Page 39 - Introduction to Business

CHAPTER 1 What Is Business? 13

EXHIBIT 1.4 of borrowed money. Capitalism is
5
a system based on private property,
Market Clearing Price and Quantity
which does not just imply land but
3.00 also includes all types of personal
property that you see, such as your
2.50 Demand
Curve house, car, furniture, books, stereos,
2.00 CDs, and so on. In the capitalist sys-
Market clearing or tem, along with private property
1.50
Equilibrium price
comes property rights, that is, your
1.00
rights to buy, own, use, and sell your
Supply
.50 property as you see fit. Private prop-
Curve
erty and property rights are things
5 10 15 20 25 that Americans take for granted.
Quantity of gasoline demanded However, in communist countries
per month (1,000 gallons)
like China (where property rights are
changing very slowly) or in countries
that have very recently gained independence from the former Soviet Union (like
Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan in Central Asia),
private property, especially land title, still belongs to the state and there are severe
restrictions on what citizens in these countries can do with their land (the house that
they build on the land may belong to them, but not the land!). This lack of property
rights severely restricts innovation and business, since people do not have the
freedom of choice to do what they want and make a profit. There is little or no incen-
tive to invest in property when people know that the government may take away their
land at any time. Private property rights are crucial for success in a free market
system.
reality How has the price of a typical personal computer performed over the
CH ECK past three years? Why?

LEARNING OBJECTIVE 4
Discuss what is meant by market structure, and explain why most industries fall
under the banner of monopolistic competition.

Degrees of Competition. What is competition, and why does it matter? By
the time you finish reading this section, you will begin to appreciate the importance
of competition, especially as it relates to the price, quantity, and quality of the prod-
ucts and services that are produced and consumed in an economy. Most firms are
founded to satisfy consumers’ unfulfilled needs and, in so doing, to earn profit
before the product or service they are selling becomes obsolete. All firms have a life
cycle that begins with the introduction of a new, better, or cheaper product. At this
stage, firms tend to be most profitable before competitors have had the time to
enter the market with a cheaper, better alternative. The potential for profit moti-
vates new entrants into the marketplace, and as the number of firms providing
similar goods and services increases, the level of competition intensifies and prices
fall. Unless the original firm increases its efficiency (by cutting production costs and
“doing things right”) and effectiveness (by introducing new products, markets,
and business models, i.e., “doing the right things”), it will become less profitable
and then obsolete and fade away. That is the fundamental reason why firms that do
not change with time do not exist forever. Just as perceived profits attract business, product life cycle theory The theory
in the product life cycle, competition forces firms to become efficient, invest, and that explains the different stages—
introduction, growth, maturity, and
outsource products and services abroad or to go out of business. In the capitalist
decline—that a product goes through
system, the law of the corporate jungle is clear: compete—restructure—or die. before it fades away
Copyright 2010 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.