a company town, the city faced serious problems when the steel mill
closed its operations.
5. To deal a blow: To have a bad effect upon something-, to cripple
Personnel management dealt our office a blow when they eliminated three positions.
6. Hot seat: A critical position; a position or condition that is subject to much pressure
Since being promoted to office supervisor, I’ve really been in the hot seat.
7. A piece o f the action: Involvement in making decisions and putting them into effect
The young college graduate was unhappy with his lowly position in the com
pany. What he wanted was a piece o f the action.
8. To pool resources: Share; cooperate
By pooling resources with the other division, we were able to save the company
a lot of expense and duplication of effort.
The Role o f Labor in Business 65

SITUATIONS
____A. He spent the whole day working at the office; then he came home, cooked
supper for the family, and spent the evening doing the laundry.
____B. One student completed all the odd-numbered questions and the other did
the even-numbered questions so they finished the homework assignment
in no time!
____C. No one wanted to have to go out and buy the new coffee maker so John
did. Now that he got it for them, everyone is complaining about his choice.
____D. She went up to her supervisor and told her she was unhappy about not
being included in the meeting.
____E. Almost every family in town has someone working at the shoe factory.
____F. The junior executive sat in on all the meetings and was in regular contact
with the company’s clients.
____G. The retail company closed down their catalog operations.
____H. The introduction of a line of cars has improved the company’s status in
the industry.

In groups of four, discuss the following questions and report back to the whole class
on your conclusions.
1. What outside forces affect workers’ wages?
2. Describe labor-management relations

in a company or business with which
you are acquainted. Has this relation
ship changed in recent years?
3. Make a list of worker benefits that this

company gives to its employees.
Many companies provide exercise roomsfo r

their employees. ©Corel Photos
66 Chapter 5
ACTIVITY 1
Recent Trends in the Labor Force of the United States
Working with a partner, study the graphs below and then answer the following
questions. Write true, if the statement is true according to the graph. Write false, if
it is false, and correct the statement. Write NS if the graphs do not give you sufficient
information to answer either true or false.
FarmWorkers inthe Labor Force
1. The proportion of women in the labor force has remained about the same
since 1940.
2. Less than 4 percent of the labor force today is involved in farm work.
3. Productivity gains were the result of improving technology and methods of

production.
4. Female workers earn less than male workers.
The Role o f Labor in B usiness 67

The Economics of Staying in School
Median Yearly Income According to Years of Education
$70,000
$62,514
^ $ 00,000
шшА
w $51,206
со
$50,000
$40,000 - $35,958
$27,915 $29,533
ZZ7l £=7I
$18,734
•§ $20,000 - ZH71
09
$ 10,000 -
$0 П ШУ
11 years 12 years 13 Years 14 years 10 years 18 years
o r le ss (W School (Some College) (A sso c ia te 's (B a ch e lo r's ( M a s t e r 's
Diploma) Degree) Degree) Degree)
Years of Education
5. The data indicate that work

ers with more schooling earn
higher wages than those with
less schooling.
6. The most significant differ

ence in earnings is between
those who graduated from
high school and those who
did not.
7. It is very likely, if trends con

tinue, that all workers will
need at least a high school
diploma in the near future.
Higher education correlates with higher salaries

in thefuture. ©PhotoDisc
68 Chapter 5
ACTIVITY 2
Before you read the next article, join into groups of four to discuss whether or not
workers should have a role in deciding the policies of the companies at which they
work. Share your ideas with the whole class.
At Pitney Bowes, Workers Talk and Management Listens
(1) An employee of Pitney Bowes Inc. stood up at a meeting of more than 200
co-workers and executives of the company. Facing the Chairman of the Board,
George B. Harvey, the excited worker exclaimed, “I want to know why I should
break my neck when the guy sitting next to me who’s gabbing on the phone gets
the same four percent seniority raise that I do. Why not give him one percent?”
(2) Such questions are not uncommon during a Jobholders’ Meeting at Pitney
Bowes. Once a year, every employee at Pitney Bowes has the opportunity to
criticize and question company policies in a unique corporate program called
Jobholders’ Meetings. The program has been held annually since its initiation
in 1947. Each meeting is similar to a stockholders’ gathering in that it includes
a management address on the state of the company. The Jobholders’ Meeting is
unique, however, in allowing employees to air their complaints in public.
(3) Airing grievances places

upper management un
comfortably in the hot seat.
Pitney Bowes holds more
than 150 such forums each
year, at a cost of US$1 mil
lion, but this company feels
it is worth the cost. The
company, which dominates
the postage meter machine
business, depends upon
employee ideas and
involvement.
(4) Complaints concerning

leaky roofs, dirty cafete
rias, security, and corpo
rate oversights have led to
employee suggestions that
have saved hundreds of
thousands of dollars in
production.
Some companies provide opportunitiesfo r employees
to question official policies and procedures. ©PhotoDisc

In groups of four, discuss the following questions and share your ideas with the
whole class.
1. Would you like to work for Pitney Bowes? Why or why not?
2. More and more firms recognize the need to use Jobholder Meetings and Peer
Review Panels to deal with grievances. Compare these two methods of solving
job related problems.
3. Explain how Employee Involvement (El) Programs are used to improve relations
between labor and management, and increase productivity.
4. Why do some managers object to Peer Review and El programs?
5. Why do some labor leaders object to El programs?
70 Chapter 5
ACTIVITY 3
Before you read the next selection, look at the title and make predictions about
what you expect the article to be about. Be as specific as you can. Share your
ideas with the whole class.
Increasingly, women are pursuing careers

while raising children. ©PhotoDisc
Taking Baby to Work
(1) Prior to the Industrial Revolution, the home and work place were one.
Craftspeople worked in their own homes. But the work place became separat
ed from the home when factories replaced cottage industries. That separation
created problems for women determined to raise a family white pursuing their
careers. This has been a particularly troublesome problem since the 1960s,
because women have been entering the work force in increasing numbers.
Today, nearly half the mothers of children under the age of six are working.
(2) In recent years, a number of labor unions and corporations have provided
child-care facilities to meet the needs of working parents. The Amalgamated
Clothing and Textile Workers launched union-sponsored day-care centers as
early as 1968. Zale Corp. of Dallas maintains a center for 70 youngsters
between the ages of six weeks and five years. At companies such as
Honeywell Inc. (an advanced technology company based in Minneapolis) and

Intermedics of Freeport, Texas (manufacturers of medical equipment), infants
and toddlers play and learn on the grounds of the corporate complex. A few
years ago, New York became the first state to provide day care. Small companies
throughout the country are pooling their resources in order to provide
quality care for children.
(3) It is a considerable expense to furnish quality day care, but many companies
find it is well worth the cost. Julia Frazier is a chemist who works for Corning
Glass, Inc. in Corning, New York. She leaves her one-and-a-half-year-old
daughter, Jennifer, at the Corning Children’s Center during the day. “It’s much
easier on us having Jennifer so close,” says Julia, whose husband also works
at the Corning plant. “We can even go over to the center and have lunch with
her. We know she’s getting all the meals and naps she needs, and the center
has opened many new interests for our daughter.” Julia adds, “Because I’m
happier about Jennifer, I have a lot more to give to my job.”
(4) The day-care center eliminates a problem that often causes companies to
lose talented women like Julia. Marie McKee, Personnel Development
Manager at Corning, says, “It is clear to me that the center has given us a
competitive edge in recruiting and retaining excellent people.” Connecticut
General, a Hartford-based life insurance company, regards day care as a
good investment. According to Cynthia Burr, Vice President for Corporate
Personnel Operations, “For us, company participation in providing good
child care makes good business sense. It helps the company to attract and
retain qualified employees, especially women who are attempting to fulfill
career desires.”
(5) There are other reasons for companies to provide day care. Not only does it
foster high morale and productivity, but it is also a cost-effective way to reduce
absenteeism and employee turnover. Parents no longer have to miss days at
work in search of reliable child care.
(6) Although only a small percentage of all companies in America have child
care, more and more businesses are adopting such programs each year.
Corporations have been providing many other services as well. It is not unusu
al to visit a corporate complex and find restaurants, retail shops and sports
centers. Xerox Headquarters in Stamford, Connecticut, for example, has a fit
ness center where employees regularly ride exercise bicycles and perform cal
isthenics. As in the era before the industrial Revolution, the division between
the workplace and the home is becoming less sharp.

In groups of four, discuss the following questions. Share your ideas with the whole class.
1. If you were on the board of directors of a large corporation, would you recom
mend that day-care facilities be instituted? Prepare a list of three reasons for
and three against such a proposal.
72 Chapter 5
2. Has the entry of married women into the work force changed how pre-school
children are cared for in your country? Explain your answer.
3. The article discussed the advantages of having a day-care center located near
the work place. What problems might also be created?
4. Why do you think Xerox decided to provide a fitness center for its employees?
Do you think it is a good idea? Explain.
5. What other social services should businesses provide for their employees?
6. Do you agree with the last sentence of the article? How does the situation in
your country support or challenge that viewpoint?

ACTIVITY 4
Before you read the next selection, look at its title. How would you answer the
question it asks? Discuss with the whole class.
Should Workers Be Owners?
(1) Traditionally, labor and capital have been regarded as two separate factors of
production. Owners have provided the money and capital equipment for oper
ating a company, and workers have provided the labor. Furthermore, labor
and capital have often been seen as adversaries—they have opposed one
another on questions related to salaries, wages, pensions and other benefits
and stock dividends. Now, however, things may be changing. Not only are
workers being given a limited voice in managing some companies, but they
are also becoming part-owners.
(2) One of the best ways for workers to get “a piece of the action” is called
ESOP-Employee Stock Ownership Plan. Over 8,000 companies in the United
States are at least partly owned by the employees. Over 10 million workers are
involved in these arrangements. Employees actually own the majority of the
shares of stock in at least 1,000 firms.
(3) People who favor these plans believe that employees will work harder, become
more efficient, and be happier in their jobs if they become part-owners of the
companies they work for. Others have doubts about ESOPs. Stockholders
must take some of the risks of ownership. If the company’s profits are low, or
if there are losses, the dividends will be low (or nonexistent), and workers will
gain little from their ownership. The value of each share may decline in the
stock market.
(4) Recently, researchers from the National Center for Employee Ownership stud
ied the effects of ESOPs. They found that employees will not necessarily work
harder just because there is an ESOP Some corporations have not included
stock voting rights with their ESOPs, and the workers do not see the ESOP as
giving them more power.
(5) Some employers argue that “management’s job is to manage” and that workers
do not have the knowledge needed to help make managerial decisions. Some
union officials charge that ESOPs do not give workers a real voice in the company,
and that the interests of managers and employees are too different—people can’t
be workers and managers at the same time.
(6) Nevertheless, the study showed that some ESOPs have been very successful.
ESOPs work best when
• the company makes large contributions to the ESOP
• the employees can make money through the stock,
74 Chapter 5
• the workers are given stock voting rights,
• the firm allows its employees to participate in company decision-making,
• the workers are kept well-informed about the corporation’s financial situation.
(7) In some companies the workers have agreed to accept lower wages and fewer
benefits in return for shares of stock. Some workers have even taken over
companies that were failing, improved their productivity, and kept the plants
going, thus saving their jobs.

Working in groups of four, discuss the following questions. Share your ideas with
the whole class.
1. Would you like to work for a firm with an ESOP? If so, to what extent would you
be willing to share in the firm’s losses as well as its profits?
2. To what extent do you think workers should be given a voice in management deci
sions? At what point does a worker stop being a worker and become a manager?
3. The Congress of the United States has passed laws to encourage companies to
give workers a share of the ownership. For example, companies that con
tribute money or stock to an ESOP receive tax deductions. Is this a good idea?
Why, or why not?
4. Do you think unions should support or oppose ESOPs and other plans in
which workers are given part-ownership and a voice in management? Do such
plans strengthen or weaken unions?

ACTIVITY 5
Read the following case study. Then working in groups of four, complete the tasks at
the end of the article and come up with a recommended plan of action.
Making Economic Decisions: Closing a Plant
(1) Jennifer Welkin, Production Manager for Intrepid Industries, Inc., returned to
her office and wondered how to deal with the problem on her hands. She had
just come from a meeting with the president of Intrepid. They had discussed
the company’s declining performance over the last four years. Present condi
tions were not likely to improve unless something drastic was done.
(2) The president’s parting words to Welkin were, “Jenny, we’ve got to do some
thing. I don’t see any alternative to cutting back, but it will be your decision.
You know the situation better than anyone else, and I trust your judgment. Let
me know your recommendation by Monday.”
(3) Intrepid Industries is a New England-based manufacturer of metal castings. Its

major customers are heavy-machinery producers. The company is headquar
tered in the city of Framton, but maintains one of its principal plants in New
Huntington which is located about 50 miles away. It lies on a main line be
tween the coal mines to the west and the old industrial centers of the north
eastern seaboard. When Intrepid was founded in 1925, coal was the major fuel
and the railroad the only means of transporting bulk freight.
(4) The New Huntington plant prospered from its opening until the mid-1960s
and was expanded several times to meet production demands. The town grad
ually became a "company tow n,” as the plant employed more and more of
the available workforce. By the time its most recent troubles began, the plant
employed almost 50 percent of New Huntington’s working population. The
plant and its employees provide much of the trade for the local merchants
and service industries. There is no other major manufacturer in the area, and
farming has all but died out because of the attraction of the work force to the
plant over the years.
(5) After the mid-1960s, the Huntington plant found it more and more difficult
to remain profitable. There were several causes. Modern casting techniques
made newly equipped factories more efficient than the Huntington plant.
These newer plants were able to draw away some of Intrepid’s business by
offering up-to-date products at a cost slightly lower than Intrepid’s. Further,
much of the heavy industry that Intrepid had traditionally supplied moved
gradually to the southern and western United States. This left Intrepid with a
much smaller custom er base to share with its northeastern competitors.
(6) Intrepid’s decline reached crisis proportions in New Huntington during the
recession of 1980. The loss of business forced the company to dismiss 20 per-
76 Chapter 5
cent of its workers. The decline worsened in 1983 and early 1984 when the
plant had to dismiss another 10 percent of its employees. At this point, several
stores and small firms that depended on the business of the plant’s workers
were forced to close. This pushed unemployment in New Huntington above
9 percent.
(7) Intrepid was unable to regain the business it had lost, and it was clear that the
plant would never return to its former level of production. With the plant oper
ating at only 70 percent of capacity, the cost per unit of its castings is now
higher than before. That makes it even less competitive, and threatens its
already diminished share of the market. The plant is now operating at a loss,
and every day it remains open it loses more money.
(8) Back in her office, Jennifer Welkin wonders what to do. She knows that by “cut
ting back” the president meant “closing down unprofitable plants,” and the
worst of these is in New Huntington. But Welkin is quite aware that closing the
plant will probably be the final blow to the already crippled town. Not only will
workers lose their jobs, but the town government will probably have to cut back
its services to almost nothing. The town is financed by taxes, primarily corpo
rate taxes paid by Intrepid, as well as the income and sales taxes paid by
Intrepid’s employees. Closing the plant will thus deal a double blow to the town.
(9) Welkin gets up, walks to the window and sighs. “It’s not an uncommon situa
tion,” she thinks. ‘A faltering company closes down an unprofitable plant and
a whole population suffers for it. But now it’s our problem, and my decision.
Must this town be sacrificed to save Intrepid? Aren’t there any alternatives?”
During the 1980s, Intrepid’s decline reached crisis proportions.

TASKS FOR UNDERSTANDING
1. Define the Problem. Why was the president of Intrepid Industries thinking of
closing the New Huntington plant?
2. Gather the Necessary Data. What were the reasons for the New Huntington
plant’s difficulties?
3. List Possible Alternative Solution. What alternatives are available to Jennifer

Welkin? List as many as possible.
4. AnalyzetheConsequencesofEachAlternative.DoesWelkin’sresponsibilitytoher
employers—the shareholders—override her responsibility to the workers and their
town? That is, must she decide to close the plant as quickly and with as little
cost to the company as possible? Why, or why not?
5. Recommend a Plan of Action. What would you do if you were Jennifer Welkin?
78 Chapter 5
C H A P T E R 6
The Role of G overnment in

M arket E conomies
GETTING STARTED
Work with a partner to do the following tasks:
1. Write a definition of money.
2. Identify the different kinds of money used in your country.
3. List reasons accounting for the changes in value of a nation’s currency.
Share your ideas with the whole class.
In the United States many people use credit cards

more ojten than they use cash.
VOCABULARY STUDY
The italicized words in the sentences below appear in this chapter. Study the
sentences. Then in the list that follows, match each word with its definition.
1. We had no assurance that the plan would be accepted.
2. The store was on the brink of disaster because of disappointing end-of-year sales.
3. Those who evade paying taxes will eventually be caught and fined.
4. Roger generated a net return of 125 percent on his stock investment.
5. With inflation running 9.2 percent, I have had to cut back

on non-essential purchases.
6. The prevailing price of soy beans on the world market is up from last year.
7. The recession has caused a slowdown in the sale of new cars.
8. Without prior approval from the budget office, employees would not be reim
bursed for any job-related purchase.
9. Following the coup d’etat, the fallen leader was granted sanctuary in a neutral
country.
10. The government is cutting its spending by getting the private sector to share
in the costs.
11. The economy is going through a period of stabilization following the crisis
last year.
12. The company lost its solvency and filed for bankruptcy.
13. Nationalized industries are subject to government control.
14. The politician has been teetering back and forth on the issue.
15. Falling mortgage rates triggered an increase in home sales.
16. In order to build a factory in that neighborhood, zoning laws had to be changed
to allow industrial use.
80 Chapter 6
1. assurance a. a rise in prices
2. brink b. a refuge or place of asylum
3. evade c. ability to pay all debts
4. generate d. a guarantee
5. inflation e. create; bring into existence
6. prevailing f. move unsteadily
7. recession g- an economic slowdown
8. reimburse h. edge; border; a point in time or place
9. sanctuary i. to cause something to start; set off
10. sector j- the act of making secure and unchanging
11. stabilization k. avoid; ignore
12. solvency 1. most common; controlling
13. subject to m. division of land into special sections
14. teeter n. pay back
15. trigger 0. a part of the whole; a grouping
16. zoning P- dependent upon
Working with a partner, use each of the above words in original sentences.

In groups of four, discuss what role you think government should play in economic
policy Cite examples to support your opinions.
The Role ojGovernm ent in Market Econom ies 81

ACTIVITY 1
Look at the title of the next selection. In groups of four, and with reference to the
economy, discuss how would you answer the question. Then read the article.
How Much Government is Too Much Government?
(1) While most Americans would agree that government has an important role
to play in the economy, there is considerable disagreement as to how active a
role that should be.
(2) This argument, which has been debated since the days of George Washington,
was rekindled in 1984 when the nation’s seventh largest bank, Continental
Illinois of Chicago, teetered on the brink of bankruptcy. Government leaders
feared that if bankruptcy were to occur, public confidence in the banking sys
tem might also fail. This was a dangerous possibility because the collapse of
public confidence in the banking system in the early 1930s helped trigger the
worst depression in American history.
(3) Under the circumstances, the Reagan Administration decided to save

Continental Illinois. It did this by investing US$4.5 billion in the bank and
promising to spend as much additional money as necessary to restore the
institution to solvency (financial health). In exchange the government was to
receive 80 percent of Continental Illinois’ stock.
(4) Critics of the move argued that government purchase of a private organization
such as Continental Illinois was contrary to the spirit of American free enterprise.
In other words, they said, just as government should not interfere with firms that
legally earn a profit, so it should allow them to fail when they lose money
(5) Supporters of the Continental “bail-out” argued that far more was at stake
than the economic health of a single bank. In fact, they said, Continental’s
troubles threatened the economy as a whole. For that reason, the government
was obliged to help Continental.
(6) Continental Illinois was not the first near bankrupt company to be rescued by
the federal government, although it was the costliest. In 1971 Washington put
up US$125 million to keep the Penn Central railroad running. That same year the
government also guaranteed loans of up to US$250 million to the Lockheed
Corporation. Lockheed, one of the nation’s most important manufacturers of
civilian and military aircraft, was on the brink of bankruptcy when the Nixon
Administration decided to rescue it.
(7) The biggest government rescue of a private corporation prior to the

Continental Illinois case involved the Chrysler Corporation. That took place in
1979 when the Carter Administration guaranteed US$1.5 billion in loans to the
nation’s third largest automobile manufacturer.
82 Chapter 6
(8) Supporters of the government bail-outs are quick to remind us that in each
of these cases the rescued firms were restored to health and are now able to
“make it on their own.” Chrysler, Lockheed and Penn Central, for example, repaid
their loans to the government with interest. They earned record profits in 1984
and have been operating without government support ever since.
(9) Those who criticize the bail-outs maintain that they are unfair to the rescued
firms’ competitors who had to make it on their own. They also fear that they could
be extremely costly to taxpayers and interfere with the working of America’s
market economy.

Discuss the following questions with a partner. Share your ideas with the whole class.
1. Why did the federal government rescue the Continental Illinois Bank?
2. Identify and explain two reasons why some people are opposed to government
“bail-outs” of private firms.
3. Identify and explain two reasons why some people favor government bail-outs
of private firms.
4. With which point of view (of those expressed in the answers to questions 2
and 3) would you agree? Explain your position by offering one additional
argument in its defense.
By restoring Continental Bank o fIllinois to

solvency, thefederal government prevented
the seventh largest bank in the United
Statesfrom going bankrupt.
The Role o f Government in Market Economies 83

ACTIVITY 2
Skim the following article for answers to the following questions. Share your answers
with a partner.
1. How do Keynes’ ideas contrast with those of Adam Smith?
2. What role did Keynes think government should have in the economy?
3. What is the Keynesian Revolution?
Read the article carefully and complete the task that follows.
John Maynard Keynes (1883-1946)

Theorist Who Brought Economics into the Twentieth Century
(1) John Maynard Keynes (rhymes with “brains”) stands with Adam Smith and
Karl Marx as one of the world’s most influential economists. The son of a
noted British economist, Keynes amassed a fortune through speculation in
stocks and commodities. He served the British government as a financial
adviser and treasury official through most of his adult life and was a key par
ticipant in the negotiations following both World Wars I and II.
(2) Although Adam Smith had written The Wealth o f Nations about the time of the
American Revolution, by the 1930s little had changed in the thinking of main
stream economists. Most would have agreed with Smith, that the best thing
government could do to help the economy would be to keep its hands off.
They reasoned that as long as the economy was free to operate without inter
ference, the forces of supply and demand would come into balance. Then,
with total supply and demand in equilibrium, everyone looking for work could
find a job at the prevailing wage, and every firm could sell its products at the
market price.
(3) But the 1930s was the period of the Great Depression. Despite the assurances
of the classical economists, the fact was that unemployment and business fail
ure had reached record proportions in the United States and the rest of the
industrialized world. It was at this time (1936) that Keynes’ General Theory o f
Employment, Interest, and Money was published. The General Theory trans
formed economic thinking in the 20th century, much the way that The Wealth o f
Nations had in the 18th.
(4) Keynes demonstrated that it was possible for total supply and demand to be at
equilibrium at a point well under full employment. What is more, Keynes
demonstrated that unemployment could persist indefinitely, unless someone
stepped in to increase total demand.
84 Chapter 6
(5) The “someone” Keynes had in mind was government. He reasoned that if, for
example, government spent money on public works, the income received by
formerly idle workers would lead to increased demand, a resurgence of business
activity and the restoration of full employment.
(6) The suggestion that government abandon laissez fa ire in favor of an active role
in economic stabilization was regarded as revolutionary in the 1930s. Since
then, however, the ideas advanced by the “Keynesian Revolution” have become
part of conventional wisdom. Now, whenever a nation appears to be entering
into a period of recession or inflation, economists and others immediately think
of steps the government might take to reverse the trend.
WRITING FOR UNDERSTANDING

With a partner, write three sentences to summarize the main ideas in the article.
Write two more sentences stating whether or not you think Keynes’ ideas are
applicable to your country’s present economic situation. Support your opinion.

ACTIVITY 3
Read the following selection with a partner and answer the questions that follow.
How Government Intervention Can Affect the Market
What can happen when government intervenes in a market economy? Using

imaginary figures, we will take the market for potatoes as an example. The demand
and supply schedules show how many bushels (bu) farmers would be willing to put
on the market at each price.
Quantity Quantity
Price Demanded Supplied Result
US$3.00 10,000 bu 60,000 bu surplus

2.50 15,000 bu 50,000 bu surplus
2.00 20,000 bu 40,000 bu surplus
1.50 30,000 bu 30,000 bu equilibrium
1.00 40,000 bu 20,000 bu shortage
.50 50,000 bu 10,000 bu shortage
The graph below shows the supply and demand situation presented in the above table.
Price
86 Chapter 6
For example, at a price of US$3.00 per bushel, buyers would purchase only 10,000
bushels; but farmers would put 60,000 bushels on the market. There would be a
surplus of potatoes. At US$1.00 per bushel, buyers would try to purchase 40,000
bushels, but farmers would be willing to put only 20,000 on the market. There would
be a shortage of potatoes. Equilibrium occurs at the price of US$1.50, at which
buyers would be willing to purchase 30,000 bushels and farmers would be willing
to produce and sell 30,000. There would be no surplus and no shortage. The market
would be “cleared.”
Now, suppose that the government decides that farmers ought to receive at least
US$2.00 per bushel. That is, it puts a “floor” under the price and takes action to
prevent the price from falling below US$2.00. In the graph below, the broken line
at US$2.00 shows this “floor” price. Notice where this broken line touches the
demand curve (D). Go from this point down to the horizontal axis at the bottom.
It shows that buyers will purchase only 20,000 bushels at this price. Notice where
the broken line touches the supply curve (S). Moving from this point down to the
horizontal axis at the bottom, you will see that farmers will try to put 40,000
bushels on the market when the price is US$2.00. As a result, there will be a surplus
of potatoes. Consumers will pay more for potatoes, even though there is a surplus of
unsold potatoes in existence.
The Role o f Government in Market Econom ies 87

1. What will happen if the government raises the support price to US$2.50? How
many bushels will be purchased? How many will be produced and put on the
market? How large will the surplus be?
2. Suppose that the government decides to put a “ceiling” on potato prices, for
bidding farmers to charge more than US$1.00 per bushel. How many bushels
would appear on the market? How many bushels would buyers be trying to
purchase? Would there be a shortage or a surplus?
3. Instead of potatoes, consider the price of labor (wages per hour). Assume that
hourly wages for a particular type of worker (unskilled laborer) and the supply
of workers are at equilibrium at US$4.35 per hour. What will happen if govern
ment increases the legal minimum wage from US$3.35 per hour to US$5.50
per hour?
4. Using the same principles, what will probably happen to the supply of apart
ments if the government sets a legal “ceiling” on the amount of rent a landlord
can charge if it is below the equilibrium price for rental property.
5. If it is the role of government to assure economic security and equity, are

there situations where price supports or ceilings are necessary?
88 Chapter 6
ACTIVITY 4
Read the following article and write a paragraph contrasting the views of the two
economists. Whose ideas are closest to your own?
Two Views of the Proper Role of Government in the Economy:

Paul Samuelson and Milton Friedman
(1) Paul Samuelson and Milton Friedman are two of America’s most distinguished
economists. In recognition of their achievements, Samuelson was awarded the
Nobel Prize in Economics in 1970 and Friedman in 1976. Both spent most of
their professional lives on the faculty of major universities (Samuelson at the
Massachusetts Institute of Technology, and Friedman at the University of
Chicago). Though they have much in common, they hold strikingly different
views on economic issues. In particular, they differ on what role the govern
ment should play in the economy.
(2) Classical economists had long recognized the need for government to provide
goods and services that would not or could not be provided by the private
sector (like national defense). But they urged that this participation be kept to
a minimum.
(3) Samuelson argued that too many of the problems the classical economists wanted
to leave to the marketplace were not subject to its influence. These externalities,
affecting things like public health, education, and environmental pollution, were
not subject to the laws of supply and demand. Consequently, it was up to govern
ment to establish goals for the economy and use its powers to achieve them.
(4) Milton Friedman sees things differently. Like the classical economists of old, he
regards supply and demand as the most powerful and potentially beneficial eco
nomic forces. The best that government can do to help the economy, in Friedman’s
view, is to keep its hands off business and allow the market to “do its thing.” The
minimum wage laws are a case in point. Whereas Samuelson endorses minimum
wage laws as a means of helping workers at the bottom of the income ladder,
Friedman would argue that by adding to unemployment, they harm the very peo
ple they were designed to help. That is, he explains, by increasing labor costs, mini
mum wage laws make it too expensive for many firms to hire low-wage workers. As
a result, those who might otherwise be employed are laid off.
(5) On the one hand, Samuelson endorses the concept of government-sponsored

programs such as public housing and food stamps as a means of reducing
poverty. Friedman, on the other hand, would prefer to give the poor additional
income and allow them to use the funds to solve their problems without govern
ment interference. To apply this concept, Friedman suggested the “negative
income tax.” The graduated income tax takes an increasing amount in taxes as
one’s income rises. The negative income tax would apply a sliding scale of pay
ments to those whose income from work fell below a stated minimum.
The Role o f Government in Market Econom ies 89

ACTIVITY 5
Read the following article. Then in groups of four, discuss the questions that follow.
The Laffer Curve
(1) Critics of the progressive income tax say that as rates increase a point is reached
where people are discouraged from earning additional income. When this hap
pens, any additional tax increases actually reduce total revenue. But how can
higher taxes yield lower revenues? The following is a summary of this point of view
(2) Let’s suppose that the maximum income tax rate was 75 percent and that a
wealthy person in that tax bracket was thinking of investing a million US dol
lars in a new business. The investor has calculated that if the business did well
he might earn an annual profit of as much as 40 percent on his investment.
(3) “Hmm, let’s see now,” the entrepreneur said the venture, “40 percent of US$1 million
is US$400,000.1 could make as much as US$400,000 a year on my investment.”
(4) But then he remembered, “Of course, that would be before taxes. Now, I’m in the
75 percent bracket, and 75 percent of US$400,000 is US$300,000. US$300,000
in taxes would leave me with only US$100,000! I can earn nearly that much
simply by investing my money in some very safe bonds. And I wouldn’t have to
face the risks of a business venture. I think I’ll forget about investing in a new
business. Let someone else work for the government.”
(5) When tax rates are so high that they discourage investment, the wealth and
jobs that might have been created are lost. Lost, too, are the taxes that might
have been collected on the earnings generated by the investment. As the
prominent economist Arthur Laffer demonstrated in his now famous Laffer
Curve, as income tax rates are increased, a point is reached where total rev
enues collected by the government actually decline.
(6) We can demonstrate this as follows:
90 Chapter 6
(7) As indicated by the Laffer Curve, as tax rates are increased, government rev
enues also increase. Once government revenues have reached point C, however,
additional increases in the tax rates result in a decrease in total revenue.

1. Explain the significance of point “C” in the illustration.
2. Summarize the views expressed by Professor Laffer and others about the ulti
mate consequences of tax increases.
3. What did the speaker mean when he said, “Let someone else work for the
government.”
4. “When tax rates are so high that they discourage investment, the wealth and
jobs that might have been created are lost.” Explain this statement.
The Role ojGovernm ent in M arket Econom ies 91

ACTIVITY 6
The United States does not have a Value Added Tax. Does your country have one?
Can you explain how it works?
Read the next article and discuss the questions that follow in groups of four.
The Value Added Tax
(1) For a number of industrial nations, the value added tax (VAT) is an important
source of revenue. VAT is paid every time value is added to a good as it moves
along the chain of production.
(2) To illustrate how a value added tax works, consider the case of the Ocean
Breeze Flounder Company. Ocean Breeze buys flounder from local fishing
boats. It cleans, packages, freezes the fish, and sells them to supermarkets and
fish stores around the country.
(3) Let’s suppose that the VAT is 5 percent, and that last week Ocean Breeze
bought US$1,000 worth of flounder from a fishing boat. They paid the captain
US$1,000 plus a VAT of US$50. The “value added” in this instance was the
US$1,000 of value that the crew added to the fish when they hauled them in.
The boat owner passed the US$50 VAT along to the government.
(4) After processing and freezing the fish, Ocean Breeze sold the packages to
Neptune’s Market, a chain of fish markets, for US$4,000. Neptune’s paid
Ocean Breeze US$4,000 plus US$200 VAT. Ocean Breeze sent US$150 to the
government. Why US$150? Because the value that Ocean Breeze added to the
fish was US$3,000 (US$4,000 - US$1,000 = US$3,000, and 5 percent of
US$3,000 is US$150). Since Ocean Breeze has already paid the government
the US$50 VAT on the first US$1,000 of value, they needn’t pay it again.
(5) Neptune’s placed the fish in their frozen food cases to sell to consumers. The
packages will be sold for US$6,000 plus US$300 VAT. The market will deduct
the US$200 in VAT’s already paid by Ocean Breeze and themselves and send
the balance of US$100 on to the government.
(6) To review the transactions, we see that:
• The fishing boat added US$1,000 to the value of the fish and collected
US$50 in VAT from Ocean Breeze. They sent US$50 to the government.
• Ocean Breeze collected US$200 in VAT from Neptune’s Market. They

reimbursed themselves the US$50 paid to the fishing boat and sent
US$150 to the government.
92 Chapter 6
From grain to bread, the VAT is paid at each stage o f production. ©PhotoDisc
• The supermarkets collected US$300 in VAT from consumers. They

reimbursed themselves the US$200 paid to Ocean Breeze and sent
US$100 to the government.
• In all, the government received a total of US$300 in taxes (5 percent

of US$6,000 in “value added” to the fish) directly from the firms as
value was added.
• The firms were able to pass the tax along to their customers.
• The tax was hidden from consumers because it was included in the
selling price.
(7) Although there is no value added tax in the United States at the present time,
there are those who favor its use. In support of their position, they make the
following points:
• Since the VAT is paid at each stage of production, it is relatively easy

for the government to collect and difficult to evade.
• Since all business transactions would be subject to the VAT, it can gen
erate a lot of revenue.
• Because the tax is hidden from the consumers, who really pay it,
there is likely to be less public opposition to it.
(8) Those opposing the VAT argue that:
• It is regressive. Like any sales tax, it falls more heavily on the poor
than on the rich taxpayer.
• Hidden taxes are unfair taxes.
• The VAT is inflationary because it increases prices (by the amount of the tax).
The Role o f Government in Market Economies 93

1. What is a Value Added Tax? How is it different from a typical sales tax, and why
will it produce more income for a government than a sales tax?
2. Should the United States levy a VAT? Explain your answer referring to the
criteria for a “good tax” listed below.
a. Fairness—based on the ability to pay. A tax should also treat people

equally.
b. Clarity and certainty—taxpayers should know the rate of the tax and
how it is to be paid.
c. Convenience of payment—easy for taxpayers to pay and easy for gov

ernments to collect.
d. Ease of administration—cost of collecting a tax should be low.
e. Flexibility—adjusts to economic conditions (in prosperous times the tax

should collect more revenue and in hard times less).
3. Working as a committee of four experts, prepare a written policy recommen

dation for the course of action that the United States should take in regard to
the VAT. Share your policy statement with the entire class.
94 Chapter 6
ACTIVITY 7
Making Economic Decisions
In the following activity you will be asked to play the role of a speaker scheduled
to appear at a hearing conducted by your local government. The purpose of the
hearing will be to discuss one of the issues indicated below. Before your presenta
tion, you will want to do some research on the issue, so that you will be able to
make the best impression possible.
The teacher will assign you a specific role and issue from the lists below. Prepare
a position statement and present it to the class. Several students will be taking a
different role in regard to the issue they are assigned. The class members should
make a list of pros and cons that they detect in each speaker’s presentation. Then
they can share their reactions as if they were active participants at a town meeting
where the hearing is being held.
Roles:
• mayor
• representatives of the senior citizens council
• member of the city council who has pledged not to raise taxes
• superintendent of schools
• labor union officials
• member of the city council who is pledged to build recreational facilities
• representative of POW (Protect Our Wildlife), an influential environmental group
• bank president
• home builder
Issues:
1. A local builder wants to build a small subdivision of about 20 houses on land

now used as a bird sanctuary. He is asking the council to change the zoning and
extend the city sewer system into this area. It will cost the city US$2.3 million
to extend water and sewer service to this area. It is estimated that the town
would receive an additional US$75,000 in taxes annually if the land were to be
replaced by 20 homes. Additional growth in the area would generate even more
income for the city.
The Role ojGovernm ent in Market Economies 95

2. It is proposed that the city sales
tax (now 5 percent) be increased
to 6 percent. The revenue from this
tax increase will be used to build a
park, a bike path and a community
center.
3. The city-owned bus system has

been losing money for several
years, and the equipment is in very
bad shape. It is suggested that the
city raise property taxes by 10 per
cent on houses worth more than
US$75,000 and use the additional
revenue to buy new buses. With
new equipment and better service it
is hoped that more people will use
the bus system.
4. A large company is going to build a computer assembly plant that will employ
several hundred workers. The company will locate the plant near your city if
the city will lease them a building for US$1 per year for 99 years and provide
various tax breaks. Other communities in your state have offered such assis
tance to the company. From your point of view, would the economic benefits
of having a new business in town offset the tax revenues and rent given up by
the city?
96 Chapter 6
ACTIVITY 8
Does a cup of coffee or a bottle of soft drink cost more to purchase today than it did
ten years ago? Have your buying habits changed in recent years because of price
changes? In what specific ways?
Read the next article and then discuss the questions that follow in groups of four.
Share your ideas with the whole group.
How Changes in the Value of the U .S . Dollar Are Measured: Index Numbers
(1) The table below contains the Consumer Price Index (CPI) for most years since 1950.
It gives us a picture of what happened to the purchasing power of the American dol
lar over more than 40 years. (It went down, down, down.) The CPI compares prices
to prices in a “base year.” In the table below the base years are 1982-84.
(2) The purchasing power of the dollar is calculated by the Bureau of Labor
Statistics (BLS), the American government agency that collects data on the
cost of living. One of the best known of the data compiled by the BLS is the
consumer price index or CPI. The CPI compares the average prices of a variety
of commonly purchased goods and services in one year to the prices of simi
lar goods in a base year. Every month, the BLS records the prices of approxi
mately 1,000 items. These are the goods and services normally consumed by
urban families. The prices are collected in 85 areas across the country from
over 57,000 households and 19,000 business firms.
(3) An index number is a number that shows percentage change from some base,
which is usually made equal to 100. Thus, a CPI number of 167 would indicate
that consumer prices had increased by 67 percent since 1982-84 (the base
years). Similarly, a CPI number of 82 would indicate a decrease of 18 percent.
In calculating the index, each item is assigned a weight to account for its rela
tive importance in consumers’ budgets. For example, if in a given month, the
price of milk is US$1 per quart, and the average household consumes 15
quarts of milk per month, then the cost of milk for that month would be car
ried as US$15. Similarly, if the price of men’s shoes averaged US$78 that
month, and the average household purchased two pairs of men’s shoes per
year, then the cost of shoes would be entered as US$13. (Because 2 pairs per
year = 1/6 pair per month. And 1/6 of US$78 = US$13.)
(4) Purchasing power is calculated by dividing 100 by the index number for the
particular year. For example, if the CPI in a given year was 85, the purchasing
power of the American dollar would be expressed as US$1.18 (because 100 -f- 85
= 1.18). In practical terms, the CPI shows how much money you need
today to buy the goods and services you could get for US$100 during the base
year. For example, as indicated in the table, the CPI in 1988 is 120.3. That
means that it would have cost US$120.30 to buy the things you could have
gotten for US$100 during the period between 1982 and 1984.

All All
Year Items Year Items
1950 24.1 1972 41.8
1952 26.5 1974 49.3
1954 26.9 1976 56.9
1956 27.2 1978 65.2
1958 28.9 1980 82.4
1960 29.6 1982 96.5
1962 30.2 1984 103.9
1964 31.0 1986 109.6
1966 32.4 1988 118.3
1968 34.8 1990 130.7
1970 38.8
Source: Economic Report o f the President and Survey
o f Current Business. 1991, Dept, o f Commerce
Calculating a Consumer Price Index
A price index can be constructed for a variety of purposes, such as for consumer
prices, producer prices, stock prices, and so forth. In this exercise you will con
struct a price index for compact automobiles during the period 1984 through
1990. You can do this by using the following formula:
Price Index = Price in any given year

Price in base year x 100
Using 1985 as your base year, complete the following chart with a partner.
Price of
Year Compact (US$) Car Price Index (1985 = 100)
1984 $ 7,200
1985 $ 8,000 8,000 divided by 8,000 x 100 = 100
1986 $ 8,800
1987 $ 9,200
1988 $10,000
1989 $12,000
1990 $12,500
Chapter 6
Weaknesses of the CPI.
Although many people follow the CPI as a way of learning what is happening to the
cost of living, its index numbers can be misleading. One reason is that the quality
of items is often improved over previous years. Although people pay more for the
improved goods and services, they are also receiving more for their money. For ex
ample, the cost of CDs is generally higher than the cost of audiocassettes. So even
though consumers are paying more for CDs, they are receiving more since the higher
quality sound makes them a better product.
The way in which items are weighted can also distort the CPI. That is, weights are
assigned on the basis of the way consumers spent their money during the base
years. But suppose that spending patterns change, and people are now buying twice
as many shoes as before. That being the case, the cost of living as reflected in the CPI
would be understated. (Because it failed to include the increased cost of shoes).

1. Why is the base year always equal to 100?
2. What was the price increase from 1985 to 1988?
(a) in dollars?
(b) in percent?
The Role ojGovernm ent in M arket Econom ies 99

100
C H A P T E R 7
The G lobal E conomy
GETTING STARTED
In groups of four, consider the following questions and then share your thoughts
with the entire class.
1. Why do countries trade with each other?
2. Why do countries sometimes put up barriers to trade? Can you give specific
examples of such barriers?
VOCABULARY STUDY
The italicized words in the sentences below are used in this chapter. Study the sen
tences; then identify the word class and write your own definition for each word.
1. In order to keep a business afloat, good management is necessary,

afloat ( )_____________________________________________________________________
2. The panel was beset by criticism that it was anti-labor.

beset ( )_____________________________________________________________________
3. When the manufacturing plant shut down, its 1,200 workers faced a calamitous
situation.
calamitous ( )_______________________________________________________________
4. Environmentalists are confronting those corporations responsible for polluting

our air and water.
confront ( )__________________________________________________________________
5. If you default on your mortgage, the bank may repossess your home,
default ( )___________________________________________________________________
101
6. Ever since the national currency was devalued, the local people have been
having a hard time, but foreign tourists find everything inexpensive,
devalue ( )______________________________________________________________________
7. The tax forms have been rewritten to embrace the new tax reforms.
embrace ( )_______________________________________________________________________
8. Technological innovations have revolutionized business and communications,

innovation ( )_____________________________________________________________________
9. The sk in diver w as in great peril when a shark approached.

peril ( )----------------------------------------------------------------------------------------
10. Sheprodded h er so n to try out for track when he was rejected for football,
prodded ( )___________________________________________________________________
102 Chapter
Research into new products can cut the cost o f production and
improve productivity. ©Digital Stock
11. The living conditions in many cities of the world have gotten
worse because of rampant population growth.
rampant ( )_____________________________________________________
12. The two countries had failed to reach an agreement on

trade, and both initiated retaliatory measures against the
other.
retaliatory ( )___________________________________________________
13. The reporter said his statements were not retractable

because he had firm evidence that his facts were correct,
retractable ( )___________________________________________________
14. Even though a lot of money had been spent in advertis

ing, the sales for the new product were stagnant.
stagnant ( )_____________________________________________________
15. During the Great Depression, Franklin Roosevelt initiated

several government projects that would stoke up the econ
omy of the United States.
stoke up ( )_____________________________________________________
Use each of the italicized words in sentences of your own.

In groups of four, consider the following questions and then share your thoughts
with the entire class.
1. What are some of the economic problems faced by the less-developed countries
(LDCs)? How do they go about solving these problems?
2. What are the advantages and disadvantages of economic growth?
The Global Econom y 103

ACTIVITY 1
Skim through the next article reading only the sentences in

boldface. Then share with a partner your predictions about
what information you expect will be provided when you
read the article in its complete form.
Then read the article carefully and discuss the questions

that follow with your partner.
Economic Growth in Industrial Economies
(1) Economic growth usually proceeds slowly. Even the most prosperous econo
mies only grow 2-3 percent year. Nevertheless, economic growth rates work
like compound interest—a steady growth rate of 2 percent each year will result
in a significantly larger and healthier economy in only ten years.
(2) Economists usually study economic growth over long periods of time. For
example, economic historians have discovered that over the last century the aver
age annual growth rate for the Japanese economy is less than two points larger
than Great Britain’s. This small difference has resulted in Japan’s emergence as an
international economic powerhouse. Meanwhile, Great Britain has fallen from its
position as the world’s strongest economy to one that is struggling.
(3) Economic Growth in the United States. The U.S. economy has grown be
tween 23-27 percent in each of the ten year periods from 1947 to 1977, but it
grew only 18 percent in the 1977-87 period. Some economists are concerned
that this lower rate of growth is a part of a long-term slowdown in economic
growth that began in the mid-1960s and became worse in the mid-1970s. This
is discouraging news because the future of the United States economy depends
on its ability to compete and grow.
(4) Economic growth can occur as a result of a grow ing labor fo rc e , additions
to the n ation 's stock o f ca p ita l equipm ent, and im proved productivity.
Today, the United States labor force is not growing as fast as in previous
decades because the “baby boom” generation (people born in the years fol
lowing World War II) have already entered the work force. In addition, the rate
women are entering the work force is slowing.
(5) The stock of capital equipment grows when business invests in tools,
machinery, buildings and facilities. In the United States investment in capital
goods has been a steady 10 percent of GNP for the past three years. But dur
ing the same time period, the Japanese have invested over 16-19 percent of
their GNP in capital goods. This difference in business investment helps
explain why the Japanese economy is growing faster than the U.S. economy.
104 Chapter 7
(6) Investment can be aimed at increasing productive capacity or at research
and development (R&D). R&D can be used to develop new products (product
innovation) or to develop new processes to cut the cost of production and
improve productivity. Both product and process innovation are important.
(7) The U.S. spends twice as much on product innovation than on process
innovation. The Japanese do just the opposite. They spend twice as much
on process innovation as they do on product innovation. This may be one reas
on why the Japanese are beating the U.S. in the ability to develop a better
mousetrap and bring that mousetrap to the market faster than we do.
(8) It is important to note that the Japanese and other foreign competitors do not
just build a cheaper mousetrap because they have lower labor costs. It is esti
mated that half of our trade deficit worldwide comes from industries overseas
that pay their workers more than the same industries in the U.S. pay their
workers. Process innovation leads to reduced manufacturing costs which can
be an important reason for increased market share and profits.
(9) The table below illustrates how important it is for businesses to continue to
invest time, money, and energy into improving products and production
processes. The Japanese, in particular, have built their economic success on
investment in research and development that leads to higher productivity.
U.S. Invented Technologies
1987
Market U.S. Producers’ Share of Domestic Market
Electronics (Millions US$) 1970 1975 1980 1987
Phonographs 630 90% 40% 30% 1%

Color TVs 14,050 90% 80% 60% 10%
Audiotape
Recorders 500 40% 10% 10% 0%
Videotape
Recorders 2,895 10% 10% 10% 1%
Machine Tool
Centers 485 99% 97% 79% 35%
Telephones 2,000 99% 95% 88% 25%
Semiconductors 19,100 89% 71% 65% 64%
Computers 53,500 97% 96% 96% 74%
Source: Council on Competitiveness, Commerce Department.
The Global Economy 105

The United States spends more money on product innovation than on
process innovation. Courtesy of G.E. Research and Development Center

1. What happened to the U.S. producers’ share of the domestic market for color
televisions between 1970 and 1987?
2. List two general reasons the Japanese economy has been growing at a faster rate
than the U.S. economy.
3. How can Japanese growth be explained by their emphasis on “process innovation”?
4. With your partner, write a short essay on question #3.
106 Chapter 7
ACTIVITY 2
Look at the complete title of the following article and skim through the introductory
dialog. From this information, what do you think the Phillips Curve is?
Read the article carefully and discuss the questions that follow with a partner.
A Phillips Curve:
The Trade-Off Between Unemployment and inflation
“You know, the ups and downs in the economy remind me o f one o f
those good news/bad news stories.’’
“What do yo u m ean?”
“ Well, think o f what happens during periods o f expansion. The

good news is that there are plenty o f jo b s around, so that anyone
looking fo r work can probablyfind it. ”
“So, what’s the bad new s?”
“Well, f y o u happen to be an employer, qualified workers become

hard tofind. ”
“Right. ”
“But the good news is that since workers are scarce, wages tend
to increase. ”
“I can live with that. ”
“Yeah, but the bad news is that as wages increase, so does the price
o f everything else. ”
“Inflation tim e?”
“That’s what they call it, but the good news is... ”
(1) In 1958, A. W Phillips, of the London School of Economics, described the

trade-off between inflation and unemployment in what came to be known as
the Phillips curve. Phillips studied the history of wages and unemployment in
Great Britain between 1861 and 1913. He found an interesting relationship
between these two economic indicators which is summarized in the graph.

Percent Inflation
0 2 4 6 8 10 12
Percent Unemployment
(2) As you can see, the horizontal axis represents the unemployment rate, and
the vertical axis the rate of inflation. You can also see that the lower the rate
of inflation, the higher the unemployment rate, and vice versa.
(3) For example, according to the information contained in the graph, with infla
tion running at a low 1.75 percent annual rate, unemployment would be 8
percent. With inflation at 3 percent, unemployment would be reduced to 4
percent. Double the inflation rate again (to 6 percent), and unemployment
would be reduced to 2 percent. Despite the problems caused by inflation, it
tends to accompany periods of growth—businesses expand and hire new
workers.
(4) During the 1960s and early 1970s the federal government used the data con
tained in their Phillips curves to reduce inflation or increase employment. But
something happened in the late 1970s and early 1980s that led economists
to question the reliability of Phillips curves. The economy was stagnant and
suffering from relatively high rates of inflation and unemployment. For exam
ple, in 1979 with inflation running at an annual rate of 11 percent, unemploy
ment stood at about 5.75 percent of the labor force. The following year the
inflation rate advanced to 13 percent, but instead of falling, the unemploy
ment rate rose to 7 percent.
(5) Economists are still debating the value of the Phillips curve. Those who see it
as a useful tool for understanding the economy point to the successful effort of
the Reagan Administration to reduce inflation in the early 1980s. It was gov
ernment’s willingness to push unemployment to record levels that finally
brought inflation under control. Those who disagree say that while the
Phillips curve provides an interesting picture of past history, it should not be
used to design economic policies for the future.
108 Chapter 7
Base your answer to the following questions on the information contained in the graph.
1. Assume that the federal government has decided to bring the inflation rate
down from 10 percent to something closer to 3.5 percent. What effect would
those policies have on employment?
2. What steps might the President, Congress, and the Federal Reserve System
take to achieve those goals?

Controversy exists about the best strategiesfor repayment o f international debt. ©Comstock
ACTIVITY 3
Skim the first three paragraphs of the following article and explain how the
International Monetary Fund (IMF) might be either a friend or a foe to Less
Developed Countries (LDCs).
Then read the entire article, and in groups of four, discuss the questions that fol
low. Share your ideas with the whole class.
The IMF and the LDCs: Friend or Foe?
(1) Less than a century ago Latin American nations that failed to pay their debts
were likely to be confronted by the British Navy or the United States Marines.
Then, under the watchful eyes of the occupying troops, the country would be
forced to pay its bills.
(2) This is a far cry from the procedures followed these days. The International
Monetary Fund (IMF), established after World War II, extends credit to finan
cially troubled countries. Nevertheless, the IMF is sometimes accused by peo
ple in the countries it is trying to help with being “a tool of imperialism,” or a
“bodyguard of the big New York banks.”
110 Chapter 7
(3) The reason for this hostility is that in return for its loans, the IMF often
demands that the countries impose certain restrictions on their economies. The
purpose of the restrictions, or “austerity programs” as they are called, is to pre
vent a repeat of the events that led to the financial problems in the first place.
To a Mexican peasant, however, “austerity” could mean that tortilla flour will
cost more. To an Argentine factory worker it could mean a reduction in real
wages, or to a Brazilian retiree it could mean a smaller government pension.
(4) The current problems faced by many less developed countries (LDCs) began with
the oil crisis of the 1970s and the global recession of the 1980s. After
OPEC quadrupled its prices in 1973, a number of the developing countries,
such as Brazil and Argentina, borrowed from private banks (many of them
American) to pay their oil bills. Those developing nations with large oil
reserves found themselves suddenly enriched by the increase in prices and
borrowed to finance expensive industrial development projects.
(5) By the 1980s, however, oil prices began to slide, and international trade
slowed. As a result, many of the debtor nations found themselves unable to
repay their loans. Private banks were no longer willing to extend additional
credit. That left it to the international Monetary Fund to keep the debtor
nations “afloat.”
(6) While the IMF will lend money to any member nation willing to accept its
terms, many governments have found those terms to be a threat to their exis
tence. In April of 1984, for example, the President of the Dominican Republic
announced that in keeping with the demands of the IMF, he was devaluing the
Dominican peso by 200 percent. By reducing the value of the peso the
President intended to make it easier for his country to pay back its loans in
pesos. However, the effect of this move was to immediately double the price
of imports for the Dominican people. (It now took twice as many pesos as
before to buy dollars, marks, or other foreign currencies.) The average
Dominican was extremely upset! Riots broke out and sixty people were killed
and two hundred more were wounded.
(7) Many loans from private banks to LDCs are still in danger of default. The amount
of money is so large that failure to repay the loans could put some of America’s
largest banks out of business. If this happens, the stability of the U.S. economy
could be threatened.
(8) As a result, the IMF has tried several strategies to help the countries in difficul
ty repay their loans.
• Lend the debtor nation the money it needs to meet its payments.
• Ask debtor countries to adopt austerity measures that would give them
enough money to repay their debts.
• Require the lending banks to reduce the interest rates on their loans and
extend the time borrowers have to repay.

• Adopt some combination of the three strategies above as a solution to the
international debt problem.
(9) Each of these approaches has its critics. Some feel that the problem was the
fault of the banks who made unwise loans. They see any effort to rescue the
banks as a waste of IMF (and U.S. taxpayers’) money.
(10) Others argue that the demands for austerity are unfair to the people of the
LDCs. They also say that currency devaluation makes it difficult to sell
American goods abroad. This, in turn, imposes hardships on businesses and
employees on firms in the export trade.
(11) Despite the disagreement over the proper role of the International Monetary
Fund in the current crisis, virtually everyone would agree that they would
rather see the IMF looking for solutions than the British fleet or the United
States Marines.

1. “I’d rather see economists trying to settle a debt dispute than see another coun
try try to settle it with 16-inch guns or bayonets.” How does this statement ap
ply to the present international debt problem?
2. Why did the devaluation of the peso in the Dominican Republic lead to rioting?
3. Explain the statement, “The source of the debt crisis of the 1980s was the oil
crisis of the 1970s.”
4. Those who favor the IMF rescue of the private banks say that it is necessary to
prevent a collapse of the American economy. Those who oppose it argue that
banks that made unwise loans should suffer the consequences. Which view do
you support? Explain your answer.
5. Working as a committee of four, prepare a one page policy statement on whether

or not the IMF should rescue private banks.
112 Chapter 7
:-rt
A s a significant tourist attraction, elephants are a valuable natural resource in Kenya.
©PhotoDisc
ACTIVITY 4
Read the following case study. Then in groups of four, discuss the questions that follow.
Saving Elephants and the Economy of a Developing Nation
(1) The Republic of Kenya is a less-developed country. Kenyans have an average

life expectancy of 55 years, an infant mortality rate of 59 per 1,000 live
births, and a literacy rate of 47 percent. The Kenyan GNP amounted to
US$230 per capita in 1985. By comparison, U.S. life expectancy is 74 years,
infant mortality is 11/1,000, and literacy is 96 percent. Per capita GNP was
US$16,776 in 1985.
(2) Despite its poverty, Kenya is blessed in many ways. It is rich in mineral
resources, has a varied climate, fertile lands, and is the home of some of the
most interesting of Africa’s wildlife. But Kenya is a developing nation. It des
perately needs to acquire capital so that it can use its resources to increase
productivity and raise living standards.
(3) Because of the widespread poverty in Kenya, some of the people have taken
to slaughtering the African elephants that roam its wilderness. They cut away
the elephants’ tusks and sell them to dealers for US$2,000 a pair. The tusks
are then transported to Europe and Asia where they are converted into jewel
ry and trinkets. At the rate poachers (hunters who illegally slaughter ele
phants) are going, it will only be a matter of time before the African elephant
will become extinct.

(4) Recently, however, the Kenyan government cracked down on the illegal hunt
ing. They did this because they now believe that elephants and other animals
may be the key to acquiring the capital they need for development. Hundreds
of thousands of tourists are flocking to Kenya every year, just to see their
wildlife and the land where they roam.
(5) In 1988, for example, 700,000 tourists spent US$400 million for the privilege.
Since there are approximately 20,000 elephants remaining in the country,
government officials realized that this averaged out to US$20,000 per live ele
phant per year. The tusks of dead elephants, are worth only US$2,000.
(6) It would appear that the interests of those working to save the world’s wildlife
and those who want to raise living standards in Kenya are one and the same.
Tourism is now the leading Kenyan export. (Tourism is an export in this
instance because it results in an inflow of foreign currency). As a result, it
hardly makes sense for the government of Kenya to allow its most valuable
natural resource (wildlife) to be wiped out. Protecting the elephants from
poachers may be Kenya’s key to accumulating capital, raising living standards,
and saving the elephants.

1. Why is Kenya considered a “less-developed country”?
2. How can the author justify saying that “Kenya is blessed in many ways” while
there is widespread poverty in the country?
3. If elephants are a valuable resource, why are they being slaughtered?
4. Why does the author suggest that it is good economic policy for Kenya to pro
tect its elephants?
5. What limitations upon development might saving the elephants impose? Can
you think of other examples where environmental concerns may be contrary
to programs supporting economic development?
114 Chapter 7
ACTIVITY 5
Read the following case study and in groups of four discuss the questions that follow.
The Globalization of American Industry:

The Tale of a Tape Measure
(1) There was a time when the term “international trade” referred to goods or ser
vices created entirely in one country that were imported from, or exported to,
another. But trade between nations today is far more complex. Companies
based in one country may manufacture components in another, assemble
them in a third, and market the finished product all over the world. It is little
wonder therefore, that people often use the terms “global,” and the “globaliza
tion of industry” when referring to trade between nations today.
(2) One American company to have followed this pattern is Stanley Works of New
Britain, Connecticut. Founded nearly 150 years ago, Stanley has long been one
of this country’s best known hardware and tool manufacturers.
(3) Prior to 1970, overseas sales of Stanley products consisted solely of goods with
a “made in the United States of America” label. Then, with foreign competition
cutting into their tool and hardware market, Stanley decided to meet the prob
lem head on by moving some of its manufacturing operations overseas.
(4) One of Stanley’s most successful products has been its retractable steel tape
measures. To increase its overseas sales of that item, the company purchased
an existing tape factory in France, and plants in Taiwan and Mexico that could
be adapted for that purpose. The moves proved to be enormously profitable.
Tape sales are now running at about US$145 million annually, with half that
amount coming from foreign sales.
(5) In analyzing why its foreign tape facilities were so successful, the company
discovered the following:
• Since the tapes were manufactured locally, they could be sold with “made
in ...” labels indicating European, Asian, and Latin American origins.
• The company was exempt from the tariffs normally levied on foreign
imports.
• Wearing Stanley tapes clipped to one’s belt has become something of a fad
among young “do-it-yourselfers” abroad.
• By purchasing going concerns in foreign countries, Stanley was able to ben

efit from the advances those firms had made in manufacturing technology.

The sales o f Stanley tape measures boomed when the company
moved m anufacturing operations overseas.

1. How does “global trade” differ from “international trade”?
2. How does the marketing of Stanley’s steel measuring tapes represent the
“globalization” of that product?
3. Instead of attempting to increase its exports of steel tape measures, Stanley

chose to invest in plants overseas. Who is likely to have benefited from that
decision? Who is likely to have been hurt by it? Explain your answer.
4. Which of the four reasons listed best explains the success of Stanley’s decision
to manufacture tapes abroad? Explain your answer.
5. Can you provide another example of a company or product that is engaged in

global trade similar to Stanley Works?
116 Chapter 7
ACTIVITY 6
Read the following article and write a definition for comparative advantage. Share
your definition with a partner.
Then in groups of four, select two products that your country produces that could
illustrate the principle of comparative advantage and be ready to present your
example to the whole class.
David Ricardo (1772-1823)

Classical Champion of Free Trade
(1) David Ricardo is one of history’s most influential economists. Born in England,
Ricardo made a fortune on the London Stock Exchange. This wealth gave him
the time to write and to serve in Parliament’s House of Commons. His most
famous work, Principles o f Political Economy and Taxation (1817), marked
him as the greatest spokesman for classical economics since Adam Smith.
(2) Ricardo is especially famous in international economics for demonstrating the

advantages of free trade. Free trade is a policy in which tariffs and other barri
ers to trade between nations are removed. To prove his point, Ricardo devel
oped a concept we now call the principle of comparative advantage.
Comparative advantage enabled him to demonstrate that one nation might
profitably import goods from another even though the importing country
could produce that item for less than the exporter.
(3) Ricardo’s explanation of comparative advantage went as follows:
Portugal and England, both of whom produce wine and cloth, are considering
the advantages of exchanging those products with one another.
Let’s assume that:
* x barrels of wine are equal to (and therefore trade evenly for) у yards
of cloth.
* In Portugal 80 workers can produce x barrels of wine in a year. It takes

120 English workers to produce that many barrels.
* 90 Portuguese workers can produce^ yards of cloth in a year. It takes

100 English workers to produce^ yards of cloth.
(4) We can see, Ricardo continued, that even though Portugal can produce both
wine and cloth more efficiently than England, it pays them to specialize in the
production of wine and import English cloth. This is so because by trading
with England, Portugal can obtain as much cloth for 80 worker-years as it
would take 90 worker-years to produce themselves.

(5) England will also benefit. By specializing in cloth, it will be able to obtain wine
in exchange for 100 worker-years of labor rather than 120.
(6) As a member of Parliament, Ricardo pressed the government to abandon its

traditional policy of protection. Though he did not live to achieve that goal, his
efforts bore fruit in the 1840s when England became the first industrial power
to adopt a policy of free trade. There followed 70 years of economic growth dur
ing which the nation became the world’s wealthiest industrial power.
118 Chapter 7
ACTIVITY 7
The next two articles take opposing views on trade policy. Read both articles and in
groups of four discuss the questions found at the end of each article.
The follow in g reading is an excerptfrom an advertisem ent developed by United

Technologies, a major producer o f highly technical machinery in the United States
and around the world. Economic conditions have changed since the advertisem ent
appeared, but the arguments against protectionism are still heard today.
The Protectionist illusion
(1) The stagnating economy makes protectionism an ever more seductive temptress.
(2) With millions of Americans out of work, pressures are mounting to restrict
imports in hard-hit industries. The longer the economic slump, the stronger the
sentiment to protect American products and the jobs of people who make them
by erecting barriers to the flow of goods into the United States from abroad.
(3) All nations, of course, want good economic times and high employment for
their own people. To one degree or another, all countries are protectionist. The
United States is less so than most. Since the end of World War II, we’ve been
opening our borders and vast internal markets to other countries’ wares. In
turn, products made in America have found acceptance around the world,
generating jobs here at home.
(4) Protectionist fever was rampant in the 1930s. The results were calamitous:
sky-high tariffs on imports, retaliatory measures by other countries, trade war
fare, unemployment—depression.
(5) Now the protectionist peril is welling up anew. Forces at work in the United
States and other countries are undermining the international trading system
that has evolved over the postwar decades and stimulated economic growth in
most parts of the world.
(6) Governments beset by economic troubles, especially unemployment, find

themselves increasingly prodded to embrace such measures as import restric
tions, trade quotas and export subsidies. Politically, such measures may have
appeal. Economically, they promise only disaster—a deepening of the world’s
economic ills, more people out of work, perhaps another outbreak of trade
warfare like that of the Great Depression.
(7) From the lessons of the past, it’s clear that protectionist remedies are an illu
sion. They don’t work. They are self-defeating, wiping out more jobs than they
preserve. While some jobs may be saved in a protected industry, others are
lost elsewhere in the economy.

choice of products, drives up prices, and stokes inflation. Producers protected
from competition lose their incentive to invest, improve, modernize, expand,
compete, create more jobs.
(9) Nations and people everywhere are better off with a trade system that’s free
and fair. As a principal economic power, the United States should lead the
way to greater cooperation and openness in commerce as the best hope for
economic health among all nations.
(10) Let’s not choke off imports. Let’s expand exports.

1. Summarize the arguments presented in the advertisement in favor of free trade.
2. What does the author mean in the statement that “to one degree or another
all countries are protectionists.”
3. Pretend that you were asked by an American automobile firm to prepare an

advertisement calling for restrictions on the imports of foreign automobiles.
What arguments would you present in the advertisement?
In contrast to the previous reading, thefollow ing is a statem ent o f opinion warning
Am ericans not to befooled by supporters o f low tariff's andfree trade.
The Free-Trade Illusion
(1) All across America, thousands upon thousands of jobs have disappeared—vic
tims of foreign competition. The failure of several of the nation’s leading steel
makers, the wholesale shift of textile manufacturing to overseas plants, and the
decline of the American consumer electronics industry are only some of the ca
sualties of this assault on the American economy.
(2) Some argue that the reason for America’s failure to outperform foreign compe
tition is a result of declining productivity. All that need be done, they claim, is
to reduce costs. Lowering costs per unit of output (in other words, increasing
productivity) will enable industry to undersell foreign competition and restore
the United States to leadership in the industrial world.
(3) But this argument has things backwards. Declining U.S. productivity is not the
reason foreign manufacturers can undersell American firms. Rather, cheap for
eign labor allows foreign firms to sell their products for less.
120 Chapter 7
(4) In other words, foreign workers earning US$.50 per hour, and producing
10 squidgets per hour, could be said to be producing squidgets at the rate of
5 cents each. If their American counterparts were producing twice that number
(20 squidgets per hour) at a wage rate of US$10 per hour, their “productivity”
would be rated at US$.50 per squidget, or a tenth that of their foreign com
petitors. In these circumstances American manufacturers would have to lower
their selling price to a point where they could meet or beat the competition.
This would only be possible, however, if they could “increase productivity” by
reducing wages.
(5) Lower wage rates explain why so many American businesses and jobs have
moved, for example, to Taiwan and the Caribbean. They also explain why
workers in those countries appear to be more “productive” than Americans.
Lower wages reduce their unit costs and increase their “productivity.”
(6) We can see that the shift in production to other countries (to produce goods for
our markets), and the loss of jobs it causes, have little, if anything, to do with
productivity. What they do have to do with are rising unemployment, lower
wage rates, and a reduced standard of living. Or, to put it another way, shifting
production abroad has had the same effect on American labor as would the
unrestricted migration of workers from foreign lands into our factories.
(7) What is needed is a trade policy that replaces the one-way competition from
low-wage countries with real trade between nations—trade in which both par
ties benefit. Will this require tariffs, quotas or other restrictions to protect
American workers and industries? Of course it will. Indeed, the sooner the
American people recognize that protection is not, in and of itself, a great evil,
and free trade the solution to the world’s economic problems, the better off
we will all be.

1. According to the author of this article, what is the principal reason for
America’s inability to compete with many foreign producers?
2. Explain the author’s statement that the shift of production to other countries
has resulted in “rising unemployment, lower wage rates, and a reduced stan
dard of living.”
3. What kinds of trade policies would the author of this article favor?
4. Write a short essay that compares the views expressed in this article with
those in “The Protectionist Illusion.”

Reaching an agreement may require concessions
on both sides. ©IMAGEZOO MEDIA
ACTIVITY 8
Negotiating a Bi-lateral Trade Agreement
(FOLLOW UP to ACTIVITY 7)
Divide the class in two teams. One team will represent Country X which favors pro
tectionist trade policies (reflecting many of the views contained in the article “The
Free-Trade Illusion”). The other team represents Country Y which supports free
trade (subscribing to the beliefs contained in the article “The Protectionist Illusion”).
Stage a meeting in which representatives from Country X and Country Y negotiate

a new trade agreement. Country Y hopes to open the market in Country X to its
agricultural and cellular telephone components. Country X contends that opening
these markets to foreign products will hurt their farmers and retard their own elec
tronics industry which does a large amount of export regionally. Each side should
be prepared to offer some concessions (not just limited to the economic sphere) in
the hopes of reaching an agreement that is acceptable to both countries.
122 Chapter 7
B I B L I O G R A P H Y
INTRODUCTION TO ECONOMICS
(Chapters 1 and 2)
Friedman, Milton and Rose Friedman. Freedom to Choose. 1980, Harcourt Brace
Jovanovich.
Galbraith, John K. The A ffluent Society. 1958, Houghton Mifflin.
Lee, Susan. Susan Lee’s A B Z ’s o f Economics. 1987, Poseidon Press.
Robinson, Marshall A. et al. An Introduction to Economic Reasoning. 1980,

Anchor Press/Doubleday.
MARKET ECONOM IES

(Chapters 3 and 4)
Adams, Walter and James W. Brock. The Bigness Complex. 1986, Pantheon.
Broom, H. N. et al. Sm all Business Management. 1979, South-Western.
Hughes, Robert J. and Jack R. Kapoor. Business. 1985, Houghton Mifflin.
Rachman, David J. and Michael H. Mescon. Business Today. 1985, Random

House/Business Division.
LABOR AND GOVERNMENT IN MARKET ECONOM IES

(Chapters 5 and 6)
Anderson, Robert A. Government and Business. 1979, South-Western.
Claypool, Jane. The Worker in America: Issues in American History. 1985, Watts.
123
Flagler, John J. The Labor Movement in the United States. 1989, Lerner.
Freeman, Richard and James L. Medoff. What Do Unions Do? 1982, Basic Books.
Galenson, Walter and Robert S. Smith. Labor in the Twentieth Century. 1978,
Academic Press.
Marshall, Ray and Brian Rungeling. The Role o f Unions in the American Economy.
1985, Joint Council on Economic Education.
Musgrave, Richard A. and Peggy B. Musgrave. Public Finance in Theory and

Practice. 1984, McGraw-Hill.
THE GLOBAL ECONOMY

(Chapter 7)
Calderwood, James. The Developing World: Poverty, Growth and R ising

Expectations. 1976, Scott, Foresman.
Fine, John Christopher. The Hunger Road. 1988, Atheneum.
Gilder, George. Wealth and Poverty. 1981, Basic Books.
Swartz, Thomas R. and Frank J. Bonello. Taking Sides: Clashing Views on

Controversial Economic Issues. 1986, Dushkin.
Thurow, Lester. Dangerous Currents: The State o f Economics. 1983, Houghton

Mifflin.
Yergin, Daniel and Martin Hillenbrand. Global Insecurity. 1982, Houghton

Mifflin.
124
G L O S S A R Y
A
adjustment: process of adaptation in an economy made necessary by technological
developments, changes in demand, or shifting trade patterns
annual percentage rate (APR): percentage cost of credit calculated on an annual
basis
arbitration: settling differences by allowing a third party (the arbitrator) to hand
down a decision that is final and binding
asset: something of value that is owned by a firm, household, or individual
в
balanced budget: financial plan in which expenses exactly equal income
balance of payments: summary of the flow of international transactions; state
ment of payments made to all other countries and payments received from all other
countries
balance of trade: the difference between the export and import of merchandise
balance sheet: financial statement summarizing a firm’s assets, liabilities, and net worth
base year: the reference year, with a value of 100, used in the construction of
index numbers
bears: investors who buy and sell stock with the expectation of profiting from stock
price declines
bilateral: an agreement involving two sides
bilateral aid: development assistance provided by one country to another
boom: the peak of the business cycle; business is producing at or near capacity
boycott: a refusal to do business with a firm involved in a labor dispute
break-even point: point at which income from sales equals fixed and variable
expenses
125
brokerage: in the securities industry, the buying and selling of stocks and bonds
on behalf of others
budget: a financial plan that summarizes income and expenditures over a period
of time
bulls: investors who buy and sell stock with the expectation of profiting from stock
price increases
business cycle: periodic fluctuation in the economy
business ethics: concern for keeping fair business practices
c
capital: something created to produce other goods and services; also money used
to pay for the operations of a business
capital gain: the increase in the value of an asset over a period of time
capital goods: industrial products or components used in producing other prod
ucts or goods
capitalism: economic system based on private ownership of the factors of produc
tion, competition, and the profit motive
cartel: alliance among industrial enterprises that produce the same commodity to
regulate its purchase, production, and/or marketing
cash flow: the amount of money coming into and going out of a firm
caveat emptor: Latin term that means “let the buyer beware”
central economic planning: doctrine placing production decisions in the hands of
government planners
chambers of commerce: associations of business and professional people that
seek to promote the interests of the business community
charter: a document issued by a state government granting a corporation permis
sion to operate
closed (or private) corporation: one whose stock is not sold to the public
closed shop: enterprise in which workers must belong to the union before they can
be hired
collateral: something with monetary value pledged as security for a loan
collective bargaining: negotiations with management by a union to prepare a
labor contract
command economy: economic system in which major decisions concerning
the allocation of resources are made by agencies of the government
commodity: any article exchanged in trade
common stock: a security that represents ownership in a corporation
126
comparative advantage: an advantage in producing an item because one’s oppor
tunity cost to produce it is lower than another’s
competition: the rivalry among buyers and among sellers in the purchase and
sale of resources and products
competitive: a product or service that can be readily sold because buyers consider
its price and quality acceptable
compound interest: interest computed on the principal and on the interest previ
ously paid
concession: a privilege or right given by one group to gain an equivalent compro
mise from the other group
conciliation: effort by a third party to bring labor and management together to
work out their differences on their own
conglomerate merger: combination of unrelated businesses under a single
management
conspicuous consumption: Thorstein Veblen’s term for the tendency to buy goods
and services to impress others
consumers: individuals or groups that use economic goods
consumer co-ops: retail businesses owned by members who share in the profits
and/or purchase goods and services at lower cost
consumer price index (CPI): compares present prices of commonly purchased
goods and services to the prices of similar goods and services in a base year
contraction: period in the business cycle after a boom when businesses begin to
reduce their spending levels
consumption: the purchase and use of goods or services to satisfy human wants
or to produce other services
copyright: exclusive right of authors of original writing and artistic work to sell or
in any way reproduce their works for their lifetime plus 75 years
corporation: a type of business organization created under a government charter
currency: paper money and coins issued by the federal government
customs union: an organization of countries who agree to promote free trade
among members but to impose a common tariff on nonmembers
D
de facto: as it exists in practice
de jure: according to legal requirements
default: failure to meet an obligation when it comes due
127
deficit: excess of expenses over expected income
demand: a consumer’s willingness and ability to buy a product or service at a par
ticular time and place
demand curve: the graphic representation of demand
devaluation: lowering of the value of a national currency in relation to the currencies
of other nations
discounted loan: loan from which interest is deducted in advance
discretionary income: money left after buying necessities
dumping: selling the same goods for a lower price abroad than at home
E
earnings: profits
economic development: the process of growth in total and per capita income in
developing countries as shown by more industrial activity, migration of labor
from rural to urban industrial areas, rising literacy and broader employment
opportunities
economic growth: increases in an economy’s total output over a period of time
economic indicator: a statistical measurement of the state of the economy or
some important part of the economy
economics: the social science that describes and analyzes how society chooses
from among scarce resources to satisfy its wants
economic system: the approach a country uses to deal with scarcity and achieve
its economic goals
elastic currency: supply of money expands and contracts with the needs of business
elasticity of demand: measure of buyers’ eagerness to acquire a good or service
elasticity of supply: measure of how easily sellers can increase or decrease the
quantity supplied
embargo: a prohibition upon exports and/or imports of a specific product or items
from or to a specific country
eminent domain: the right of governments to take private property, at a fair price,
for public purposes
Engel’s Law: as a family’s income increases, the percentage spent for necessities
decreases, while the percentage spent for luxuries increases
entrepreneur: person who creates a business in the hope of earning a profit; also a
person who organizes, manages, and assumes the risks of a business enterprise
entrepreneurship: the managerial or organizational skills needed to produce goods
and service at a profit
128
equilibrium: condition in which economic forces that may cause changes in
opposite directions are in perfect balance so that change does not occur
equilibrium price: the price of a good or service at which the quantity demanded
matches the quantity supplied
equilibrium quantity: the number of products that would be sold at the equilibri
um or market price
export: good or service sold to a buyer in another country
export subsidy: a payment by a country to exporters enabling them to sell their
products abroad at a lower price than at home
externalities: the effects of economic activities that fall outside the market system
F
factors of production: the productive resources of land, labor, capital and
entrepreneurship
fiscal policy: use of a government’s power to tax and spend to regulate economic
activity
franchise: a license to operate an individually owned business as if it were part of
a large chain
franchisee: one who purchases a franchise
free market: a market that operates under conditions of perfect competition
free trade: the absence of any trade restrictions
G
General Agreement of Tariffs and Trade (GATT): a multilateral trade agreement
aimed at expanding international trade as a means of raising human welfare
throughout the world
general tariff: a tariff that applies to imports from countries that do not enjoy
special trade concessions
generic products: products sold without a trademark or brand name
goods: merchandise; wares
Great Depression: the worst period of economic decline in U.S. history, lasting from
1929-1940
gross domestic product: total value of the goods and service produced within a
country in a single year
gross national product (GNP): the measure of a nation’s total output of goods and
services per year
129
н
horizontal merger: combination of companies in the same business
human resources (labor): the physical and mental effort needed to produce goods
and services
I
import: good or service purchased from a seller in another country
index number: a measure of relative value compared to a base number
indirect tax: a tax levied on spending, such as a sales tax or a value-added tax
inflation: period of rising prices during which the purchasing power of the dollar is falling
infrastructure: the basic facilities, such as roads, harbors and utilities, on which
the smooth operation of the economy depends
insurance: protection against financial loss by sharing risks with others
interest: payment for using someone else’s money; income derived from allowing
someone else to use one’s capital
International Finance Corporation (IFC): provides capital and managerial assis
tance to private business in the less-developed countries
International Monetary Fund (IMF): an agency that lends foreign exchange to
LDCs and other member nations
J
job discrimination: practice of favoring one group over another in hiring, salary,
or promotion for reasons that have nothing to do with ability
L
labor: the human effort required to produce goods and services
labor force: consists of all people 16 years of age or older who are currently employed
or are looking for work
labor unions: associations of workers formed to promote the interests of their members
laissez faire: French term meaning “let them do”; describes a policy of minimal
involvement of government in business
law o f demand: all else being equal, more items will be sold at a lower price than
at a higher price
law of supply: sellers will offer more of a product at a higher price and less at a
lower price
130
less-developed countries (LDCS): countries in which per capita real income is
much lower than in industrialized nations
liability: any claim on, or debt of, a business or individual
liberalization: reductions in tariffs or other restrictive trade measures
licensing: a special permit required before import or export of a particular good is
allowed
limited liability: advantage of a corporation allowing a stockholder no legal respon
sibility for its debts beyond the sum he or she has invested in the corporation
liquidity: the ease with which savings or other assets can be converted to cash
м
macroeconomics: the study of the economy as a whole
managed trade: attempts by governments to influence or control exports and imports
management: the organization and coordination of an enterprise
market: place where buyers and sellers come together
market economy: an economic system in which national economic decisions are
the result of decisions by individual buyers and sellers in the marketplace
marketplace: any place in which goods are bought and sold
market forces: shifts in demand and supply that are reflected in changing prices
market price: price at which goods or services and money will actually be exchanged
The price at which supply exactly equals demand
mediation: method for settling labor disputes in which a third party makes non
binding suggestions
mercantilists: some of the first modern economists who believed that nations
should behave like merchants competing with one another; advocates of govern
ment support to keep the nation’s businesses competitive
merger: combination of previously separate firms into one
microeconomics: the study of the individual parts of the economy, with special
attention to the market process and how it works
mixed economy: economic system that combines elements of public ownership
of the means of production with private ownership
money: can be anything that is generally accepted in payment for goods and services
monopolist: seller who controls the supply of a good or a service
monopoly: market in which there is only one seller
mortgage: a long-term loan usually used to finance a building
multilateral: having three or more participating sides or countries
131
mutual funds: companies that sell stock and use the proceeds to invest or speculate
in the securities markets
N
nationalization: government takeover of a privately owned industry
natural resources: the things provided by nature that go into the creation of goods
and services
near monies: assets that are easily turned into cash
negotiations: bargaining between and among representatives of different groups
or nations to obtain an agreement that is mutually acceptable
net exports: the difference between total exports and total imports over the
course of a year
newly industrializing countries (NICs): relatively advanced developing countries
whose industrial production and exports have grown rapidly in recent years
non-market economy: a national economy in which the government determines
economic activity through central planning
o
oligopoly: market dominated by a few large firms
open (or public) corporation: a corporation whose stock is sold to the public
opportunity cost: the amount of goods and services that must be given up in
order to obtain other goods and services
overhead costs: fixed costs of doing business
p
partnership: unincorporated business organization owned by two or more persons
perfect competition: a market for uniform products in which there are many buy
ers and sellers, not one of which is big enough to affect the price, and full knowl
edge of market conditions
physiocrats: thinkers in 18th-century France who believed that because natural
resources were the true source of wealth, it made little sense for government to
promote business
preferred stock: stock that receives a specified dividend before any dividends are
paid on common stock and that receives a share of the assets of a liquidated cor
poration ahead of common stock holders
private sector: the part of a national economy that is comprised of privately
owned enterprises
production: the process of creating or changing the form of commodities
132
production-possibilities curve: a curve showing the possible combinations of
total output that could be produced if a nation’s resources were fully employed
productive capital: things used to produce goods and services; machines, tools,
factories, equipment, etc.
productivity: the output of goods and services as measured per unit of time, person,
company, industry, or for the whole economy
profit margin: difference between cost and selling price
profit motive: the desire to benefit from the investment of time and money in a
business enterprise
protective tariff: tariff levied to protect a domestic industry from foreign competi
tion (see revenue tariff)
public sector: the part of a national economy controlled by the government
purchasing power: the value of money at a particular point in time
Q
quotas: restrictions on the number of goods that can enter the country from abroad
R
rate of exchange: the price at which a particular currency sells in terms of other
currencies
rate of inflation: annual percentage increase in the general level of prices
rate of return: the amount of interest or dividends stated as a percentage of the
principal of an investment
real GNP: GNP adjusted for changes in the price level; the value of goods and ser
vices produced in the nation in a given year
recession: the bottom of the business cycle; a period of low business activity and
high unemployment
reciprocity: the practice by which governments extend similar concessions to
each other
regressive tax: one that takes a higher percentage of low income and a lower
percentage of high income
reserve ratio: the proportion of a bank’s deposits that must be kept on reserve at
the Federal Reserve Bank or in its own vaults
retaliation: action taken against another, as when a country limits its imports
from a country that has increased a tariff
revenue tariff: tax on imports designed to raise money for the government (see
protective tariff)
133
risk: the possibility of profit or loss depending upon the success or failure of a
commercial venture
s
sales tax: a regressive tax added to the price of goods at the time they are sold
scarcity: a limit to the supply of productive resources or consumer goods in rela
tion to producers’ or consumers’ demand for them
security exchange: market where brokers meet to buy and sell stocks and bonds
seniority: the importance assigned to a worker’s length of service when it comes
to questions of raises or layoffs, etc.
services: intangible items of value, such as the work of physicians, lawyers, actors
or mechanics
sole proprietorship: a business that is owned by one person
standard of living: a measure of the amount of goods and services an individual
or group considers essential
standards: technical specifications for a product describing size, quality, perfor
mance or safety features
structural change: changes within an economic system including its patterns of
production, consumption, trade and relative prices
structural unemployment: unemployment resulting from changes in technology,
consumer preference, or movement of jobs from one region to another
subsidiary: a company controlled by another company
subsidy: financial aid
т
tariff: a tax or duty on imports
tax base: the money, property and people on whom taxes could be levied
technology: the application of science to commerce and industry
trade loans: credit extended by vendors to their customers
trademarks: special designs, names or unique symbols that identify a product,
service or company
traditional economy: an economic system that allocates scarce resources accord
ing to custom; change and growth are very slow; people do what their parents did
before them; and most goods are produced and consumed locally
134
и
underground economy: exchanges of goods and service not reported to the govern
ment for tax purposes
underwrite: to assume liability for a sum or risk
unilateral: an action taken by a single country or interested party
unlimited liability: requirement that the owner or owners assume full responsibil
ity for all losses or debts of a business
v
value: the real worth of a specific good or service
value-added tax (VAT): tax levied on the value added to goods at every stage of
production
w
waiver: an exemption or dropping of a right or claim
World Bank: officially, the International Bank for Reconstruction and Development;
an international agency that makes loans to less-developed countries as a way of
stimulating economic growth
135
E n g l is h through Content: Applied Economics
T h o m a s Krai E d it o r
Intended as a supplementary text for EFL courses in

Business English, this text combines the content of
market economics with language enhancement activi
ties. Collaborating with a partner and frequently inter
preting graphs and tables, students are asked to find
solutions for a variety of problem situations set forth
in case studies and business-related reading selec
tions. This edition has been adapted by editor Thomas
Krai from the Junior Achievement text book Applied
Economics of Junior Achievement International, head
quartered in Colorado Springs, Colorado, USA.

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Economic Considerations

First published in 1994

This printing published in 2006

Office of English Language Programs

FOREWORD to the Third Printing

FOREWORD to the First Printing

ACKOWLEDGMENTS for the Third Printing

This third printing of Economic Considerations has new photographs, graphics,

ACKOWLEDGMENTS for the First Printing

ECONOMIC CONSIDERATIONS is a content-based text for advanced level students of

Collaborating with a partner or working as a member of a small group, students

A bibliography provides suggestions for further reading in economics. A glossary of

ECONOMIC CONSIDERATIONS is intended to serve as a supplementary text for

Don't opposeforces, use them.

1. The government will allocate more of its budget to health care,

3. A high tax was placed upon luxury commodities.

5. The government enacted a law to control the sales of guns,

7. Food and shelter make up ourfundam ental needs,

9. As an added incentive, the car dealer offered a special service agreement,

11. They optimized their profits by reinvesting them in the company,

13. A basic knowledge of economics is relevant to everyone,

1. acquire get obtain question

2. allocate assign attract set aside

3. alternative change option possibility

4. commodity item market product

6. enact establish represent specify

7. forego precede renounce sacrifice

8. fundamental basic essential secondary

9. hoard accumulate exchange save

10. incentive encouragement occurrence stimulus

11. intervention familiarity imposition interference

12. optimize make efficient make necessary make useful

13. promote publicize obstruct advocate

14. relevant applicable dependable fitting

15. scarcity gap lack terror

ORGANIZING OUR THOUGHTS

1. Why should everyone understand basic economics?

1. What two groups are discussed?

2. How were they different from each other?

3. What is a “favorable balance of trade”?

4. What is “laissezfaire” and with which group is the term associated?

The First Modern Economists

(2) “Favorable balance of trade” described a situation in which exports exceeded

(10) Interestingly, the 200-year-old argument between those favoring regulation of

What is Econom ics? 5

2. Identify the neo-m ercantilists.

4. In the United States today, opinion about economic policy continues to be

(1) Supermarkets offer valuable economic lessons. The modern supermarket

(2) Information about consumer preferences in this huge mix of products is

QUESTIONS FOR UNDERSTANDING

2. Why is “self-interest” significant to the operation of a market system?

What is Econom ics? 7

What is Econom ics? 9

QUESTIONS FOR UNDERSTANDING

3. What is the opportunity cost involved in a decision to continue schooling after

4. What is the opportunity cost involved in a decision to forego schooling in favor

What is Econom ics? 11

1. What is the maximum quantity of butter that can be produced in Ecomania in

S upply, D emand and

Shifting consumer preferences result in a change o f products available on the market.

1. Their investments were not attuned to their future goals.

2. The workers conceded on salary increases in order to retain their retirement

5. Sociologists tend to be more interested in contemporary problems than they

10. The research division of the сотщхгуJu n ctio n s as a laboratory.

“Every individual is continually exerting himself to find the most advanta

(6) Equilibrium Price and Quan

In interpreting demand curves, it is necessary to understand the concept of elas