CHAPTER 1 INTRODUCTION

QUESTIONS 1. Scarcity is a condition that exists when resources are limited relative to the demand for their use. Another way of describing this condition is to state that scarcity exists when resources are not available in unlimited amounts. When resources are available in unlimited amounts, economists consider them to be free goods. Because of the scarcity of resources, choices have to be made about their allocation among com eting uses. !ach choice is considered by economists to involve an o ortunity cost because the use of scarce resources in one activity im lies that they cannot be used in an alternative one. "n other words, this o ortunity cost is the amount that is sacrificed when choosing one activity over its next best alternative. "t is reasonable to assume that all organi#ations have to wor$ with scarce resources, no matter how large or rofitable. A $ey role that managers lay is to decide how best to allocate their organi#ations% scarce resources. &rom an economic stand oint, o timal decisions involve their weighing of the benefits associated with a articular decision against the o ortunity cost of this decision. '. What()*his involves deciding what goods and services to roduce and in what +uantities ,e.g., guns versus butter, ca ital goods versus consumer goods, etc..ow()*his involves deciding how best to allocate a country%s resources in the roduction of articular goods or services ,e.g., ca ital intensive versus labor intensive, domestic roduction versus foreign roduction etc.-. &or whom()*his involves deciding how to distribute a country%s total out ut of goods and services ,e.g., income and wealth distribution-. /. a. b. c. d. e. how what for whom how how

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1ar$et 2rocess3 *he use of su ly, demand and material incentives ,e.g., the rofit motive- to decide how scarce resources are to be allocated. "t answers the three +uestions of what, how and for whom in the following ways3 What()Whatever is rofitable will be roduced. 2rofitability in turn de ends on the strength of a society%s demand for a articular good or service and the cost to roducers of roviding such a good or service. .ow()4esources should be allocated and combined in the least costly way. &or whom()*he out ut of goods and services should be allocated to whoever is willing and able to ay for them. 5f course the ability to ay de ends on the country%s distribution of income. 1any 6o yright 7 '889 2earson !ducation, "nc. 2ublishing as 2rentice .all

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"ntroduction factors may account for the distribution of income in a mar$et economy. &or economists, one of the most im ortant is the roductivity rinci le. *his states that income is allocated according to the relative roductivity of the various factors of roduction.

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As much as managers in a mar$et economy rely on demand, cost, and rofitability to guide them in their economic decisions, we have observed that command and tradition continue to lay an im ortant role in the decision;ma$ing rocess. "n articular3 6ommand 2rocess3 Strategic, long;term or olitical decisions that are made by some central authority in an organi#ation ,in a large com any it might be for exam le the 6!5, the cor orate management committee, in a small com any it might be the owner<o erator- can be considered art of the command rocess. &or exam le, a manager might believe that a articular roduct is not rofitable and recommend that it be dro ed for the com any%s roduct line. .owever, u er management might believe that the roduct might have some long;term or strategic value and override this decision. *he o osite might also be true. A good exam le of this is the case of the "B1 ty ewriter. "n 19=0, "B1 made a ma>or strategic decision to stay in the business of ma$ing ty ewriters, even though analysis indicated that it would become increasingly more difficult for it to be rofitable in this business as ty ewriters became electronic rather that electromechanical and as 26s and word rocessors erformed more and more of the basic ty ing functions. "t invested a roximately ?:88 million to com letely moderni#e and automate its roduction facilities in @exington, Aentuc$y. A ma>or reason for maintaining and investing further in this business was because u er management believed that for strategic reasons, "B1 needed to have its own ca ability of ma$ing $eyboards for its com uters. "n 1998, "B1 decided to s in off its ty ewriter division to a se arate, rivately owned com any called @exmar$. ,We do not $now whether it was because the ty ewriter division was not rofitable.5f course, managers in a mar$et economy must also deal with the command rocess whenever government rules, regulations, or laws have to be considered. 6ha ter 1: of this text is devoted to this ossibility. *raditional 2rocess3 As ointed out in the text, customs and traditions lay a more im ortant role for managers in develo ing countries. .owever, we have observed or read about certain instances in which they affect management decisions here in the Bnited States. &or exam le, some years bac$ it was re orted in the Wall Street Cournal that the 6!5 of "nternational .arvester ,now o erating as Davistar- lamented that the com any should have sold off its farm e+ui ment long before it actually did. .owever, he ointed out that he and the rest of the management found it very difficult to divest itself of the roduct line on which the com any was founded. "f the instructor wishes, he or she may wish to bring u the whole issue of the traditional view of occu ations for men and women. &or exam le, years ago, suitable rofessional wor$ for women was usually confined to teaching and nursing. 5bviously, this traditional view of the role of women in the wor$ lace has changed in the Bnited States. .owever, in the rest of the world, even in the develo ed countries such as Ca an and those in Western !uro e, tradition is still an im ortant factor.

6o yright 7 '889 2earson !ducation, "nc. 2ublishing as 2rentice .all

"ntroduction

"nstructors may also wish to consider the traditional view and acce tance of various unethical ractices such as $ic$;bac$s in government contracts and the ractice of ne otism in the hiring of ersonnel that exists today in many develo ing countries. E. *his +uestion is sub>ect to considerable inter retation and the instructor may choose to use his or her own distinctions between the two conce ts. We believe that management s$ills have to do more with the organi#ing and management of scarce resources , articular the managing of eo le- and entre reneurshi has more to do with the ta$ing of certain ris$s in such activities as the introduction of goods and services to the mar$et lace. "deally, the successful manager or entre reneur should have both ca abilities. 1icroeconomics focuses on individual mar$ets for goods and services, while macroeconomics focuses on aggregate economic activity. 1anagers should understand the macroeconomy in order to re are for or o erate more effectively over different hases of the business cycle. &or exam le, if managers believe that the economy will soon come out of a recession, they may want to begin building inventories or ma$ing certain ca ital investments in order to better handle the increased demand which accom anies a recovery. Alternatively, managers may want to consider diversifying their firm%s ortfolio of goods and services to include some roducts that are recession roof ,i.e., those with income elasticities that are very low or negative-. 1ar$eting is the $ey to success in this industry. S ecifically, this includes all of the four 2%s of mar$eting3 ricing, roduct, romotion, and lacement. 2roduction is also im ortant. 4ecently, 2e si6o has been buying a selected number of inde endently owned bottlers because it believes it can o erate them more efficiently and also gain certain economies of scale. 5ur bac$ground a er on this industry should give instructors further information to discuss this +uestion with the class. 9. Dote to "nstructors3 .ere are some suggested answers. *hese may be modified de ending on changing events. a. *elecommunications3 *his is a ra idly changing industry for all ty es of com anies. @et us suggest an answer for the regional bell o erating com anies ,4B56s-. 6om etition3 6ertain states li$e 6alifornia are already allowing other com anies such as A*G* and 16" to offer com eting local service. *echnology3 Wireless communications in the form of cellular hone service is ra idly growing. 2ersonal communications service ,26S- could well be another com eting ty e of wireless com etition. b. 4etail 1erchandising3 6om etition3 6ategory busters such as .ome He ot, S orts Authority, and Borders Boo$s have become real threats to the existence of smaller retail stores. !veryday low rice ,!H@2stores such as Wal;1art and A;1art continue to grow and dominate the retail scene. *echnology3 @arge chains such as Wal;1art are able to send sales data on a daily basis bac$ to head+uarters, enabling financial analysts to trac$ closely inventory and roduct category sales. 6o yright 7 '889 2earson !ducation, "nc. 2ublishing as 2rentice .all

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"ntroduction c. .igher !ducation3 *he "nternet has enabled institutions to offer online, distance learning classes. "t is now ossible to obtain a degree without attending any classes on a hysical cam us. *he virtual cam us is now a reality. d. Airlines3 After more than '8 years of deregulation in the Bnited States, the airline industry has finally s awned the $ind of com etition that was intended. &or exam le, the low cost a roach of Southwest Airlines, CetBlue and others has resulted in serious ongoing losses for the incumbent airlines such as Bnited, B.S. Air, American and Helta.

6o yright 7 '889 2earson !ducation, "nc. 2ublishing as 2rentice .all