Page 67 - Introduction to Business

CHAPTER 1 What Is Business? 41

LEARNING OBJECTIVE 2 develop business and profits, the role of government is
Summarize the evolution of business in the United to ensure that these enterprises do not get involved in
States and explain the key issues that are impacting illegal (drugs, money laundering, environmental pollu-
its outlook for the future. tion, employee discrimination) or anticompetitive activ-
ities. Second, the free market system operates on the
The evolution of business in the United States can be
traced from the time when the first settlers from basis of supply and demand, where consumers are the
Europe crossed the Atlantic Ocean. The initial business source of demand and producers are the source of sup-
climate largely reflected a free market, or laissez-faire, ply. In the marketplace, supply and demand interact to
system, coupled with the availability of abundant land determine the price of goods and services. The free
(and natural resources) and a constant and growing market system is efficient because supply will always (in
inflow of labor and capital, in the beginning from the medium term) equal demand and there will be no
Europe. The Industrial Revolution (1815–1875) trans- surplus or shortage. In the short term, if there is a surplus
formed the United States from an agrarian economy to (supply exceeding demand), price will fall until the sur-
an industrial giant that fostered the growth of the fac- plus vanishes. Similarly, if there is a shortage (demand
tory system, which involved efficient mass production exceeding supply), price will rise until the shortage
of standardized products under one roof. Business vanishes. From the above discussion it is clear that the
prospects accelerated with the introduction of the rail- free market system is both efficient and dynamic.
road (1875–1913), which led to the westward (coast-to-
LEARNING OBJECTIVE 4
coast) expansion of the United States and increased the
need for goods and services. This was also an era of Discuss what is meant by market structure, and
explain why most industries fall under the banner of
mergers and acquisitions that resulted in the growth of monopolistic competition.
huge companies, which dominated the U.S. market.
Public concern enabled the introduction of antitrust Market structure describes the level of competition
policies to curb anticompetitive business practices. A (number of producers of goods or services) within an
new era (1913–1944) of manufacturing began in 1913 industry. In the free enterprise system there are four
when the Ford Motor Company initiated assembly line different forms of market structure—pure competition,
manufacturing using scientific management tech- monopolistic competition, oligopoly, and monopoly. In
niques. Finally, at the end of World War II, the United pure competition there are several producers of identi-
States and other major nations of the world saw the cal products, in monopolistic competition there are
need to work together to increase trade and investment several producers of similar (not identical) products, in
among countries as a way to propel global business oligopoly there are few producers of similar products
growth. Several international organizations were set up who supply a significant share of the market demand,
to facilitate the process, and this started the globaliza- and in monopoly there is only one producer who sup-
tion era—the first major element impacting the outlook plies the whole market. Producers can have an influ-
for U.S. business. ence over prices, depending on the level of competition
The two other major elements are technology and in the industry. The monopolist has the power to set
ethics. Advances in technology have moved the United market prices, while a producer under pure competi-
States from an agrarian to a manufacturing to a service tion will not be able to influence market prices at all. In
and now to a knowledge-based economy. The future of the real world, most of the goods and services that are
U.S. business will be heavily influenced by the success- produced are not identical; they are similar, and that is
ful evolution of its knowledge workers and by how ethi- the reason why most industries fall in the category of
cally its managers function in the global economy. monopolistic competition. While pure competition is
best for society as a whole, in practice, firm concentra-
LEARNING OBJECTIVE 3 tion ratios (especially in the United States) seem to
Explain the fundamental features of the free enter- indicate that most industries fall within the monopolis-
prise, or capitalist, system that make it efficient and tic competition framework.
dynamic.
LEARNING OBJECTIVE 5
The free market system, also called the laissez-faire or
capitalist system, is based on private property rights, the Discuss the rationale for countries wanting to
pursuit of profits, and the freedom to choose. The sys- choose other forms (rather than capitalism) of eco-
nomic systems and explain what direction most
tem espouses two major principles. First, it calls for countries are moving toward.
minimum government intervention in the marketplace;
that is, entrepreneurs should be allowed to participate Apart from the free market system, the other major eco-
in any commercial venture they see fit with ease of nomic systems today are the command, or planned,
entry into and exit out of the industry. Since entrepre- economic system; the mixed economic system; and the
neurs take a risk by investing their time and resources to transition economic system. In the command economic

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