Universitatea „Alma-Mater” din Sibiu

Ana-Maria Iuga

BUSINESS COMMUNICATION
COMUNICARE în AFACERI
-Limba engleza -

Lecture Notes
 CUPRINS
Nota .........................................................................................................
1. On Communication ...........................................................................
2. Individual/Nationality (Stereotypes) ................................................
3. Democracy ........................................................................................
3.1. Constitutionalism and Independent Judiciary ................
3.2. The Rule of Law and the Legislative Power ..................
3.3 Education and Democracy ...............................................
4. The European Union .......................................................................
5. Issues Concerning Economics .......................................................
5.1. Overview ..........................................................................
5.2. Goods & Production / Buyers& Sellers .........................
5.3. The Business Firm & Consumer Behaviour .................
5.4. Economic Decisions ......................................................
6. The Financial Sector .......................................................................
7. Types of Business Documents ......................................................
7.1. Business Plans and Technical Specifications ................
8. Marketing Campaigns ...................................................................
8.1. Case Study I ..................................................................
8.2. Case Study II ...............................................................
8.3. Case Study III .............................................................
9. The Management Consultancy Report ...................................
10. Style in Business Correspondence ..........................................
Appendix
I. Selection of Who’s Who Related to Economics ………………
II. Selected Glossary of Microeconomic Terms ………………..
III. Adjective Intensifiers ……………………………………….
IV. Food Phrases ……………………………………………….
Bibliography ……………………………………………………
Nota:

Materialul prezent a fost conceput în primul rând ca un

suport de studiu individual pentru studentii anului II la
specializarile Facultatii de Stiinte Economice din cadrul
Universitatii „Alma- Mater” din Sibiu.
Materialul are în vedere familiarizarea studentilor cu
notiuni si informatii din domeniul afacerilor pentru a-si
perfectiona competentele de comunicare în domeniul
activitatilor economice.
Mentionam ca prezentul material reprezinta o
sinteza a temelor ce vor fi tratate pe larg la cursuri si
seminarii.
Consideram ca materialul de fata ofera o sansa în plus
pentru îmbogatirea cunostintelor de limba engleza în
domeniul comunicarii în afaceri.

Conf. univ. dr. Ana-Maria Iuga

 1.On Communication

It is difficult to come to an understanding unless

one has a grasp of the full complexity of language,
and hence of language learning. Language is
multifaceted to the extent that human activity is
various. There is an enormous variety of walks of
life/occupations/lifestyles, each of which has its own
language and cultural setting. We may divide the
walks of life/occupations/lifestyles into two
categories: those that are common to everybody and
those that are concerned with specialized topics
familiar only to a few.
Obviously, those walks of
life/occupations/lifestyles that are common to many
people are concerned with everyday existence.
Examples of these universal topics are socializing,
shopping, travelling, eating out, telephoning friends,
greetings and introductions, and reading newspapers.
So, when one learns a language, one must be exposed
to linguistic items relating to these universal topics.
Yet in addition to such topics, there is an
enormous range of specialized topics that are of
significant importance only to sections of the
population. Examples of these are as follows: sports,
hobbies and interests, business, banking and finance,
medicine, academics, literary criticism, travel and
tourism, biology, chemistry, physics, agriculture and
law or military matters. The list is endless. The extent
to which an individual will need language pertaining
to any of these specific topics depends upon how
important the topic is to him in his everyday life. If
the topic is not at all important for him, there is no
need for him to know any of the linguistic items
pertaining to it. At the other end of the scale, when
we reach the stage at which any topic constitutes an
individual's profession, it becomes crucial that he
have a mastery of the specialized language pertaining
to it.
Each topic will contain certain tasks, specific to
it, which an individual will need to accomplish and
which require him to use language. Here are some
examples taken from different fields:
- University Professor: - Giving lectures,
participating in seminars, reading and
writing papers for publication, reading and
writing books, discussing academic topics
with students and conducting
examinations, oral and written.
 - Businessman/businessperson/executive: -
Giving presentations, negotiating,
participating in meetings, writing reports,
press releases, letters, faxes and memos,
telephoning, note taking, socializing and
entertaining.
- Research Scientist: - Writing the results of
experiments, writing reports on the
significance of the results, giving
presentations, participating in seminars,
reading recent research.
- Army Professional: Training soldiers,
discussing strategies and tactics, giving
instructions, writing reports, giving
interviews to the press …
These lists are quite general in scope. It is
possible, and desirable, to define the fields of
expertise more specifically so that the accompanying
tasks can be defined precisely. In addition, each
defined task should be divided into its various
subtasks, so that the linguistic items to be learned
may be identified more easily. In general, we may
state the situation as follows. Human life, and hence
human language, is concerned with many and various
topics. Each topic requires certain communicative
tasks to be performed, and these tasks require
mastery of certain task-based skills. Such skills are:
reading and writing texts of various styles, register
and lengths, listening in various styles, accents and
registers, speaking appropriately in a variety of
contexts including socializing, negotiating,
interviewing, presenting information and
pronouncing material in a clear and culturally
acceptable way. People who are engaged in different
activities need to master different skills.
In order to acquire the desired skills, a range of
linguistic items specific to each skill must be
mastered.
- Specialized vocabulary: Each field will
have vocabulary, which is special to it.
Some of the words may have meanings
specific to the field, different from their
meanings in everyday life.
- Register: Basically, register is concerned
with the levels of politeness and formality
to be found in language and the attitudes
or values conveyed by certain words and
phrases. Within each field, there will be
specific registers to be learned. Speaking
and writing in different social and cultural
 contexts require language with different
levels of formality and politeness.
Register is very complex and highly
developed in English and includes not
only certain forms of grammatical
structure, but specific kinds of vocabulary.
Using even a single word inappropriately
can have disastrous consequences.
- Functions: Each field will have different
linguistic functions, which need to be
performed, such as apologizing,
complaining, introducing, requesting,
refusing requests and making suggestions.
Each function may be performed in
different registers.
- Structures: Certain tasks require certain
structures much more than others. For
example, a mastery of the various forms
of conditional sentence is essential for
writing philosophy, but is hardly needed at
all for writing personal letters.
Different human activities require different
communication skills, which in turn require mastery
of specific linguistic items. Within this broad
definition, we may identify two central areas: content
and methodology.
So, for instance, a course in English for
Business Purposes will be concerned with developing
all of the linguistic skills, which are required in order
to function at a professional level in the world of
international business. For some people, even a
course entitled "English for Business Purposes" will
prove to have too broad a scope and for them, a
course designed for their specialization within the
field of business will be appropriate, for instance in
Advertising, Accounting, Marketing or Human
Resources.
In general, we may say that learning should take
place in contexts that are as authentic as possible and
content-based. The requirement of authenticity means
that learning materials should use actual texts
produced by people working in the field under
consideration. For instance, a class on how to write
business reports should use good examples of reports
produced by actual
businessmen/businesspersons/executives. A class
devoted to the oral skills needed to function in the
currency exchange market should use, as listening
materials, recordings of conversations carried out on
the telephone by actual dealers. The requirement
that the learning materials be content-based means
that they should focus on specific problems that
people are likely to encounter in their everyday
working lives. For instance, to develop fluency in a
course on negotiating, a case study, which presents a
real negotiating situation-, faced by actual companies
or in specific military, police or community
departments- could be used.
The extent of the authenticity of the learning
materials will vary depending upon two related
factors: the language level of the trainees and the
degree of linguistic complexity of the skills presented
and practiced. If the language level is low, then
perforce the degree of authenticity will be
compromised. As the language level increases, the
degree of authenticity becomes greater.
Romanian people have a very specific way of
discussing things. If you are brought up with it, you
see no problem. However, in terms of strategies for
communication in Business English, the Romanian
way may be ineffective.
It is over direct and often could be received as
an abusive one. Therefore, I decided to investigate
the case and find some solution. Unfortunately, there
was absolutely no data and no descriptive evaluation
of Romanian strategies for communication.
Searching libraries, I came across” Intercultural
Communication - a Discourse Approach” by Scollon
and Scollon. It focuses on professional
communication in a cross-cultural context and
emphasises the importance of proper meaning
interpretation. Briefly, Scollon and Scollon suggest
that in most cases, a sudden breach of any kind of
professional communication could be owed to the
misinterpretation of signals, verbal messages and
gestures particular to a given culture. Therefore, they
believe that to eliminate or lower the risk of a breach,
professional students should be informed about
potential problems and sensitised to peculiarities of
an alien code of practice. Nevertheless, it is virtually
impossible to predict every professional problem, one
might say. To solve this problem, the authors suggest
a skeleton for situation-context analysis – Grammar
of Context.
The main purpose of Grammar of Context is to
analyze and describe the environment in which a
communicative situation occurs. It takes into
consideration the following factors:
 1. Scene - participants’ expectations in terms
of location and communication content ( what
information should be used and how)
2. Key - participants’ expectations of the
communication tone (formal / informal)
3. Participants - their status; relationship
with each other
4. Message Form - whether it is speaking,
writing, or other media
5. Manifestation - deals with the way
members of a particular group find out about a code
of practice; whether it is explicit – a company’s
statute // regulation, or tacit – common knowledge,
traditional behaviour
A training session for Business English
Teachers led by Marie Delaney offered – a cross-
cultural awareness questionnaire, which is presented
below:

What is your cultural approach to the

following aspects?
Answer the following questions:

1. Time – Do you tolerate being late - If yes,

how much?
 2. Eye contact – Is it important for a
communicative event? Do you need to maintain it? If
yes, for how long?
3. Small Talk – Do you use it? Do you think
it is important? What is your personal attitude to it?
4. Silence – How do you understand silence?
Is it meaningful?
5. Teams – Is it natural for you to work in
teams?
6. Difficult people & situations –
- What is your way of dealing with
interruptions and difficult people?

Business English serves the role of a medium

for a corporate communication; it is used and
influenced by different cultures. Therefore, by raising
cultural awareness we help improve both the
language and the working relationships.
Informal communication is vital for achieving
certain types of work-related tasks. Research on
scientific collaboration has shown that physical
distance is the strongest predictor of collaboration
between researchers. Physical proximity promotes
frequent, impromptu face-to-face communications,
which are crucial for the planning and negotiation
phases of projects. Work on software development
also has demonstrated that the degree to which
project workers engage in interpersonal
communication strongly predicts project success.
Furthermore, other work has shown negative impacts
on teamwork when opportunities for ad hoc
communication are reduced, as in remote
collaboration. Work becomes more difficult to
coordinate and advance despite the use of longer and
more task-focused meetings in remote settings.
Sociological studies of organizational life stress the
primary role of mundane office conversations in
helping workers learn, understand, adapt, and apply
formal procedures and processes.[…]
Despite research from various disciplines
showing the value of informal interactions, evidence
indicates that people in the workplace do not
recognize its value. Kraut & Streeter (1995) found
impromptu communication is under-utilized
compared with its value, whereas formal
communication techniques are overused relative to
their value. Our own preliminary evidence supports
this result. In a series of interviews with a dozen
employees in a Fortune 500 U.S. corporation, we
found that although people reported gaining most of
their work-related news and information from
informal interactions, those same people said they
used almost exclusively formal approaches to convey
information to other parts of the company. Most
commonly, they reported their information to a high-
level management group and asked that they pass the
information down the hierarchy in their staff
meetings. In many cases, they wrote a document to
convey information and either gave it to managers to
give to their employees, or made it available to
employees directly (in email, mailings to the home,
or by publishing it on the company's internal World
Wide Web pages). Some also gave formal
presentations to supplement the document. When we
asked information disseminators if they had
considered spreading their information through word
of mouth, they either had not thought of it or did not
trust it. They were concerned that information passed
informally would be distorted and misinterpreted and
might not become available to all the intended
recipients.
Say whether the statements below it are true (T)
or false (F). Read the part that has helped you choose
your answer:
 • The farther they are from each other, the
more effectively scientists can cooperate.
• Sometimes interpersonal communication
makes it difficult for the team to
concentrate on their specific tasks.
• Corporate workers should be discouraged
from engaging in routine conversation
during office hours.
• Unfortunately, only sociologists recognize
the value of interpersonal communication.
• Researchers interviewed dozens of
employees in 500 U.S. corporations.
• The employees used to find out about the
latest projects and developments within
the firm most of the time by talking to
their colleagues.

To communicate effectively you need to be

familiar with the process and the variables involved.
The basic communication process includes a
source, a message, a channel and a receiver. The
source is you, including your communication skills,
your attitudes and your purpose, as well as your
knowledge of the subject, your audience, and the
context in which you are communicating.
 The message includes the code or language you
are using as well as the message’s treatment, that is,
what content is selected and how it is organized. You
can think of the channel as both the senses and the
medium of communication used. For instance, seeing
and hearing, are the senses variously involved in
reading the printed page, listening to a tape, or
speaker, watching TV, video. Generally, the more
channels we use, that is, the more senses we
stimulate, the more effective the communication.
Keep Marshall McLuhan’s aphorism "the medium is
the message" in mind. McLuhan overstates his point
but, by affecting different senses and thus our
perception of reality, the media or technology used
can itself influence the message we receive and how
we respond to it. Recall that radio and print reports of
the Ethiopian drought and famine a few years ago
were largely ignored. We really did not receive the
message until it was conveyed through photos and
TV video footage.
Receivers are the final link in the
communication process. They must accurately
receive and decipher your message. How well your
audience understands the message you intend will
depend on not only the previous factors, but also their
own knowledge, attitudes and context.
The process of communication is on going and
dynamic, is irreversible, requires perception of
meaning, and occurs in a situational context. There
are many barriers to effective, accurate
communication. These can be mechanical, involve
differing perceptions or values (not having the same
understandings), or be a matter of semantics, that is,
the use of words, images, or examples that are
beyond the receiver’s intellectual or cultural ability to
understand.
Non-communication is not possible. Every
word, every gesture communicates something to the
receivers, to your audience. In addition, once
communicated, they cannot be retracted. You want to
communicate your intended message and enhance
your professional reputation. You do not want to be
remembered for a lacklustre presentation and a
garbled message. First impressions are difficult to
overcome! Communicating well benefits you,
your audience, and society as a whole. Thinking
about communication as a process is useful because it
helps explain why we must establish the purpose and
goals of our message, why we need to know our
audience, what media we select, what meaning is
perceived, and more.

2. Individual / Nationality (Stereotypes)

“He would like to believe there is enough pity

in the air for black people and their lot, enough of a
desire to deal honourably with them, to make up for
the cruelty of the laws. However, he knows it is not
so. Between black and white there is a gulf fixed.
Deeper than pity, deeper than honourable feelings,
deeper even than goodwill, lies an awareness on both
sides that people like Paul and himself, with their
pianos and violins, are here on this earth, the earth of
South Africa, on the shakiest of pretexts. This very
milkman must know it. A year ago, he must have
been just a boy herding cattle in the deepest Transkei.
In fact, from Africans - in general from Colour
people - he feels a curious, amused tenderness
emanating. A sense that he must be a simpleton in
need of protection if he imagines he can get by on the
basis of straight looks and honourable dealings when
the ground beneath his feet is soaked with blood and
the vast backward depth of history rings with shouts
of anger. Why else would this young man, with the
first stirrings of the day’s wind fingering his horse’s
mane, smile so gently as he watches the two of them
drink the milk he has given them?
………………………
Downstairs he has tea with her and her
employer, an Englishwoman whose cool eyes takes
his measure and finds him wanting. This is a
European house - her eyes say, we do not need a
graceless colonial here, and a Boer to boot.
It is not a good time to be a South African in
England. With great show of self-righteousness,
South Africa has declared itself a republic and
promptly been expelled from the British
Commonwealth. The message contained in that
expulsion has been unmistakable. The British have
had enough of the Boers and of the Boer-led South
Africa, a colony that has always been more trouble
than it has been worth. They would be content if
South Africa would quietly vanish over the horizon.
They certainly do not want forlorn South African
whites cluttering their doorstep like orphans in search
of parents. He has no doubt that Astrid will be
obliquely informed by this suave Englishwoman that
he is not a desirable”.
 (From J.M. Coetzee, Youth, Secker&Warburg,
London, 2002, p.17, 86-87)

Discussion points:

How many nationalities are there in your

country - what languages do they speak?

What is the difference between “nation”,

“nationality” and “nationalism”?

People of the same nationality should all live in

the same country. Do you agree with this statement -
Why (not)?

What does a term such as “the European

nation” refer to? In what context do you think it may
be used?

One cannot choose one’s parents, one’s race,

one’s mother tongue or one’s nationality. How far do
you agree?
 What could be, in your opinion, the global
language of the future?

Are stereotypes simply examples of prejudice

or the embodiment of identifiable social trends and
cultural traditions? Are they subjective, objective or
somewhere in-between? - Overly generalized,
nationally specific or both?
Do you think Brits are reserved, inhibited or
distant? Do you consider that a negative trait? I know
many Brits who are proud of just such a trait.
However, perhaps Brazilians would consider such a
trait negative.
Are the French the most romantic?
Are men really better drivers than women are?
Are women really more sensitive than men, or
are women simply sociologically programmed to
display more emotion than men?
Why do we continue using stereotypes? There
must be a reason other than primitive instinct.
Is nationality now becoming a branded good?
Do governments actually support stereotypes,
seeking to associate certain positive values with their
industries, companies and goods? Of course they do.
Cultural propaganda is the name of the game. There
will not be physical conflicts in the future, only the
struggle of cultures.

(Viewing the Viewer: Stereotypical Stereotypes

by Adam Dalton)

Discussion Points:

Have you ever been the subject for stereotypes?

What kind (related to age, sex, race, religion,
vocation)? How did you react?
Do you use stereotypes yourselves - Under what
circumstances?

Let us look at some concrete examples. Many

countries make jokes about a particular group or
nationality being stupid. The Brits make jokes about
the Irish. The Poles make jokes about the police. The
French make jokes about the Belgians … and so it
goes on.
In addition, other core character traits are
identified in the humour of prejudice and stereotype.
The Irish make jokes about the Scots being tight-
fisted. … I am sure you know other examples that I
do not need to repeat here. …
 (Adapted from the Internet page of the
British Council Warsaw, 2001)

Stereotypes are often associated with clichés.

The word cliché comes from French and both terms
were originally used in the print industry, to
designate a solid printing mould which, once cast,
was difficult to change.

3. Democracy
(Adapted from: Principles of Democracy;
published online by the U.S. Department of State's
Bureau of International Information Programs.)

What do we understand by Democracy today?

What are the fundamentals of Democracy?

Democracy comes from the Greek word,

"demos," meaning people. In democracies, the people
hold sovereign power over legislator and
government.
 Although nuances apply to the world's various
democracies, certain principles and practices
distinguish democratic government from other forms
of government.
• Democracy is government in which power
and civic responsibility are exercised by all
citizens, directly or through their freely
elected representatives.
• Democracy is a set of principles and
practices that protect human freedom; it is
the institutionalization of freedom.
• Democracy rests upon the principles of
majority rule, coupled with individual and
minority rights. All democracies, while
respecting the will of the majority,
zealously protect the fundamental rights of
individuals and minority groups.
• Democracies guard against all-powerful
central governments and decentralize
government to regional and local levels,
understanding that local government must
be as accessible and responsive to the
people as possible.
• Democracies understand that one of their
prime functions is to protect such basic
 human rights as freedom of speech and
religion; the right to equal protection under
law; and the opportunity to organize and
participate fully in the political, economic,
and cultural life of society.
• Democracies conduct regular free and fair
elections open to all citizens. Elections in a
democracy cannot be facades that dictators
or a single party hide behind, but authentic
competitions for the support of the people.
• Democracy subjects governments to the
rule of law and ensures that all citizens
receive equal protection under the law and
that their rights are protected by the legal
system.
• Democracies are diverse, reflecting each
nation's unique political, social, and cultural
life. Democracies rest upon fundamental
principles, not uniform practices.
• Citizens in a democracy not only have
rights, they have the responsibility to
participate in the political system that, in
turn, protects their rights and freedoms.
• Democratic societies are committed to the
values of tolerance, cooperation, and
 compromise. Democracies recognize that
reaching consensus requires compromise
and that it may not always be attainable. In
the words of Mahatma Gandhi, "intolerance
is itself a form of violence and an obstacle
to the growth of a true democratic spirit."

On the surface, the principles of majority rule

and the protection of individual and minority rights
would seem contradictory. In fact, however, these
principles are twin pillars holding up the very
foundation of what we mean by democratic
government.
Majority rule is a means for organizing
government and deciding public issues; it is not
another road to oppression. Just as no self-appointed
group has the right to oppress others, so no majority,
even in a democracy, should take away the basic
rights and freedoms of a minority group or
individual.
• Minorities - whether because of ethnic
background, religious belief, geographic
location, and income level, or simply as the
losers in elections or political debate -
enjoy guaranteed basic human rights that no
 government, and no majority, elected or
not, should remove.
• Minorities need to trust that the government
will protect their rights and self-identity.
Once this is accomplished, such groups can
participate in, and contribute to their
country's democratic institutions.
Among the basic human rights that any
democratic government must protect are freedom of
speech and expression; freedom of religion and
belief; due process and equal protection under the
law; and freedom to organize, speak out, dissent, and
participate fully in the public life of their society.
Democracies understand that protecting the
rights of minorities to uphold cultural identity, social
practices, individual consciences, and religious
activities is one of their primary tasks.
Acceptance of ethnic and cultural groups that
seem strange if not alien to the majority can represent
one of the greatest challenges that any democratic
government can face. Nevertheless, democracies
recognize that diversity can be an enormous asset.
They treat these differences in identity, culture, and
values as a challenge that can strengthen and enrich
them, not as a threat.
 There can be no single answer to how minority-
group differences in views and values are resolved -
only the sure knowledge that only through the
democratic process of tolerance, debate, and
willingness to compromise can free societies reach
agreements that embrace the twin pillars of majority
rule and minority rights.

3.1. Constitutionalism and Independent

Judiciary1

A written constitution contains the most

important laws by which a nation's citizens agree to
live, and it outlines the basic structure of their
government. Thus, democratic constitutionalism -
based on ideals of individual freedom, community
rights, and limited government power - creates the
framework for governing a democracy.
Constitutionalism recognizes that democratic
and accountable government must be coupled with
constitutional limits on the power of government.

1
Web version created by David L. Heiserman
Published by Sweet Haven Publishing Services
 A constitution defines the basic purposes and
aspirations of a society, including the common
welfare of the people.
All laws must be written in accordance with the
constitution. In a democracy, an independent
judiciary allows citizens to challenge laws they
believe to be illegal or unconstitutional and to seek
court-ordered remedies for illegal actions by the
government or its officials.
A constitution provides the framework for
government power -- its scope of authority,
mechanisms for exercising that authority, and the
procedures for passage of future laws.
A constitution defines citizenship and
establishes the basis for deciding who shall have the
right to vote.
A constitution establishes the political,
administrative, and judicial foundations of the state
including the structure of the legislature and courts,
requirements for holding elected office, and terms of
office for elected officials.
A constitution lays out responsibilities of
government ministries and grants authority to collect
taxes and create a national defence force.
 In a federal system, the constitution divides
power among the various levels of government.
Since a constitution is written at a certain point
in time, it must be amendable so that it may adapt to
the changing needs of the people in the future. Since
the flexibility to meet unpredictable and
unforeseeable challenges in the future is important,
constitutions are usually written to specify general
principles of government.
Constitutions generally contain two different
types of rights - negative and affirmative rights.

o Negative rights tell the government what

it cannot do. These rights limit
government and prevent it from affecting
certain behaviours of its citizens. For
example, the government must refrain
from limiting free speech and the ability
of citizens to peacefully assemble, and
from illegal imprisonment.

o Affirmative rights tell the government

what it must do and citizens what they
are entitled to. Such "entitlements" may
include social, economic, and cultural
 rights in the form of government
guarantees of various social indicators.
There may be guarantees of primary and
secondary education for all boys and
girls, "well being" after retirement, or
jobs and health care for all citizens.

Independent and professional judges are the

foundation of a fair, impartial, and constitutionally
guaranteed system of courts of law known as the
judiciary. This independence does not imply judges
can make decisions based on personal preferences but
rather that they are free to make lawful decisions --
even if those decisions contradict the government or
powerful parties involved in a case.
In democracies, independence from political
pressures of elected officials and legislatures
guarantees the impartiality of judges. Judicial rulings
should be impartial, based on the facts of a case,
individual merits and legal arguments, and relevant
laws, without any restrictions or improper influence
by interested parties. These principles ensure equal
legal protection for all.
• The power of judges to review public laws
and declare them in violation of the nation's
 constitution serves as a fundamental check
on potential government abuse of power -
even if a popular majority elects the
government. This power, however, requires
that the courts be seen as independent and
able to rest their decisions upon the law, not
political considerations.
• Whether elected or appointed, judges must
have job security or tenure, guaranteed by
law, in order that they can make decisions
without concern for pressure or attack by
those in positions of authority. A civil
society recognizes the importance of
professional judges by providing them with
adequate training and remuneration.
• Trust in the court system's impartiality -- in
its being seen as the "non-political" branch
of government -- is a principal source of its
strength and legitimacy.
• A nation's courts, however, are no more
immune from public commentary, scrutiny,
and criticism than other institutions.
Freedom of speech belongs to all: judges
and their critics alike.
 • To ensure their impartiality, judicial ethics
require judges to step aside (or "recluse"
themselves) from deciding cases in which
they have a conflict of interest.
• Judges in a democracy cannot be removed
for minor complaints, or in response to
political criticism. Instead, they can be
removed only for serious crimes or
infractions through the lengthy and difficult
procedure of impeachment (bringing
charges) and trial -- either in the legislature
or before a separate court panel.
• An independent judiciary assures people
that court decisions will be based on the
nation's laws and constitution, not on
shifting political power or the pressures of a
temporary majority. Endowed with this
independence, the judicial system in a
democracy serves as a safeguard of the
people's rights and freedoms.

3.2. The Rule of Law and the Legislative

Power
For much of human history, rulers and law were
synonymous - law was simply the will of the ruler. A
first step away from such tyranny was the notion of
rule by law, including the notion that even a ruler is
under the law and should rule by virtue of legal
means. Democracies went further by establishing the
rule of law. Although no society or government
system is problem-free, rule of law protects
fundamental political, social, and economic rights
and reminds us that tyranny and lawlessness are not
the only alternatives.
Rule of law means that no individual, president
or private citizen, stands above law. Democratic
governments exercise authority by way of law and
are themselves subject to law's constraints.
• Laws should express the will of the people,
not the whims of kings, dictators, military
officials, religious leaders, or self-appointed
political parties.
• Citizens in democracies are willing to obey
the laws of their society, then, because they
are submitting to their own rules and
regulations. Justice is best achieved when the
very people who must obey them establish
the laws.
• Under the rule of law, a system of strong,
independent courts should have the power
 and authority, resources, and the prestige to
hold government officials, even top leaders,
accountable to the nation's laws and
regulations.
• For this reason, judges should be well
trained, professional, independent, and
impartial. To serve their necessary role in the
legal and political system, judges must be
committed to the principles of democracy.
• The laws of a democracy may have many
sources: written constitutions; statutes and
regulations; religious and ethical teachings;
and cultural traditions and practices.
Regardless of origin the law should enshrine
certain provisions to protect the rights and
freedoms of citizens:

A. Under the requirement of equal protection

under the law, the law may not be uniquely
applicable to any single individual or group.
B. Citizens must be secure from arbitrary
arrest and unreasonable search of their homes or the
seizure of their personal property.
C. Citizens charged with crimes are entitled to
a speedy and public trial, along with the opportunity
to confront and question their accusers. If convicted,
they may not be subjected to cruel or unusual
punishment.
D. Citizens cannot be forced to testify against
themselves. This principle protects citizens from
coercion, abuse, or torture and greatly reduces the
temptation of police to employ such measures. 2

Elected representatives in a democracy; whether

members of a parliament, assembly, or congress; are
there to serve the people. They perform a number of
roles essential to the functioning of a healthy
democracy.
Elected legislatures are the principal forum for
deliberating, debating, and passing laws in a
representative democracy. They are not so-called
rubber stamp parliaments merely approving the
decisions of an authoritarian leader.
• Oversight and investigation powers allow
legislators to publicly question government
officials about their actions and decisions,
and otherwise serve as a check on the
power of various government ministries --

2
Web version created by David L. Heiserman - Published by Sweet Haven
Publishing Services
 especially in the presidential system of
governing where the legislature is separate
from the executive.
• Legislators may approve national budgets,
conduct hearings on pressing issues, and
confirm executive appointees to courts and
ministries. In some democracies, legislative
committees provide lawmakers a forum for
these public examinations of national
issues.
• Legislators may support the government in
power or they may serve as a loyal political
opposition that offers alternative policies
and programs.
• Legislators have a responsibility to
articulate their views as effectively as
possible. However, they must work within
the democratic ethic of tolerance, respect,
and compromise to reach agreements that
will benefit the general welfare of all the
people -- not just their political supporters.
Each legislator must alone decide on how
to balance the general welfare with the
needs of a local constituency.
• Legislators often provide constituents with
a sympathetic hearing for their individual
complaints and problems -- along with help
in getting assistance from large government
bureaucracies. To do this, they often
maintain a staff of trained aides.
• National legislators are usually elected in
one of two ways. In plurality elections,
sometimes called "first past the post," the
candidate with the most votes wins. In the
proportional system, often used in
parliamentary elections, voters usually cast
ballots for parties, not individuals, and
representatives are chosen based on their
party's percentage of the vote.
• A proportional system tends to encourage
multiple, tightly organized smaller parties.
Plurality elections encourage a looser, two-
party system. Under either system,
representatives engage in the debate,
negotiation, coalition building, and
compromise that are the hallmarks of
democratic legislatures.
• Legislatures are often bicameral, with two
chambers, and new laws generally require
 passage by both the upper and lower
chambers.

3.3. Education and Democracy

Education is a universal human right. It also is a

means of achieving other human rights and it is an
empowering social and economic tool. Through the
Universal Declaration of Human Rights, the world's
nations have agreed that everyone has the right to
education.
Every society transmits its habits of mind,
social norms, culture, and ideals from one generation
to the next. There is a direct connection between
education and democratic values: in democratic
societies, educational content and practice support
habits of democratic governance.
• This educational transmission process is
vital in a democracy because effective
democracies are dynamic, evolving forms
of government that demand independent
thinking by the citizenry. The opportunity
for positive social and political change rests
in citizens' hands. Governments should not
 view the education system as a means to
control information and to indoctrinate
students.
• Governments should value and devote
resources to education just as they strive to
defend their citizens.
• Literacy enables people to stay informed
through newspapers and books. Informed
citizens are in a better position to improve
their democracy.
• Education systems in democracies do not
preclude study of other political doctrines
or systems of government. Democracies
encourage students to develop reasonable
arguments based on careful research and a
clear understanding of history.
• Private and religious groups should be free
to create schools or parents may choose to
teach their children at home.
• Government-run schooling must be equally
accessible to all citizens regardless of their
ethnic or religious backgrounds, gender, or
physical disabilities.
• Democratic norms and practices should be
taught in order for people to understand and
 appreciate their opportunities and
responsibilities as free citizens.
• Education for democratic citizenship
includes knowledge of national and world
history and of basic democratic principles.
• School curricula in democracies include
history, geography, economics, literature,
philosophy, law, the arts, social studies,
mathematics, and science courses available
to all students - girls and boys.
• Students should also be free to organize
clubs and activities where democratic
norms can be put into practice. For
example:

o Student government gives pupils

experience in the democratic process.
o Mock elections teach students about
citizen participation and encourage in
them lifelong voting habits.
o School newspapers educate students
about the role of a free media and
responsible journalism.
o Civic clubs promote a connection to the
larger community
 4. The European Union
A worldwide economic recession in the early
1980s brought with it a wave of 'euro-pessimism'.
Nevertheless, hope sprang anew in 1985 when the
European Commission, under its President Jacques
Delors, published a 'white paper' setting out a
timetable for completing the European single market
by 1 January 1993. The Communities adopted this
ambitious goal and enshrined it in the Single
European Act, which was signed in February 1986
and came into force on 1 July 1987.
The political shape of Europe was dramatically
changed by the fall of the Berlin wall in 1989. This
led to the reunification of Germany on 3 October
1990 and the coming of democracy to the countries
of central and Eastern Europe as they broke away
from Soviet control. The Soviet Union itself ceased
to exist in December 1991.
Meanwhile, the European Communities were
changing too. The member states were negotiating a
new treaty that was adopted by the European Council
(i.e. their presidents and/or prime ministers) at
Maastricht in December 1991. This 'Treaty on
European Union' came into force on 1 November
1993. The EEC was renamed simply 'the European
Community' (EC). Moreover, by adding areas of
intergovernmental cooperation to the existing
Community system, the Treaty created the European
Union (EU). It also set new ambitious goals for the
member states: monetary union by 1999, European
citizenship, new common policies - including a
common foreign and security policy (CFSP) - and
arrangements for internal security.
The new European dynamism and the
continent's changing geopolitics led three more
countries - Austria, Finland and Sweden - to join the
EU on 1 January 1995. The Union now had 15
member states and prepared for its most spectacular
achievement - replacing its national currencies with a
single European currency, the euro.
On 1 January 2002, euro notes and coins came
into circulation in 12 EU countries (the 'euro area').
The euro is now a major world currency, having a
similar status to the US dollar.
As the world moves forward into the 21st
century, Europeans must together face the challenges
of globalization. Revolutionary new technologies and
the Internet explosion are transforming the world
economy. However, these profound economic
changes bring with them social disruption and culture
shock.
Meeting in Lisbon in March 2000, the European
Council adopted a comprehensive strategy for
modernizing the EU economy and enabling it to
compete on the world market with other major
players such as the United States and the newly
industrialized countries. The 'Lisbon strategy'
includes opening up all sectors of the economy to
competition, encouraging innovation and business
investment, and modernizing Europe's education
systems to meet the needs of the information society.
At the same time, unemployment and the rising
cost of pensions are both putting pressure on the
member states' economies, and this makes reform all
the more necessary. Voters are increasingly calling
on their governments to find practical solutions to
these issues.
Scarcely had the European Union grown to
encompass 15 member states when another 12 began
knocking at its door. In the mid 1990s, it received
membership applications from the former Soviet bloc
countries (Bulgaria, the Czech Republic, Hungary,
Poland, Romania and Slovakia), the three Baltic
states that had once been part of the Soviet Union
(Estonia, Latvia and Lithuania), one of the republics
of the former Yugoslavia (Slovenia) and two
Mediterranean countries (Cyprus and Malta).
The EU welcomed this opportunity to help
stabilize the European continent and to extend the
benefits of European unification to these young
democracies. Accession negotiations with the
candidate countries were launched in Luxembourg in
December 1997 and in Helsinki in December 1999.
The Union was on the way to its biggest enlargement
ever. For ten of the candidate countries, negotiations
were completed on 13 December 2002 in
Copenhagen. The European Union had 25 member
states in 2004, and continued growing as more
countries joined in the years ahead.
More than half a century of integration has had
an enormous impact on the history of Europe and on
the mentality of Europeans. The member state
governments, whatever their political colour, know
that the age of absolute national sovereignty is over
and that only by joining forces and pursuing "a
destiny henceforward shared" (to quote the ECSC
Treaty) can their ancient nations continue to make
economic and social progress and maintain their
influence in the world.
 Integration has succeeded in overcoming age-
old enmity between European countries. Attitudes of
superiority and the use of force to resolve
international differences have been replaced by the
'Community method' of working together. This
method, which balances national interests with the
common interest and respects national diversity while
creating a Union identity, is as valuable today as
ever. Throughout the Cold War period, it enabled
Europe's democratic and freedom-loving countries to
stick together. The end of east-west antagonism and
the political and economic reunification of the
continent are a victory for the spirit of Europe - a
spirit that European peoples need more than ever
today.
The European Union offers a response to the
huge challenge of globalization - a response that
expresses the values Europeans believe in. The EU
offers, above all, the best possible 'insurance policy'
for a free and peaceful future.
 5. Issues Concerning Economics3

5.1. Overview

Economics has been recognized as a special

area of study for over a century. Economics and
economists are words that almost everyone has heard
of and uses. But what exactly is economics?
In recent years, the subject matter that
economists have studied has expanded, making its
boundaries less defined.
A good definition must explain what it is that
makes economics a distinct subject, different from
physics or psychology. Many good definitions are
possible, and each will focus on some important
aspect of the subject.
Philosopher Karl Popper's widely accepted
definition of science says that a statement is scientific
only if it is open to the logical possibility of being
found false. This definition means that we evaluate
scientific statements by testing them, by comparing
them to the world about us. A statement is non-
scientific if it takes no risk of being found false; that
is, if there can be no way to test the statement against
3
Adapted from: Robert Schenk – internet pages 1997-2002 and earlier dates
observable facts or events. Popper called this
distinction the "line of demarcation."
Most economists see their discipline as
scientific in Popper's sense of the word. Economic
theory makes statements about how facts fit together,
and there are constantly new sets of facts arising that
allow one to test the theory to see whether the facts
are as theory predicts. However, this process is more
difficult for economists than it is for physical
scientists.
There is a minority of economists, however,
who do not see economics as scientific in Popper's
sense. A group of economists called the Austrian
school, for example, has argued that economics starts
with assumptions and that economic theory is the
logically deduced results of those assumptions. If the
theory does not fit the facts, one cannot conclude that
the theory is wrong, but only that it is inappropriate
to apply the theory in that particular situation because
the initial conditions do not agree with the
assumptions of the theory.
Economists make a distinction between positive
and normative that closely parallels Popper's line of
demarcation, but which is far older. David Hume
explained it well in 1739, and Machiavelli used it two
centuries earlier, in 1515. A positive statement is a
statement about what is and that contains no
indication of approval or disapproval. Notice that a
positive statement can be wrong. "The moon is made
of green cheese" is incorrect, but it is a positive
statement because it is a statement about what exists.
A normative statement expresses a judgment
about whether a situation is desirable or undesirable.
"The world would be a better place if the moon were
made of green cheese" is a normative statement
because it expresses a judgment about what ought to
be. Notice that there is no way of disproving this
statement. If you disagree with it, you have no sure
way of convincing someone who believes the
statement that he is wrong.
Economists have found the positive-normative
distinction useful because it helps people with very
different views about what is desirable to
communicate with each other. Libertarians and
socialists, Christians and atheists may have very
different ideas about what is desirable. When they
disagree, they can try to learn whether their
disagreement stems from different normative views
or from different positive views. If their disagreement
is on normative grounds, they know that their
disagreement lies outside the realm of economics, so
economic theory and evidence will not bring them
together. However, if their disagreement is on
positive grounds, then further discussion, study, and
testing may bring them closer together.
If economists limit themselves to evaluating
whether or not proposed actions will achieve
intended results, they confine themselves to positive
analysis. However, most economists prefer a wider
role in policy analysis, and include normative
judgments as well.
Most statements are not easily categorized as
purely positive or purely normative. Suppose, for
example, someone says, "The minimum wage is a
bad law." Behind that simple statement are
assumptions about how to judge whether a law is
good or bad (or normative statements) and beliefs
about what the actual effects of the minimum wage
law are (or positive statements).
In a market economy, the ability of people to
obtain goods and services depends, with some
exceptions, on the marginal productivity of the
resources they hold. The most important resource is a
person's ability to work (human capital) but others
are ownership of natural resources and capital. Those
who hold resources that are highly valued will earn
large incomes, whereas those who hold no valuable
resources earn little or no income. This unequal
distribution of income that a market system produces
raises questions of whether or not a market system is
fair.
Fairness is a normative issue. It involves
judgments about what is good and what is bad. As a
result, economists cannot claim special expertise on
this issue. They often rely on arguments from
philosophers when they discuss fairness, and they
hold widely diverse beliefs. There are, however,
some insights from economics that can be useful
when one discusses issues of fairness.
Because people have different goals, unequal
incomes do not necessarily mean that the mechanism
for producing those incomes is unfair. Some people
have goals that can be met only if they earn high
incomes, whereas others have goals that require less
income but more leisure. A fundamental trade-off
that people face is a leisure-income trade-off. If Mike
Fleming wants more income, he must work more,
which means he sacrifices leisure. People who value
their leisure time highly will earn less income than
people who put little value on leisure, all things being
equal. In a world in which everyone had equal
abilities but different goals, people will earn unequal
incomes.
Of course, we do not live in a world of equal
abilities. Some people are smarter, more athletic,
more social, or in some other way more talented than
others. Some people--whether through bad genes, bad
nutrition, or bad cultural environment--cannot cope
by themselves in a complex world. Hence, even if
everyone had the same goals, people would earn
unequal incomes.
If you look at a situation and decide that it is
unfair because one person has too much and another
has too little, you probably are making a judgment
that compares goals. The judgment says that the
person with too much is satisfying goals that are less
worthy than those of the person with too little are.
We commonly make this sort of normative judgment;
our decision to give money to one charity rather than
another indicates that we find some goals more
deserving than others do. Our decision to give at all
suggests that we decide that the goals of someone
else are more worthy than our own "selfish" goals.
Economic analysis suggests that people earn
different amounts of income both because they have
different goals and different abilities (or resource
endowments, to use a more comprehensive but also
more abstract term). From this starting point, we can
examine a few common judgments on fairness.
One view is that fairness means everyone
should have an equal opportunity to succeed. In this
view, process matters--not results. This position sees
economic life as a race. In any race, some people are
faster than others are. As long as all contestants face
the same rules, the race is fair even though some win
and others lose. In the economic game, some people
fail and have low incomes because they made
mistakes or were unlucky or did not have enough
ability. Yet their failure does not mean that the
system is unfair, if no one erected obstacles in their
path. This view is sympathetic to a market system
A completely different view is the egalitarian
position, which judges: results--not process. It argues
that more equality of income is always better than
less, and that the best of all possible worlds is one of
complete equality. John Rawls has developed an
influential justification of egalitarian positions using
the notion of the social contract, an idea that Thomas
Hobbes and John Locke made famous in the 17th
century. Rawls asks what rules we would agree on if
we were designing a society that we then had to join,
assuming that we had no knowledge of how
successful we would be in that society. He argues that
most of us would want to join a society that ensures a
great deal of income equality because we are afraid
of risk. The egalitarian view tends to be
unsympathetic to market systems because they
generate very unequal incomes.
Both these views have internal inconsistencies.
Obtaining equal results requires the use of
government power, and only some will be able to
wield this power. Those who have the jobs of
equalizing incomes will have more power than those
who do not; equal income results in unequal political
power. Obtaining a system of completely equal
opportunity is impossible because the results that one
generation obtains help determine the starting points
of their offspring. People who do well in the
economic game will try to help their children succeed
by giving them a good childhood environment, a
good education, and inherited wealth.
A third viewpoint suggests that income should
be determined based on need. Though this view is
often associated with socialism, it has a very long
tradition in Christian thought, which is where the
socialists, a product of the 19th century, found it. A
position that equal work deserves equal pay, which is
a position consistent with the opportunity approach,
is inconsistent with the need approach.
To implement the need approach there must be
some way of measuring need. This measurement is
most practical in small-group situations, that is,
within groups where members know each other well
and where members have the same goals. It is hard to
implement in large groups of strangers who do not
know each other well and who may disagree radically
about which goals are worth attaining. One escape
from this problem has been to assume that everyone's
needs are identical, which collapses this point of view
into egalitarianism.
Modern societies have taken aspects of all three
viewpoints and established them as public policy.
Income taxes are progressive; that is, they take
greater percentages of income from those with big
incomes than from those with small incomes. This
policy can be justified from an equal results point of
view. Employment laws require equal pay for equal
work. The employer is prohibited from taking factors
such as personal need of an employee into account in
establishing pay. These laws make sense from an
equal opportunity point of view. Finally, tax laws and
some transfer payments favour families with more
children and higher medical bills. The need viewpoint
can justify this aspect of taxes.
In addition to income distribution, social
mobility and status may shape views on fairness. For
example, would you rather live in a society with a
great deal of inequality but with a lot of social
mobility, or in one with less inequality but also less
mobility? As for status, would you rather have an
income of $30,000 and live in a society in which this
income put you at the top of the social pyramid, or
would you prefer another society in which you would
be in the middle and earn $45,000?
Economics cannot tell you what view of
fairness are correct; you must make up your own
mind about how important various characteristics are.
Facts in economics need to be organized in
some way before they can tell one anything. By
themselves, they are meaningless. Thus, the study of
economics involves more than a memorization of
facts. Economics tries to organize facts with its
theory. Good theory tells us which facts are important
and which are not, and what is cause and what is
effect. The study of economics involves learning how
to organize facts the way economists do.
People who do not understand economics still
try to make sense of the world around them by trying
to see pattern in the facts they observe. Sometimes
they use a simplistic "good-versus-bad" model. In a
good-versus-bad model, two conflicting groups are
classified as good people and bad people. These
groups are usually involved in a zero-sum game: one
person's gain is another's loss. Further, evil motives,
possessed by the bad people, lead to bad results
unless these people are in some way controlled. Good
motives lead to good results.
An economic model suggests that, in cases of
shortages, one should search for government
regulation of prices. The good-versus-bad model does
not suggest that such regulation is something one
should look for. In fact, there were price restrictions
in place at the time, and such restrictions can lead to
shortages. The good-versus-bad view of the world is
attractive because we are able to understand the
model at a very young age and because we see the
model used so often: in fairy tales, in comic books, in
movies, and in television shows, among other places.
Because we know how to use this model, and because
our culture discourages use of alternative
explanations such as fate or mystery, it is easy to fall
back to this model if we do not have a more
sophisticated model to explain our world.
Economic issues affect us all and most people
have opinions about them. These opinions may be
based on a good-versus-bad view, some other non-
economic framework, or simply slogans that are often
repeated. Often the hardest problem students have in
learning about how economists interpret the world is
to unlearn their old, non-economic views.
Economic education involves learning to see
reality from new perspectives. Sometimes these new
perspectives may surprise you. They may even shock
you. However, if you take the time to look at the
reasoning behind these economic ways of looking at
things, you will find that they consist of carefully-
thought-out-and-applied common sense.
A central question in economics is the
relationship between an individual's interests and the
interests of the group. An examination requires the
analytical tools of microeconomics. Once one
understands the economic theory of consumer
behaviour and the theory of the firm, one can come
back to the invisible-hand question--the question of
whether individual action serves the good of the
group--using the concept of economic efficiency.
A prime purpose of microeconomics is to ask
what sort of economic system, if any, brings harmony
rather than conflict between the individual and the
group. For economists, the concept of economic
efficiency is a key to discussing this question.
Efficiency is a relative term. It is vital that this
point be understood. Efficiency is never absolute; it is
always relative to some criterion. This can be seen
when one asks if farms are more efficient in the
United States or China. The farming techniques in
China are more efficient than those in the United
States when measured in terms of output per unit of
land, output per unit of fossil fuel, or output per unit
of machinery. The farms in the United States are far
more efficient in terms of output per man-
hour/person-hour.
The criterion for economic efficiency is value.
A change that increases value is an efficient change
and any change that decreases value is an inefficient
change. A situation, which is economically efficient,
may be inefficient when judged on different criteria.
Value is subjective. A thing has value only if
someone wants it. How then can we know if value is
maximized? If there is some change that makes
someone feel better off, but making this change does
not make anyone feel worse off, then the original
situation was not one of highest value. Improvement
was possible. When the highest value is reached, then
any possible change that helps anyone must harm
someone else. This way of defining economic
efficiency, Pareto optimality, is named after Vilfredo
Pareto, an early mathematical economist.
Economists are interested in economic
efficiency for two reasons, one positive and the other
normative. The positive reason is based on the
observation that people search for value. Given
enough money, any occupation, no matter how
immoral or risky, will attract people. The normative
reason stems from a desire to make policy
recommendations. It is possible to discuss some
aspects of policy without normative assumptions. An
economist can predict, for example, whether a policy
will or will not achieve the goals set for it. However,
economists often want to do more. They often want
to compare two policies or two situations and decide
which is better. To decide which is better requires
some sort of basis for ranking situations. Thus, if they
want to ask whether government regulation of utility
prices, a tariff on steel, or a program to train unskilled
workers helps society, economists need a criterion on
which to base their answer. Economists generally use
the criterion of economic efficiency to evaluate
situations, though they often supplement it with other
considerations because economic efficiency is not the
only way to judge the relative merits of two
situations.
The value maximized in the notion of economic
efficiency reflects the goals people have. Not all
goals are equal in determining value. The goals of
some are given more emphasis than the goals of
others. In a market economy, the goals of the rich are
given more weight than the goals of the poor.

5.2. Goods & Production - Buyers & Sellers

An exchange is a voluntary agreement between

two people, in which each gives something to the
other and gets in return something that he considers
of greater value. Economics focuses almost
exclusively on interactions based on exchange.
People engage in exchange to attain goals.
Exchange is not just taking; in order to get, one must
give. People must do things that they do not want to
do in order to get things that they desire. The
unpleasant part of this process is work and
production, and the pleasant part is consumption.
Work and production are not pursued for their own
sakes, but only because without them we cannot
consume.
Thus, the economy is divided into two sectors:
one concerned with producing goods and services,
and the other with consuming them. Resources are
converted into goods and services by business, and in
this transformed state travel back to consumers.
Money flows in the opposite direction. These flows
involve two markets in which exchange takes place:
the resource or factor market in which business buys
resources, and the goods and services market in
which business sells goods.
The word "firm" takes on two meanings in
economics. Sometimes, the word refers to an agent
that produces something. Other times, it refers to a
business organization. The second meaning of the
word is more restrictive than the first. A self-
employed farmer is not a firm in the second meaning
because he is not an organization, nor is a non-profit
organization because it is not a business. Yet both are
firms in the first meaning.
 The word "industry" cannot be used
interchangeably with "firm." An industry is defined
as all firms producing similar products. It can contain
one firm or millions of firms. In practice, there are
two complications with this definition. First, there is
no clear rule for deciding how similar products must
be before they belong in the same industry. For
example, what other products belong in the industry
that Coca Cola is in? Does Pepsi Cola, or Seven Up,
or orange juice, or milk, or beer belong in the same
industry? There is no clearly correct answer. Second,
the number of firms in an industry depends on the
price of the product. Firms enter as price rises and
exit as price falls.
A firm must obtain inputs. Inputs include raw
materials, energy, machinery, office space, workers,
and anything else needed to produce output. Output
may either be a tangible good such as a pair of shoes
or an automobile, or a service such as a haircut or a
medical check-up. The firm must sell its output to
someone else. The economic theory of the firm is an
analysis of the way the firm must perform to make a
profit.
 What determines the amount of a good or
service that people are willing and ready to sell
during some period of time?
Sellers intend to make a profit from their sales,
and economists assume that they want their profits to
be as large as possible. Because profit is the
difference between benefits in the form of revenues
and costs, anything that influences revenues or costs
can influence the amounts sellers want to sell.
Revenue is found by multiplying the price of the
product by the amount sold.
Because a higher price leads to higher profit,
and a higher profit leads to a larger amount that
sellers will want to sell, one expects that a greater
quantity should be supplied when the price is higher.
Thus, the relationship between quantity that sellers
will sell and price should be direct or positive.
Though the positive relationship is usually the
case, there are a few exceptions. An example is
labour - as wages go up, people may decide to enjoy
their higher wages and work less.
The cost of something is what must be given up
in order to get it. When costs are only monetary, they
are easy to see. Production costs are determined not
only by the prices of inputs, but also by technology.
Technology represents the knowledge of how inputs
(such as labour, raw materials, energy, and
machinery) can be combined to produce the product.
Costs may be non-monetary as well as
monetary. For example, a farmer takes the expected
price of soybeans into account in deciding how much
corn to plant. If soybeans are expected to sell for a
high price, then the farmer may find that shifting
some of his land from corn production to soybean
production will increase profit. The decision to plant
corn means that the farmer gives up the opportunity
to plant soybeans (as well as giving up the money for
seed, fuel, equipment, and labour). Because we have
defined cost as what must be given up to get
something, the prices of other goods that sellers could
otherwise produce and sell must be part of the
calculation of the cost of production.
There are other factors that can influence the
amount of a product that sellers will sell, such as the
number of sellers, expectations about the future, and
whether or not there are by-products in production
that are valuable.
A market exists when buyers and sellers interact
to exchange products.
 What determines the amount of a product that
people are willing and ready to buy during some
period of time? For example, what determines the
amount of hamburger purchased in Chicago during a
week? Economists answer such questions by
examining the costs and benefits of buying the
product. When any of the costs or benefits changes,
the amount of the product, which people will buy,
should also change.
The benefits a person gets from a product
depend on his goals. These goals are referred to in
many ways. The words "tastes," "wants," "needs,"
"preferences," and "usefulness" all refer to goals.
When people's goals change, the amount of benefit
they get from the good changes, and this will cause
them to change the amount of the good they want to
buy.
Goals (or preferences or tastes) depend on many
factors, such as the age of people and the amount of
education they have. Social custom is an important
determinant of preferences and can account for many
differences in demand among groups.
There is too much diversity in the ways buyers
and sellers interact to explain everything.
 The ordinary consumer when he goes to the
store, he can buy one or twenty gallons of milk with
no effect on price.
In the list of factors that affected buyers and
sellers, the only common factor is price. Few people
who buy hamburger know or care about the price of
cattle feed or the details of cattle breeding. Cattle
raisers do not care what the income of the buyers is
or what the prices of related goods are unless they
affect the price of cattle.
If information is not good, the same product
may sell for a variety of prices. Often, however, what
seems to be the same product at different prices can
be considered a variety of products. A pound of
hamburger for which one has to wait 15 minutes in a
checkout line can be considered a different product
from identical meat that one can buy without waiting.
A task of the firm is to obtain resources needed
to produce a product. For each resource, the firm
faces limitations based on the preferences of sellers
and on the actions of other firms that use the
resource.
In the world we live in, greater amounts of
income must be purchased with more work - which
means less leisure.
 Higher wages have two effects on the leisure-
work decision, and these two effects pull in opposite
directions. A higher wage rate increases the benefits
of working, causing people to substitute work for
leisure. Higher wages also increase income, and
people want more leisure with a higher income.
If a firm hires two clerks who do exactly the
same work, and pays one $4.00 per hour and the
other $6.00 per hour, the lower-paid one will be
unhappy and may refuse to work for the lower pay.
On the other hand, many firms do not publicly
disclose what they pay various people, and
discourage employees from discussing salaries. To
the extent that people are unaware of what others are
earning, the firm may be able to pay different prices
for the same resource, or in economists' jargon, to
price discriminate.
For economic agents to act means that prices
are important in deciding what goods are produced,
or, in the jargon of economists, they help allocate
resources. Consumer preferences, the relative
availability of resources, and technology determine
how much of each good and service will be produced
in a market system.
 Citizens, as consumers, vote in the marketplace.
The marketplace offers consumers a variety of
products, and each producer tries to convince
consumers that his product is best. Consumers vote
for products by spending their money. Products
receiving many votes will be profitable and will
continue being produced. Products that do not receive
enough votes will die. Voting provides feedback to
producers. It tells them whether their performance is
acceptable or not. Voting implies that consumers, not
producers, ultimately decide what will be produced in
a market economy. This power of consumers is often
called "consumer sovereignty."
There are times in which a society may not
want the consumer to be sovereign. It may decide that
there is some social goal more important than
individual goals. When nations are at war, for
example, they usually want to lessen consumer
sovereignty. As a result, most nations reduce the
importance of market decisions and increase the
importance of allocation by government direction and
regulation in times of war.
 5.3. The Business Firm & Consumer
Behaviour

The business firm is the productive unit in an

exchange economy. In order to survive, a firm must
deal with three constraints: the demand for its
product, the production function, and the supply of its
inputs. When the firm successfully deals with these
constraints, it makes a profit.
When most people think of a firm, they think
first of production. Economists describe this task with
the production function, an abstract way of discussing
how the firm gets output from its inputs. There is one
rule that seems to hold for all production functions,
and because it always seems to hold, it is called a
law. The law of diminishing returns says that adding
more of one input while holding other inputs constant
results eventually in smaller and smaller increases in
added output. What the law of diminishing returns
says is that as one continues to add workers;
eventually one will reach a point where increasing
returns stop and decreasing returns set in.
The law of diminishing returns is not caused
because the first worker has more ability than the
second worker, and the second is more able than the
third. By assumption, all workers are the same. It is
not ability that changes, but rather the environment
into which workers (or any other variable input) are
placed. As additional workers are added to a firm
with a fixed amount of equipment, the equipment
must be stretched over more and more workers.
Eventually, the environment becomes less and less
favourable to the additional worker. People's
productivity depends not only on their skills and on
abilities, but also on the work environment they are
in.
If one increases all inputs in equal proportions,
there is no law to predict what will happen to output
in this case and leads to returns to scale. It is
important for determining how many firms will
populate an industry. When increasing returns to
scale exist, one large firm will produce more cheaply
than two small firms will. Small firms will thus have
a tendency to merge to increase profits, and those that
do not merge will eventually fail. On the other hand,
if an industry has decreasing returns to scale, a
merger of two small firms to create a large firm will
cut output, raise average costs, and lower profits. In
such industries, many small firms exist rather than a
few large firms.
 Products require various types of labour and
capital, energy of various sorts, and raw materials.
One of the key inputs, especially in larger firms, is
managerial ability. Inputs do not combine by
themselves to produce output. Someone must have
knowledge of how to combine inputs and to
coordinate the production process.
If business decision-makers lack information or
are incompetent, the firm will not make the best use
of available resources. Alternatively, if morale is bad
in a firm, people may work poorly and produce less
than they could.
Creativity in the form of new technology or
new management techniques may loosen the
boundary that the production functions represents and
may make possible greater profit.
For a firm to be economically efficient is that it
be on its production-possibilities frontier. If it is not
on the production-possibilities frontier, more could
be produced with the given resources and technology.
Because greater production would increase value, any
position below the production-possibilities frontier is
inefficient.
To be on the production-possibilities frontier,
all resources must be used. Unemployed resources
indicate that more goods and services could be
produced. In addition, resources must be used
properly. If society randomly assigns people to jobs
or if it assigns jobs on the basis of political reliability,
it will not produce as much as it could.
Economists conventionally assume that firms
attempt to maximize profit. This assumption has been
a source of controversy, in part simply because the
word profit is a bit nebulous. One might think that it
is well defined because each year thousands of firms
announce to the public exactly what their profits are.
Profit emerges as a residual; something left over after
costs have been paid.
The grocery or restaurant may seem to have a
profit when costs are subtracted from revenues, but
this may be only because the owners do not pay
themselves a wage. When their time is valued at even
low levels, the "profit" may disappear. On the other
hand, the family farm may have a profit, but only
because it neglects to take into account a return on
the land. If this return is computed on the basis of
what rent could be obtained on the land, and if an
allowance is made for the value of the farmer's
labour, there may be little or no profit.
 Much of corporate profit can reflect an implicit
return on investment. If the corporation has a large
investment in capital and this entire investment was
financed by borrowing, then the return on capital is
captured in the interest payments the firm makes. But
if the investment is not financed by borrowing, then
the return on it will be reported as profit in the
income statement.
The economic definition of profit is the
difference between revenue and the opportunity cost
of all resources used to produce the items sold. This
definition includes implicit returns as costs. Because
profit is a surplus in this definition, it should not exist
in industries in which entry is easy. Whenever a
surplus exists, new firms should flow into an
industry, bidding up the price of resources and
bidding down the price of output until profit in the
economic definition is eliminated. Profit should not
exist in long-run equilibrium.
Profit does exist in the real world, and there are
several explanations that economists have for it.
Some economists simply consider it as an indication
that the economic system is in perpetual
disequilibrium. Joseph Schumpeter, for example, saw
profit as a return to a successful entrepreneur. The
entrepreneur, who finds an opportunity where no one
before him saw one, and takes advantage of this
opportunity, will make a profit. However, this profit
will be temporary because as time goes on, others
will follow him and erode his profit. Others see profit
as an indication that forces of competition may not be
strong, and that in some industries barriers to entry
exist. Still other economists have argued that profit is
a special sort of implicit return, a return for bearing
risk. Those who are willing to take more risk will, on
the average, earn higher returns.
After one includes implicit costs as part of
costs, an accurate measurement of profit is
impossible, which is a major reason why accountants
do not try to measure the economic concept of profit.
This obviously causes problems if one wants to test
whether or not firms try to maximize profits. An
alternative way to approach the measurement
problem begins with the Schumpeterian notion of
profit, which is that it comes from the discovery of
opportunity. A discovery of an opportunity should
increase the discoverer’s wealth. Thus, a way to
measure profit is to try to measure unexpected
changes in wealth - wealth increasing faster than a
normal rate of return. If one sees people whose
wealth is increasing more rapidly than it would if
their assets were entirely in the form of high-grade,
short-term bonds, one could conclude that they had
found a profitable opportunity. There are
measurement problems here as well, however. Much
of people's assets is in the form of investment in them
- human capital - and is not easily measured.
Do firms try to maximize profits? For example,
suppose a humanitarian opened a business with a goal
of helping the poor. He might keep prices below a
level at which accounting profits are maximized. Yet
one can argue that if the humanitarian raises prices,
his (opportunity) costs increase because he must
partially forgo the goal of helping the poor.
Most firms do not have a single decision-maker.
Instead, they are made up of an assortment of
individuals, each using the firm to attain his own
goals. Managers pursue goals; stockholders pursue
goals; blue and white-collar workers pursue goals;
but the firm does not.
The assumption that firms attempt to maximize
profits is inconsistent with the underlying
methodology of microeconomics, which assumes that
all decision-makers are individuals.
 One attempt to ground the assumption of profit
maximization on individual behaviour appeals to the
principal-agent problem. An agent acts on behalf of
another person, called a principal. How can the
principal be sure that the agent acts in the principal's
interest? The principal must restrict the agent in some
way so that it is in the agent's interest to act in the
interest of the principal. The most common way to do
this is to tie rewards with performance.
Payment on a commission basis is an important
way to solve the principal-agent problem. When one
hires a lawyer to sue on a civil matter, an auctioneer
to sell one's belongings, or a real-estate agent to sell
one's house; or when a movie star hires an agent to
seek employment, payment is done with
commissions. When the agent does a good job, he or
she is paid a lot. When the agent does a poor job, he
or she is paid little or nothing.
Sometimes, the principal can protect himself
with a contract that specifies how the task is to be
performed and what the price will be. The ability to
use the courts to enforce the contract protects the
principal. The principal-agent problem is one of
control: how does the principal control those working
on his behalf? Once one starts looking for cases of
this problem, one finds them everywhere. How do
shareholders control management, citizens control
government, or management control employees? The
principal-agent problem is everywhere because we
live in a world of interdependence and specialization.
The principal-agent problem occurs in several
places in the firm, including in the relationship
between legal owners and hired managers.
Stockholders own shares because they believe that
this ownership will increase their wealth. Managers
work for the firm primarily because it provides them
with income needed to buy goods and services, and
because their positions provide them with prestige
and authority. The threat of a takeover or hostile
merger provides stockholders with their most
effective constraint on managerial action. If managers
perform poorly at making profits, shareholders will
sell their shares because they will not achieve their
goal of increasing wealth. The lower value of the
company is an inducement for other management
groups to buy out the company and replace
management. If the new managers can improve
performance, they can capture at least some of the
increased value of the firm.
 Some economists have tried to construct a
theory of the firm in which the firm decides prices by
a mark-up over costs. Grocery stores, for example,
mark up different products by different percentages,
and they have a much smaller average mark-up than
furniture stores have.
If a firm marks up a product by 50% and finds
that it does not make a profit at that price, it tries
another percentage. When it finally finds a mark-up,
which generates a profit, it will stick with it. Real
businesses rely much more on trial and error than on
sophisticated, mathematical analysis.
In a competition for profit, those firms that do
maximize, whether intentionally or by accident, stand
the best chance of survival and growth. Setting up a
goal such as "quality at a reasonable price" may be
better for both employee morale and consumer
reception than a more straightforward "profit-first"
goal.
Consider, for example, rent controls, a popular
form of a price ceiling. If the demand curve and the
short-run supply curves are inelastic, then a sizable
drop in rents may result in a very small shortage. The
benefits to consumers will, in the judgment of most,
clearly outweigh the costs to the consumers. Further,
the short-run supply of housing should be quite
inelastic because apartment buildings take time to
build and even longer to wear out.
But apartment buildings do wear out, and they
wear out much faster when they are not properly
maintained. Effective rent controls discourage the
construction of new buildings and encourage the
retirement of old buildings. Though the long-run
costs to consumers may outweigh the benefits, the
program may remain politically popular because
those who benefit by living in rent-controlled
apartments can vote, whereas those harmed cannot
vote since the shortage of housing forces them to live
in other political jurisdictions.
The most visible price floor in the United States
is the minimum wage. The U.S. Congress passed a
minimum wage law in 1938 and has raised its level
and extended its coverage several times since then.
The stated goal of the minimum wage is to help the
poor. It will not directly affect most workers because
they have wages that are above the minimum. Only
those workers who are earning less than the minimum
will be directly affected.
Economists have done numerous studies to try
to discover the effects of the minimum wage. Most
studies suggest that the minimum wage does have
some adverse employment results. They find that the
minimum wage results in unemployment for some,
especially those whose skills and abilities are very
low and higher wages for others.
Mainstream macroeconomists view recessions
as a case of market failure. There are workers who
would like to work but cannot because no one is
willing to hire them. Their lack of income creates
consumers who would like to spend but who cannot
because they do not have the funds to do so. As a
result, there are businesses that would like to produce
and hire more workers, but cannot because there is
not enough demand for final output. The circle is
complete, and there is something not working
properly.
The traditional explanation for this situation
was a failure of wages and prices to adjust quickly
enough. A change in spending drives the economy
away from equilibrium, but sticky wages and/or
prices prevent rapid adjustment to a new equilibrium.
Because wages and prices do not adjust, output does.
If markets are always in equilibrium, then how
do we explain the fluctuations in business activities
that have been obvious for over two centuries? An
important cause is fluctuation in the rate of
technology change.
When there is a technological shock raising real
wage, people will work more causing output to surge,
and when there is a technological shock lowering real
wage, people will withdraw from work, causing
output to fall. This pattern is what we observe as
booms and recessions. The patterns we observe are
possible and are a reminder of how little we know for
certain in macroeconomics.
People are not rational calculating machines.
The economists and psychologists studying consumer
behaviour have suggested that our mental abilities
cannot process the economic information in our lives
and in order to deal with it, we develop mental
accounting systems. Sometimes, these systems are
more than mental, as when families have separate
savings accounts for various items. They will often
borrow money rather than dip into one of these
special accounts, though a calculating-machine mind
would never do that.
If we can be fooled by the way situations are
framed, people selling things to us should be smart
enough to take advantage of this computational
defect. There are a number of situations in which this
seems to happen.
We are more pleased with many small gains
than one big gain of equal magnitude--we would
rather get our Christmas presents in lots of boxes
rather than one big one. There are innumerable sales
pitches that promise something free if and only if we
buy a product. If we think about this, we realize that
nothing is free--we are paying for the complete
package. Yet, the popularity of this type of sales pitch
suggests that it works.
Alternatively, we are less affected by one big
loss than a number of small ones of equal value. One
of the appeals of credit cards is that they give us the
bad news as one number. In addition, sellers know
that when we make a large purchase, they have an
opportunity to sell us even more. If we are paying
$100,000 for a house, an extra $1000 does not seem
to be much to add on some conveniences. However,
if we see the extra $1000 as a completely separate
transaction, we may react in a very different way.
Though the free trial with money-back
guarantee is a way to signal quality, it also takes
advantage of our mental accounting. Once we have
an item at home and in use, it becomes part of the
status quo.

5.4. Economic Decisions

If people act based on self-interest and there are

no restrictions on their behaviour, the results will not
be in the interests of the group.
Ownership encourages decision-makers to
consider all the costs and benefits of their decision.
A more direct way is to have a strong central
authority that regulates people's behaviour and
punishes deviations. Hunting regulations, for
example: Wild ducks are owned by no one. As a
result, the problem of the commons should apply, and
ducks should be hunted to extinction. They are not
because governments set limits on when and where
ducks may be hunted, and on how many ducks each
hunter may kill. To the individual hunter, these
restrictions may seem as irritating limitations on his
freedom, but without them, hunters as a group would
be much worse off.
The use of central authority as a way of
coordinating behaviour is widespread. It is the
method that allows large business firms to exist. The
boss coordinates his subordinates, directing them to
actions that are in the interest of the all those who
make up the firm. This solution was used in an
extreme form in the socialist economies of Eastern
Europe and Asia. These economies were designed as
if they were one giant firm. Government
bureaucracies made the bulk of economic decisions,
such as what to produce and how to produce it.
Which method, the market or central direction,
is better? Evidence suggests that sometimes the first
is and sometimes the second is. There are costs to
using either and, as a result, no country totally relies
on either.
Those who designed the Soviet economic
system began with a belief that "the problem with
capitalism is that it produces for profit instead of for
people's needs". They set out to build a system that
produced directly for people's needs and not at all for
profit A system of central planning evolved; a system
in which all decisions about what people needed were
decided from the top.
To see how this system worked, consider how
the operator of a shoe factory in the United States
would make decisions. His major concern would be
whether he could sell at a profit the shoes he made. In
the Soviet Union, however, profit was of no concern
to the manager of the state-owned shoe factory.
Neither did he worry about selling the shoes. His only
concern was to produce what he was told to produce,
and if he could do that, both he and the workers of
the plant received sizable bonuses. The problem the
Soviet Union had was that it is very difficult to
specify in physical terms what a manager should do.
(If you do not believe this, try to write down a set of
instructions specifying what sort of shoes should be
produced. Remember, instructions to produce "good
shoes" or "attractive shoes" involve instructions that
are not measurable.) The Soviet Union produced
huge numbers of shoes that no one would buy
because they were of such low quality.
A reason that designing effectively is so
difficult is that information and knowledge are
scarce. People have a limited capacity to know. In
small groups, people know a great deal about others
simply from day-to-day interaction. But in large
groups, knowledge about others requires expenditure
of time and effort. For a modern, complex economy
to function well, people must coordinate their actions
with the actions of many people, but all of these
people have very limited knowledge of how their
actions fit into the big picture.
Portfolio choice involves decisions about the
way we want to hold our assets (or to structure our
liabilities). It is a fancy term for something we do all
the time. For example, a yard sale is an example of
portfolio adjustment. People holding yard sales are
attempting to convert assets in the form clothing and
household items into cash. They are not changing the
amount of assets they have, but rather the form in
which they hold them.
From a macroeconomic perspective, most
important cases of portfolio adjustment involve
financial assets. When we look at financial assets,
there are three characteristics that most people want
to have. First, they like assets with low risk. Second,
they want assets that are liquid, that can be converted
to money and spent easily. Third, they like assets that
give them a high rate of return. Because no assets
combine all three characteristics, people face
tradeoffs. If they want a higher return, they usually
have to accept more risk or less liquidity. For
example, investment in stocks can be quite risky.
With a system of central planning, the
government decides what the priorities of the society
will be and implements these priorities through a
central planning agency. However, central planners
cannot simply issue orders and expect them to be
obeyed. They must first obtain information about
what the factories, mines, and farms in the nation are
capable of producing. The central planning agency
could send out questionnaires, but there is no
assurance that the answers that would come back
would be truthful because, despite the socialist dream
that men should act in total selflessness--for the good
of the society as a whole--this does not seem to be the
way that people actually act in the real world. It
certainly has not been the way that men have acted in
nations that adopted socialism.
The central planning agency wants the factories,
mines, and farms to produce as much as possible. It
must reward those who produce up to their potential
and penalize those who do not. Rewards and
penalties introduce an incentive to lie when the
central planning agency tries to determine potential.
If the plant, mine, or farm manager underestimates
potential and the central planners believe this
estimate, the chances that the production unit will
appear to be a good performer are enhanced.
 In a modern economy, there are a tremendous
number of linkages and interdependencies. Thus, any
change in production of one-product sets off a
cascade of other changes needed to support the first
change.
Between 1920 and 1940, a number of
economists debated about whether a centrally
planned economy could match the performance of a
decentralized market economy. One of the most
insightful of these economists was Friedrich Hayek,
who argued that information is widely scattered in
society and cannot be effectively collected for use by
a central authority making production decisions for
the entire economy. Rather, the existence of market-
determined prices communicates vital information
that encourages individuals not only to use whatever
information they have about production of goods,
availability of resources, and how to satisfy
consumers' desires, but also to actively search for
more information. The market, said Hayek, was a
way a society minimized the effort needed to
discover and communicate information.
Economists have little to say about small-group
situations. The realm of the economist has been
large-group situations, in which individuals interact
with others who they do not know well or at all. In
these situations, the assumption of self-interest seems
to serve quite well even if it is not literally true. The
area in which the analytical tools of economics have
been most useful has been the area of exchange.
In small groups, the role of exchange is
replaced with gift giving. A member of a family who
has no food will be given food by those who do.
However, gift giving usually has strings attached.
People who receive gifts are expected to reciprocate,
to give back something in the future. This reciprocity
helps bind small groups together.
Exchange does not bind people together in the
same way. Two people exchange only when both
benefit. Neither incurs a social obligation as a result.
In fact, where social obligations exist, exchange may
not work well. Most people are uncomfortable
negotiating a purchase from or sale to a close friend.
Exchange allows for extremely complex
interactions among strangers. When you use a pencil,
for example, you benefit from efforts of hundreds of
people who in some way contributed to getting that
pencil to you. Wood had to be grown, cut, and
shaped. Graphite had to be mined, transported, and
processed. Iron had to be mined, refined, and
moulded. The paint and eraser each required their
own processes. All of the many people involved are
probably total strangers to you.
Most of economics is devoted to discussing
exchange, but economists also spend time examining
other topics. Of those other topics, the one that has
drawn the most research is the study of government.
However, the economic theory of government is less
advanced than the theory of exchange for at least
three reasons. First, specific individuals are often
very important in government, and economics does
not deal well with specific individuals. In monarchies
and dictatorships, for example, the decisions of one
individual may outweigh the decisions of all others.
Economics seeks regularities in social life, and those
regularities are more likely to occur when no one
individual has appreciable effects on the group.
Economists usually assume that people are
motivated by self-interest, but for many years, they
implicitly assumed that once the government
employed a person, his motivations changed to
unselfish and his knowledge became infinite. This
assumption allowed economists to treat the
government as a solution to problems. If, for
example, the private market did not perform well, the
government could remedy the problem. It was only in
the 1960s and 1970s that economists fully realized
that they had made what was for them a most unusual
assumption about behaviour. Some of the most
interesting and informative research undertaken in the
1970s was that which asked what would one expect if
one assumes that those who work for the government
are in fact no different from the rest of us, and that
they seek only their own self-interest. This research
suggested that the government might often make a
bad situation worse.
Self-interest may not work as well in politics as
in exchange. Politicians can and do make use of
people's small-group responses. For example, many
people feel loyalty to nation, party, or political
personality. This loyalty can alter behaviour from
what it would be if based only on self-interest.
The future always brings surprises. Sometimes,
the surprises are nice, but often they are unpleasant.
Many people want ways to protect themselves from
the unpleasant surprises. They are willing to pay for
protection against risk and uncertainty.
Where some people consider risk a problem,
others see it as an opportunity. A speculator is one
who takes risks in the hope of making a profit,
usually by trying to forecast future prices and betting
his money that he is correct. If a speculator expects
the price of gold to be higher in a year than it is now,
he can buy gold and wait. If he is right, he will make
a profit on his action, while if he is wrong, he will
lose.
The speculator is widely regarded as someone
who contributes nothing positive to the economy
because he produces nothing. However, by buying
when prices are low and selling when they are high,
the successful speculator transfers goods from low-
valued uses to high-valued ones, which is a useful
task. He also smoothes price fluctuations because his
purchases increases prices when they are low, and his
sales when prices are high helps keep prices from
going even higher.
The development of futures markets allows
anyone who wants to be a speculator to become one.
In a futures market, agreements to buy and sell at a
future date are made, with the price set when the
agreement is made. There are futures markets for
most major agricultural commodities. Farmers use
them to fix the price of their crop long before harvest
and millers and owners of feedlots use them to lock
in the price they will pay for grain in the coming
year. In fixing these prices with a futures contract,
farmers and buyers of grain reduce the risk they take
by hedging. They are able to reduce their risk because
speculators are willing to take risk. Without
speculators, a futures market could not function
properly. The benefits that speculators provide others
are not part of their intentions.
A person involved in speculation is not engaged
in arbitrage, he is not a middleman/an intermediary,
nor is he an entrepreneur. Arbitrage is buying in a
market where prices are low and simultaneously
selling in a market in which they are high. There is no
risk involved in pure arbitrage. Arbitrage tends to
equalize prices in various markets.
A middleman is part of a distribution or
marketing network. Though frequently disparaged,
the fact that sellers are willing to use middlemen
indicates that they do perform a useful service.
Middlemen generally try to keep risk to a minimum.
The entrepreneur deals in risk, but unlike the
speculator who reduces the risk of those who do not
want to bear it, the entrepreneur's risk is of his own
making. The entrepreneur is the creative element in a
market economy. His presence makes the system
dynamic and ever changing. He creates new products,
develops new managerial techniques, introduces new
ways of producing products, and finds new resources.
The entrepreneur is searching for unoccupied
economic niches, opportunities to make a profit. The
search is risky. Most large corporations are the results
of entrepreneurial effort.

6. The Financial Sector

A well-functioning financial sector increases

economic growth. If an economy does not allocate
savings to the most productive uses, it will grow
more slowly than it can grow.
From a microeconomic point of view, the
primary purpose of financial markets is to allocate
available savings to the most productive use.
Markets are interrelated, and a problem in one
market can have its source in a different market. This
finding is a starting point for macroeconomics.
Macroeconomists ask two central questions: "Is
this market a likely source of instability that shows
up as inflation or recession," and "Will the
adjustment process in this market cause problems for
the overall adjustment of the economy."
 Changes in one part of the economy are rapidly
transmitted to other parts through financial markets.
Such transmission is not limited to questions of tariffs
or to the market for foreign exchange; all financial
markets transmit.
When most people think of financial markets,
they think of the stock market. A stock is a share in
the ownership of a corporation, and through the stock
market, one can buy and sell. The stock market has
high visibility because it is open to anyone who can
collect several hundred dollars together. However,
the stock market is only a very small part of the total
financial market and plays only a minor role in
macroeconomic theory.
Markets for debt are much larger than the stock
market in terms of their daily transactions. These
markets have less visibility because many require
hundreds of thousands or even millions of dollars to
enter directly. Some of these markets for debt do play
an important role in macroeconomic theory.
Whenever economists include an interest rate in their
discussion, a market for debt is playing a role in their
thinking.
There are many kinds of transactions that take
place in the market for debt. Some transactions are
highly publicized: when a big corporation issues
marketable bonds with the aid of a brokerage house,
the brokerage house advertises the event to attract
buyers. Transactions on the New York Bond
Exchange are also very visible--they are reported in
the financial section of major newspapers. Many
more transactions involve financial intermediaries
and less publicity. Eventually most people visit a
bank (or a savings and loan association, which has
become almost identical) to arrange a loan. Large
corporations, small businesses, non-profit groups, and
individuals all use banks to obtain funds.
In addition to lending money to individuals and
groups, banks are part of financial markets in other
ways. Banks borrow and lend funds among
themselves in the funds market. They buy and sell
foreign exchange. They buy and sell government and
commercial debt. Finally, one form of bank debt
serves as money in modern economies, and banks
create this debt because of their financial
transactions.
Prices in the debt market are interest rates, what
one pays (or receives) for the use of funds for some
period of time. Because they aggregate financial
markets, economists often talk about "the interest
rate." In fact, there are many interest rates. Rates
differ depending on factors such as the risk of default,
the liquidity and time to maturity of the debt, and the
tax status of the interest payments.
The press commonly reports several interest
rates. The prime rate was once the interest rate that
large commercial banks charged their most credit-
worthy customers for short-term loans. In recent
years, banks have usually given their best customers
discounts from the prime, so this definition is no
longer accurate. A good definition of the prime is
hard to give other than - it is the rate that banks
publicize.
The funds rate is the rate that banks charge one
another for funds they borrow on an overnight basis.
The discount rate is the rate at which banks may be
permitted to borrow from a Central/Federal Reserve
bank. Finally, the interest rate on 13 and 26 week
Treasury Bills is used by many banks to determine
rates that they pay on some of their accounts. This
interest rate is probably the one most economists
have in mind when they talk about "the interest rate."
In practice, all these rates tend to fluctuate together.
Though many of us hold savings bonds, very
little of the debt is financed with them. More of the
debt is in the form of long-term debt (bonds),
medium-term debt (notes), and short-term treasury
bills, or T-bills for short.
Financial intermediaries, large companies, and
governmental units buy T-bills. Organizations find
them a safe and profitable way to invest funds
available for short periods of time. The attractiveness
of T-bills is enhanced by the secondary market that
has developed. A secondary market does not sell
newly-issued securities, but previously issued - or
"used" - securities. (The stock and bond exchanges
are examples of secondary markets.) The existence of
this secondary market has made T-bills very liquid,
that is, T-bills can be converted into cash quickly and
cheaply. However, because it does not deal in small
transactions of $50000 or $100000, it is not visible. It
is an over-the-counter market, which means
transactions are done by computer or telephone.
T-Bills are now sold as book-entry security,
which means they are in the form of a paper
certificate, but are only entries in the books of the
Treasury.
Most people do not enter financial markets
directly but use intermediaries or middlemen.
Commercial banks are the financial intermediary we
meet most often in macroeconomics, but mutual
funds, pension funds, credit unions, savings and loan
associations, and to some extent insurance
companies are important financial intermediaries.
When people deposit money in a bank, the bank uses
the funds to make loans to homebuyers for
mortgages, to students so they can pay for their
education, to business to finance inventories, and to
anyone else who needs to borrow. A person who has
extra money could, of course, seek out borrowers
himself and bypass the intermediary. By eliminating
the middleman (intermediary), the saver could get a
higher return.
Financial intermediaries provide two important
advantages to savers. First, lending through an
intermediary is usually less risky than lending
directly. The major reason for reduced risk is that a
financial intermediary can diversify. It makes a great
many loans, and even though some of those loans
will be mistakes, the losses will be largely offset by
loans that are sound. In contrast, an average saver
could directly make only a few loans, and any bad
loans would substantially affect his wealth. Because
an intermediary can put its "eggs" in many "baskets,"
it insures its depositors from substantial losses.
 A second advantage financial intermediaries
give savers is liquidity. Liquidity is the ability to
convert assets into an able form to spend – money -
quickly. A house is an illiquid asset; selling one can
take a great deal of time. If an individual saver has
lent money directly to another person, the loan can
also be an illiquid asset. If the lender suddenly needs
cash, he must either persuade the borrower to repay
quickly, which may not be possible, or he must find
someone else who will buy the loan from him, which
may be very difficult. Though the intermediary may
use its funds to make illiquid loans, its size allows it
to hold some funds idle as cash to provide liquidity to
individual depositors. Only when a great many
depositors want to withdraw deposits at the same
time, which happens when there is a "run" on the
institution, will the financial intermediary be unable
to provide liquidity. Unless it can obtain help from
the government or other institutions, it will be forced
to suspend payments to depositors.
Financial intermediaries help large numbers of
people to use, though indirectly, financial markets.
Although these intermediaries are important in the
macroeconomic functioning of the economy, they are
usually stable and change only slowly. With the
exception of those intermediaries that issue deposits
against which checks may be written, economists do
not expect disturbances to arise in financial
intermediaries. As a result, macroeconomic theory
does not pay much attention to them.
A financial market is an "efficient market" if its
prices take into accounts all knowledge that people
have about that market. If there is knowledge, which
is not being used, unexploited profit opportunities
exist, and in financial markets, these opportunities
should be quickly taken. If one knows that a stock or
bond is undervalued and that it will rise in value, one
will make a large amount of money by buying until it
does rise. Because profit opportunities are quickly
exploited once they become known, one cannot
"beat" an efficient market unless one has special
information that is unavailable to others.
The idea of efficient markets suggests that one
should not place a great deal of faith in any forecasts
about interest rates or stock prices, because if the
person making the forecast really does know what
will happen, he could keep quiet and get rich.
The speculators play a useful role in an efficient
market where prices adjust very quickly to new
information. They are coolly rational individuals
looking at the fundamental values of items, buying
when prices are too low and helping lift these prices,
and selling when prices are too high and helping to
lower these prices. As a result, prices correctly
transmit information about values, which people can
then use to make decisions. An efficient market will
not be the source of economic disturbances.
However, it can transmit disturbances, and this alone
would be enough to interest economists.
An important reason people buy items in
financial markets is in the hope of selling them at a
profit. Thus trading in these markets involves not
only an analysis of the fundamental value of an asset,
but also an analysis of how other people will react. If
people are confident that others will buy the item for
more than they paid for it, then they will buy it even
if it has little value to them.
The idea described above has been called the
"greater-fool" theory. It implies that although one
may be a fool for buying an asset that is overpriced,
one can profit if there are still greater fools who will
pay even more for it.
Markets based on the "greater-fool" theory
always collapse. Eventually the greatest fool is found,
and once he is found, the process cannot continue. It
can affect the production of an economy if the
speculations cause enough financial disruption. They
will cause bankruptcies, reduce people's trust in
others, and cause unemployment for the people who
became speculators.
A speculative crash in financial markets is not
enough, by itself, to trigger a recession.
The federal government not only regulates
financial markets and intermediaries, it is also a
major financial intermediary itself. Two agencies
with important regulatory functions are the Securities
Exchange Commission (SEC), the Federal Deposit
Insurance Corporation (FDIC). The SEC regulates
behaviour in stock and bond markets, and also
specifies which information a publicly-traded
company must provide to shareholders. The FDIC
insures deposits at commercial banks and, with the
demise of the Federal Savings and Loan Insurance
Corporation in the 1980s deposits at savings and loan
associations.
The U.S. government makes extensive loans for
agriculture and housing. Because the government can
borrow at a lower interest rate than most private
borrowers can, and because it does not need to make
a profit, it can lend at lower interest rates than private
intermediaries can. The government also subsidizes
borrowers by guaranteeing loans that private lenders
make. However, the issues that these actions of the
government raise are primarily microeconomic in
nature.
From a macroeconomic perspective, by far the
most important government institution involved in
financial markets is the Federal Reserve System. The
Federal Reserve System (often referred to as the
"Fed" by economists and bankers) is the central bank
of the United States. A central bank functions as a
banker's bank. Just as individuals and businesses
have deposits at a regular bank and can write checks
on these deposits, banks have deposits at a central
bank and can write checks on these deposits.
The Federal Reserve System is a rather strange
"central" bank because it is composed of 12 separate
banks. When you examine your paper currency, you
will see the district number and letter of one of these
12 banks on the left side of the portrait. This strange
structure exists because of the political realities that
faced Congress when it established the system in
1913. In 1935, Congress reduced the independent
authority of these 12 banks and centralized policy-
making authority in a group called the Federal Open
Market Committee (FOMC) which decides monetary
policy. Though today the individual Reserve banks
retain little independent power, the president of each
can serve as a voting member of the FOMC.
In the market for foreign exchange, people trade
one country's money for another's. If, for example,
you decide to travel to Thailand, you will need to buy
some bahts, the currency of Thailand, either before
you go or once you get there. In your transaction, you
will supply dollars to the foreign exchange market
and demand bahts.
The foreign exchange market provides an
excellent illustration of how financial markets can
transmit disturbances. The market is usually
considered to be an efficient market, not subject to
runaway speculative binges. The heart of the market
is the trading by a number of very large banks. A
trade worth a million dollars is very small in this
market, but it is the prices of these very large bank
transactions that newspapers report when they
publish exchange rates. When you deal in smaller
amounts when you travel to Thailand, you will get
less favourable prices.
The market for foreign exchange can be
analyzed in terms of supply and demand. Americans
demand foreign money (and supply dollars) when
they buy things abroad, such as vacations, goods,
services, factories, and financial assets. Foreigners
supply foreign currency (and demand dollars) when
they buy things here, such as vacations, goods,
services, factories, and financial assets. Though when
you buy a Japanese camera, you do not deal in the
foreign exchange market, someone did in the process
of bringing the camera to you. It may have been the
American importer, who would have sold dollars to
buy yen, and then used the yen to buy the camera. On
the other hand, it may have been the Japanese
exporter, who sold cameras for dollars and then sold
the dollars for yen. In either case, dollars were
supplied to the foreign exchange market and yen
were demanded.
The exchange rate, or the price of foreign
money, is an important price when we buy things
made in other countries.
Two things affect the price of the Japanese
camera as seen from America. The first is the yen
price of the camera, and the second is the dollar price
of the yen. If either one increase: Japanese cameras
will become more expensive and Americans will
want fewer of them. The exchange rate also affects
the price of American goods as seen in Japan.
When foreign currency is cheap, foreign
products are cheap in dollars, and Americans will
want a lot of them. To buy these foreign products,
Americans must buy a lot of foreign exchange. When
the price of foreign exchange is expensive, so also are
foreign products and Americans will not want many.
Hence, they will not need as much foreign exchange.
Let us consider what will happen if the United
States increased its tariffs. Because tariffs are taxes
on imports, foreign products will become more
expensive for Americans. As a result, Americans will
want to buy fewer imports, which is usually the
desired result of tariffs. However, if the exchange rate
is: a floating rate, that is, one that can take whatever
value supply and demand dictate, the story has not
ended. Because of the tariff and the resulting
decrease in imports, foreign money becomes cheaper
for Americans and American dollars become more
expensive for foreigners. If dollars become more
expensive, foreigners will find American goods more
expensive. The end effect of a tariff with floating
exchange rates, then, is to cut not just imports, but to
cut exports as well.
 If a country treats the foreign exchange market
as any other market, allowing the marketplace
determine the price of foreign money, it has a system
of floating exchange rates. This is what most of the
Western world has had since the 1970s. However,
governments have often fixed prices in this market.
In doing so they simultaneously establish price floors
and price ceilings--they will neither let the price rise
nor fall (except within a small range).
There are two ways a government can keep
exchange rates fixed. One method, which has been
common in less-developed nations, is called a fixed
and unconvertible exchange rate because the
exchange rate is fixed, but domestic currency cannot
be freely converted into foreign money. Governments
using it almost always set the price of foreign
exchange below the market-clearing price (which
means that they price their own currency too high),
and thereby cause a shortage of foreign money. The
government prevents the market-increasing price to
eliminate this shortage by outlawing private
transactions in foreign exchange and requiring
citizens who obtain foreign exchange to sell it to the
government. Because the government becomes the
only legal source of foreign money, those who want
to buy products from abroad must obtain those funds
from the government, which rations these funds to
those purposes it deems most worthy. Though this
system is hard to justify on economic grounds, and is
often evaded with extensive black-marketing, the
system gives rulers a powerful tool to reward friends
and punish enemies.
The second method is a fixed and convertible
exchange rate. With this method a government does
not abolish the private market for foreign exchange,
but fixes exchange rates by standing ready to absorb
any surpluses or to fill any shortages.
If the price of foreign exchange is set above the
market-clearing price, there will be a surplus of
foreign exchange (and a shortage of the domestic
currency). At this price, people will want to sell more
foreign exchange than they want to buy. The
government can prevent this surplus from lowering
price by stepping into the market and buying the
excess foreign exchange. On the other hand, if the
price that the government sets is below the market-
clearing price, there will be a shortage of foreign
exchange called a balance of payments deficit. The
government can prevent the shortage from raising
price by selling foreign exchange into the market.
The government can obtain this foreign exchange
from reserves it stored up when there was a surplus,
or by borrowing from other countries, or by selling
assets such as gold. It should be obvious that a
government can only fill a balance of payments
shortage temporarily and that if it runs for too long;
the country will run out of foreign exchange to
provide to the market.
Now most of the industrial world has floating
exchange rates.

7. Types of Business Documents

This chapter deals with company or newspaper

reports, marketing, advertising and public relations
and discusses some basic guidelines for writing style
for some of the types of business documents
including business letters.
To begin with, we will briefly define different
types of report:
• Organizational policies and procedures
These are the operating documents for
organizations; they contain rules and
regulations on how the organization and its
members are expected to perform. Policies and
procedures are like instructions, but they go
much further.
• Feasibility, evaluation, recommendation
reports
This group of similar reports does things like
compare several options against a set of
requirements and recommend one. It considers
an idea (plan, project) in terms of its
"feasibility," in terms of some combination of
its technical, economical, social practicality or
possibility. It passes judgment on the worth or
value of a thing by comparing it to a set of
requirements, or criteria.
• Technical background reports
This type is the hardest one to define but the
one that most people write. It focuses on a
technical topic, provides a certain background
on that topic for a specific set of readers who
have specific needs for it. This report does not
supply instructions, nor does it supply
recommendations in any systematic way, nor
does it report new and original data.
• Primary research reports
This type presents findings and interpretation
from laboratory or field research.
 • Business plans
This type is a proposal to start a new business.
• Technical specifications
This type presents descriptive and operational
details on a new product.

7.1. Business Plans and Technical

Specifications4

A business plan is a document used to start a

new business or get funding for a business that is
changing in some significant way. Business plans are
important documents for business partners who need
to agree upon and document their plans, government
officials who may need to approve aspects of the
plan, and of course, potential investors such as banks
or private individuals who may decide to fund the
business or its expansion.
A business plan is very much like a proposal,
except for at least one big difference. The prospectus
seeks to start a new business or significantly expand
an existing business. A proposal, on the other hand,
seeks approval to do a specific project. For example,
a business plan might seek funding and other support
4
From: Online technical writing resources
to start a software company to create computer
games. A proposal, on the other hand, might bid to do
the development work for some specific computer
game.

Common sections in business plans:

Many of the elements of the plans are only

typical and not necessarily in any required order. For
your plan, you will need to think about the best
sequencing of the sections and about other sections
that might also be necessary.
• Product or service to be offered - One of
the most important sections of the business
plan is the description of the actual product
or service to be offered by your company.
If it is a description of a product--a physical
object - you need to use the techniques for
description. If you are going to offer a
service, explain it, and take readers on a
step-by-step tour of how the service will be
handled.
• Technical background on the product or
service - If your product or service involves
technologies or technical processes
 potentially unfamiliar to your readers,
explain these. Remember that business
plans often go to non-specialists who,
despite their lack of technical expertise,
have the investment funds or the legal
understanding to get your business going.
• Market for the product or service - Critical
also to any business plan is the exploration
of the existing marketplace into which your
product or service fits. What other
companies offer the same thing you plan to
offer? How much business do they do?
How are they different from each other?
How will your business differ from them?
• Process by which the product or service is
produced - If applicable, explain how the
product or service will be produced.
Explain how the proposed business will
operate on a day-to-day basis.
• Facilities and personnel needed for the
operation - Plan to discuss the facilities
(storefronts, warehouses, production
facilities, vehicles) your business will
require as well as the personnel that will be
needed.
• Projected revenues from the operation - Of
obvious importance in any business plan is
the discussion of the revenues you project
for your business. If you know the estimate
of total revenues for the market area in
which you plan to operate, what percentage
do you explain to win? Obviously, in your
first few years, you may operate at a loss -
at what point in time do you project to
break even?
• Funding necessary for start up and
operation - The plan should also discuss the
funding you'll need to get the business
started as well as the operating costs - the
funding needed to run the business on a
daily basis.
• Legal issues related to the proposed
business - Your business plan may also
need to discuss your business, its products,
or its services in relation to government
regulations - for example, environmental
restrictions.
• Qualifications and background of the
personnel - Important too is the section that
presents your qualifications to start and
 operate the business you are proposing. Of
course, "you" can mean a number of people
with whom you are working to start the
business. This section can be very much
like a collection of resumes, although you
want to write an introduction in which you
describe your group's qualifications as a
whole.
• Discussion of feasibility and investment
potential - You will want to include in your
plan a discussion of the likelihood of the
success of your business. Obviously, you
believe that it will be a success, but you
must find a way to support this belief with
facts and conclusions in order to convince
your readers. In addition, you must discuss
what sort of return on investment readers
can expect.
• Investment offering - And finally, you may
need to present what kinds of investment
apparatus you are actually offering.

In planning your business plan, remember that

you try to provide whatever information the audience
may need to consider your idea. Your goal is to
convince them you have a good idea and to
encourage them to invest in it (or to approve it in
some way). It is okay to provide marginal
information - information you are not quite sure that
readers will want. After all, you section off the parts
of a business plan with headings; readers can skip
over sections they are not interested in.

Format for business plans:

Business plans, even those for small operations,
can run well over 15 pages - in which case you will
want to bind the plan. As you plan the format of your
business plan, you will want to think about designing
it so that readers can find and read essential
information quickly. This means setting up an
abstract, but calling it "Executive Summary" or
"Prospectus Overview."
Try to group similar sections. In the preceding
section that lists the various kinds of information to
include in a plan, some of the suggestions should be
combined - for example, the sections on financial
aspects of the proposed business.
Finally, make use of appendixes for unwieldy,
bulky information. Enable readers to quickly find the
main sections of the plan, without having to wade
through tables and charts that go on for pages and
pages.

Technical Specifications are descriptions of

products or product requirements. More broadly, they
can provide details for the design, manufacture,
testing, installation, and use of a product. You
typically see specifications in the documentation that
comes in the package with certain kinds of products,
for example, CD players or computers. These
describe the key technical characteristics of the item.
However, specifications are also written as a way of
"specifying" the construction and operational
characteristics of a thing. People who actually
construct the thing or go out and attempt to purchase
it then use them.
When you write specifications, accuracy,
precision of detail, and clarity are critical. Poorly
written specifications can cause a range of problems
and lead to lawsuits.
Graphics, tables, and lists are heavily used, but
some details can only be provided through sentences
and paragraphs.
 For these reasons then, specifications have a
particular style, format, and organization.
Make every effort to find out what the specific
requirements are for format, style, contents, and
organization. If they are not documented, collect a
big pile of specifications written by or for your
company, and study them for characteristics like
those described in the following.
• Use two-column lists or tables to lists
specific details. If the purpose is to indicate
details such as dimensions, materials,
weight, tolerances, and frequencies, regular
paragraph-style writing may be
unnecessary.
• Make sure that each specification receives
its own number-letter designation. In
sentence-style specifications, make sure
each specific requirement has its own
separate sentence.
• Use the decimal numbering system for each
individual specification. This facilitates
cross-referencing.

Graphics and tables used to present information

in specifications:
• Use either the open (performance) style or
the closed restrictive style, depending on
the requirements of the job. In the open or
performance style, you can specify what the
product or component should do, that is, its
performance capabilities. In the closed
style, you specify exactly what it should be
or consist of.
• Cross-reference existing specifications
whenever possible. Various government
agencies as well as trade and professional
associations publish specifications
standards. You can refer to these standards
rather than include the actual specifications
details.
• Use specific, concrete language that
identifies as precisely as possible what the
product or component should be or do.
Avoid words that are ambiguous - words
that can be interpreted in more than one
way. Use technical jargon the way it is used
in the trade or profession.
• Test your specifications by putting yourself
in the role of a bumbling contractor--or
even an unscrupulous one. What are the
 ways a careless or incompetent individual
could misread your specifications? Could
someone wilfully misread your
specifications in order to cut cost, time, and
quality? Obviously, no set of specifications
can ultimately be "foolproof" or "shark-
proof," but you must try to make them as
clear and unambiguous as possible.
• For specifications to be used in design,
manufacturing, construction, or
procurement, use "shall" to indicate
requirements. In specifications writing,
"shall" is understood as indicating a
requirement. Provide numerical
specifications in both words and symbols:
for example, "the distance between the two
components shall be three centimetres (3
cm)."
• Writing style in specifications can be very
terse: incomplete sentences are acceptable
as well as the omission of functions words
such as articles and conjunctions that are
understood.
• Exercise great caution with pronouns and
relational or qualifying phrases. Make sure
 there is no doubt about words such as "it,"
"they," "which," and "that" refer to. Watch
out for sentences containing a list of two or
more items followed by some descriptive
phrase - does the descriptive phrase refer to
all the list items or just one? In cases like
these, you may have to take a wordier
approach for the sake of clarity.
• Use words and phrasing that have become
standard in similar specifications over the
years. Past usage has proven them reliable.
Avoid words and phrases that are known
not to hold up in lawsuits.
• Make sure your specifications are complete
- put yourself in the place of those who
need your specifications; make sure you
cover everything they will need.

8. Marketing Campaigns

The chapter is dedicated to a description (case

studies) of three marketing companies: - Verity,
Impact Ads and Transworld.
 8.1. CASE STUDY: I.

This is a conversation between the managing

director Andrew Hodge to Stephen Johnson, the
assistant sales director who will choose who will
manage his company's marketing campaign:

Andrew Hodge: Well, have you decided which

one it is going to be?
Stephen Johnson: Well, its tough - but I think it
is between Impact Ads and Verity.
Andrew Hodge: What is wrong with
Transworld?
Stephen Johnson: Well, they are a little low on
substance. They keep saying they are a 'top'
company, but they do not say what they are top of!
They say they have original designs, and ideas, but
they do not give any examples. I would like to know
more about their campaigns and their clients. The
only thing they do say is that they are cheaper than
the others - but do they give value for money? I could
find more about them, but if a marketing company
can't sell itself, can it sell for us?
I like Verity's idea; of working closely with us at
every stage of the process … I think we need
something like that. They seem to me to be a good
company, and all the people who have worked with
them tell me that they do exactly as they say - they
work with you, and they don't mess you around.
Andrew Hodge: And Impact?
Stephen Johnson: That's the problem. They are
good, very good. They are very expensive, but they
do a fantastic job. If you look at their list of satisfied
customers, it is as long as your arm. They are a young
team, very professional, very innovative … but they
are a bit light on their management consultancy side -
they know it too, so they have brought in an outside
partner. They will do a very good campaign, but we
will have to organize it a lot more for them - their
service is less complete.
Andrew Hodge: So they do less, but do it well?
Stephen Johnson: Very well. And they are
cheaper than they look.
Andrew Hodge: So it's going to be Impact then?
Stephen Johnson: Well, if we end up with
Impact, it will be no bad thing. But I have been
talking to George Halds at Verity - they have a new
young employee, Sandra Sean. She's got some
original ideas, and they want to give her a try on a big
project. And she is almost as good as Impact in one
way - they tried to poach her from Verity earlier this
year!

8.2. CASE STUDY: II

Who we are: When John Weznik lost his job in

1935, he started an advertising company from his
own kitchen at home. Verity advertising was born.
Now Verity has 85 employees and offices in London,
Paris and New York. Still today, we keep to our
founder's principles of integrity, customer service,
and dynamic advertising campaigns tailored in close
consultation with our clients.
What we do: Verity advertising makes you, the client,
an active partner in our advertising campaigns,
combining our knowledge of the advertising market
with your knowledge of your product to make an
unbeatable partnership.
How we do it: Verity has an intimate knowledge
of the markets, and our skilled analysts will work
with your managers and designers, bringing
marketing into every aspect of design, production and
sales, optimizing them to meet what you are seeking.
Market share, and all the rest are all very well, but
what you really, really want, is customers buying
your product in large amounts, and at good margins.
That is what it is all about. And that's what Impact
Ads will get you.
You have seen our award-winning marketing
campaigns; you know our clients are some of the top
companies in the Fortune 500. We have come from
nowhere to the top in 10 years, because we are good,
we hire the best, we have one of the most creative
and innovative teams in the business.
We are not just a talented team. We work
closely with Valerie Maxim management consultants
guaranteeing that our campaigns do not just grab the
attention of the public, but make good business sense
too. We are not the cheapest in the business, but the
ROI we generate speaks for itself!

8.3. CASE STUDY: III

Your campaign needs a company that is top for

quality top for price and top for performance. You
need Transworld - the advertising company with the
ideas and results that are changing the industry.
Contact us today, to find how we can turn your
campaign into a dynamic, powerful monster that
leaves your competition stopped dead in their tracks!
For the past two decades, we have combined
innovation, high-quality concept designs and strategic
vision, to make ourselves the first choice to help you
meet the challenge of successfully reaching your
target audience. From concept to completion,
Transworld supplies the experience and the support
that gives your message maximum impact.
No other advertising agency supplies the value
for money that Transworld can bring to your
campaign. With our slim, flat management structure,
helped by the latest in IT, we put more of your
expenses back into your campaign than any other
agency in the business.

Questions concerning the three case studies:

1. Which company emphasizes that it costs

less?
2. Which company stresses its relationship with
clients?
3. Which company puts most weight on the
quality of its product?
 4. Which is the oldest company?
5. Which company has the least aggressive
sales pitch?
6. Which company tells you least about itself?
7. Which company offers the least complete
service?
8. Which company stresses it will generate
income?

9. The Management Consultancy Report

This is the summary of a management

consultancy report commissioned by Chapman
clothing.
Summary of Report
Situation analysis:
Chapman Clothing co has been selling clothes
for the past 73 years. They have two factories making
their product domestically, and they use contract
work from abroad. Their product is retailed at
department stores across the country, and they feature
in a number of mail order catalogues. Recently they
launched an internet site for customers who want to
buy direct.
 As can be seen from the sales figures for the
past 12 months, sales dropped sharply in the first part
of the year. There has been some recovery in clothing
sales to men and women but sales of children's
clothing remain flat.
Market trends
Recently the market for their product has
expanded, with a greater proportion of the national
income being spent on clothing.
As can be seen from chart 1A sales in the early
part of the decade have been flat, and even fell in the
recent recession, but they have since recovered
strongly. Though there was a slight dip the year
before last, figures have climbed ever since, and there
is no sign yet that the market has peaked.
Outlook
Strong competition both at home and abroad
has forced down the cost of fabrics, and the
company's buyers have closed a number of very
favourable deals, locking suppliers into long-term
contracts on very favourable terms. However, it
appears the company's competitors have done the
same. This means that the market over the coming
two years will be very competitive. Therefore, it is
important that Chapman clothing find a strong selling
point, either in terms of price, style, quality image or
some combination of these.
Competition
As you can see from the pie charts, which show
Chapman’s share of the market as a dark blue wedge,
it can be seen that the company's market share today
(chart A) is less than it was five years ago (chart B).
In short, Chapman’s has been losing market share.
This is mainly due to the expansion of the market
leader Tommy Dee and Andreas. The red wedge
represents imported clothing from foreign brands,
and it can be seen that this sector too is expanding.
This means that smaller domestic companies, such as
Chapman’s are being squeezed.
Risks and opportunities
The fact that more people are spending more
money on their clothes means that Chapman’s has a
chance to approach new customers in an expanding
market. Technological change means that there are
new ways to find customers, such as marketing
through the internet. Chapman’s has good brand
recognition, and an established customer base. The
challenge for this company is to break out of its
present market, and expand into new ones. The risk is
clearly shown in the falling sales figures at a time
when the market is expanding. New brands such as
Andreas are expanding aggressively, and their
products are seen as very attractive by certain key
market segments. The risk is that Chapman’s sales
might continue to decline to the point where retailers
lose interest in stocking their goods, after which the
company has a serious risk of failing.

Questions:
1. Who is this report for?
- A newspaper
- Shareholders
- A management consultancy
- Company directors
2. What is the challenge mentioned in the
sector headed 'Outlook'?
- To keep prices down
- To find cheaper suppliers
- To make the product distinctive
- To compete for two years
3. How would you describe the tone of the
risks and opportunities?
Critical
Optimistic
Pessimistic
Balanced
 10. Style in Business Correspondence5

Writing business letters and memos differs in

certain important ways from writing reports. Keep the
following advice in mind when you write and
especially when you revise your business letters or
memos.
State the main business, purpose, or subject
matter right away.
Let the reader know from the very first sentence
what your letter is about. Remember that when
business people open a letter, their first concern is to
know what the letter is about, what its purpose is, and
why they must spend their time reading it. Therefore,
avoid roundabout beginnings. If you are writing to
apply for a job, begin with something like this: "I am
writing to apply for the position you currently have
open...." If you have bad news for someone, you need
not spill all of it in the first sentence. Here is an
example of how to avoid negative phrasing: "I am
writing in response to your letter of July 24, 1997 in

5
From the internet: site maintained by Patrick Burne, a retired
business communication consultant
which you discuss problems you have had with an
electronic spreadsheet purchased from our company."
If you are responding to a letter, identify that
letter by its subject and date in the first paragraph or
sentence. Busy recipients who write many letters
themselves may not remember their letters to you. To
avoid problems, identify the date and subject of the
letter to which you respond:
Keep the paragraphs of most business letters
short. The paragraphs of business letters tend to be
short, some only a sentence long. Business letters are
not read the same way as articles, reports, or books.
Usually, they are read rapidly. Big, thick, dense
paragraphs over ten lines, which require much
concentration, may not be read carefully - or read at
all.
To enable the recipient to read your letters more
rapidly and to comprehend and remember the
important facts or ideas, create relatively short
paragraphs of between three and eight lines long. In
business letters, paragraphs that are made up of only
a single sentence are common and perfectly
acceptable.
"Compartmentalize" the contents of your letter.
 When you "compartmentalize" the contents of a
business letter, you place each different segment of
the discussion - each different topic of the letter - in
its own paragraph. If you were writing a complaint
letter concerning problems with the system unit of
your personal computer, you might have these
paragraphs:
• A description of the problems you've had
with it
• The ineffective repair jobs you've had
• The compensation you think you deserve
and why

Study each paragraph of your letters for its

purpose, content, or function. When you locate a
paragraph that does more than one thing, consider
splitting it into two paragraphs. If you discover two
short separate paragraphs that do the same thing,
consider joining them into one.
Provide topic indicators at the beginning of
paragraphs.
In the first sentence of any body paragraph of a
business letter, try to locate a word or phrase that
indicates the topic of that paragraph. If a paragraph
discusses your problems with a personal computer,
work the word "problems" or the phrase "problems
with my personal computer" into the first sentence.
Doing this gives recipients a clear sense of the
content and purpose of each paragraph.
Place important information strategically in
business letters.
Information in the first and last lines of
paragraphs tends to be read and remembered better.
Information buried in the middle of long paragraphs
is easily overlooked or forgotten. Therefore, place
important information in high-visibility points. For
example, in application letters that must convince
potential employers that you are right for a job, locate
information on appealing qualities at the beginning or
end of paragraphs for greater emphasis. Place less
positive or detrimental information in less highly
visible points in your business letters. If you have
some difficult things to say, a good (and honest)
strategy is to de-emphasize by placing them in areas
of less emphasis. If a job requires three years of
experience and you only have one, bury this fact in
the middle or the lower half of a body paragraph of
the application letter. The resulting letter will be
honest and complete; it just will not emphasize
however weak points unnecessarily.
 Find positive ways to express bad news in your
business letters.
Often, business letters must convey bad news: a
broken computer keyboard cannot be replaced, or an
individual cannot be hired. Such bad news can be
conveyed in a tactful way. Doing so reduces the
chances that business relations with the recipient of
the bad news will end. To convey bad news
positively, avoid such words as "cannot," "forbid,"
"fail," "impossible," "refuse," "prohibit," "restrict,"
and "deny" as much as possible.
Focus on the recipient's needs, purposes, or
interests instead of your own.
Avoid a self-centred focusing on your own
concerns rather than those of the recipient. Even if
you must talk about yourself in a business letter a
great deal, do so in a way that relates your concerns
to those of the recipient. This recipient-oriented style
is often called the "you-attitude," which does not
mean using more you but making the recipient the
focus of the letter.
Avoid pompous, inflated, legal-sounding
phrasing.
Watch out for puffed-up, important-sounding
language. This kind of language may seem business-
like at first; it is actually ridiculous. Of course, such
phrasing is apparently necessary in legal documents;
but why should we use it in other writing situations?
When you write a business letter, picture yourself as
a plain-talking, common sense, down-to-earth person
(but avoid slang).
Give your business letter an "action ending"
whenever appropriate.
An "action-ending" makes clear what the writer
of the letter expects the recipient to do and when.
Ineffective conclusions to business letters often end
with rather limp, noncommittal statements such as
"Hope to hear from you soon" or "Let me know if I
can be of any further assistance." Instead, or in
addition, specify the action the recipient should take
and the schedule for that action. If, for example, you
are writing a query letter, ask the editor politely to let
you know of his decision if possible in a month. If
you are writing an application letter, try to set up a
date and time for an interview.
 APPENDIX

I. Selection of Who's Who related to

Economics
(For more detail on most of these entries, see
the History of Economic Thought website at
http://cepa.newschool.edu/het/)

Becker, Gary. b. 1930. One of the many

prominent economists associated with the University
of Chicago, Becker won the Nobel Prize in
economics for his applications of economic methods
to a variety of novel situations.

Boulding, Kenneth. b. 1910. This British born

economist taught for many years at the University of
Michigan and then at the University of Colorado.

Buchanan, James. b. 1919. A founder of a

branch of economics called Public-Choice
economics; Buchanan won a Nobel Prize for his
contributions to economics in 1986.
 Fischer, Irving. 1867-1947. an amazingly
prolific writer on a wide range of topics, Fisher may
have been the most important American-born
economists during the first half of the twentieth
century. A professor at Yale University, he made
contributions in many areas of economics, including
monetary theory, mathematical economics, index
numbers, and the theory of interest. Among the
reform movements he championed were prohibition
of alcohol and eugenics.

Friedman, Milton. b. 1912. One of the most

important economists of the twentieth century,
Friedman is noted for his studies of monetary history,
his development of the permanent income hypothesis,
and his argument that most intellectuals overvalue
political processes and underestimate the importance
of market processes in a free and prosperous society.
Friedman won the Nobel Prize in economics in 1976.

Hayek, Friedrich. - Austrian borne economist

who taught both in England and the United States,
Hayek won the Nobel Prize for economics in 1974.
He opposed most government interventions into the
economy. He is perhaps best knows for his early
recognition that markets have the ability to
coordinate widely dispersed information.

Hicks, John. b. 1904. This British economist is

best known for his development of the IS-LM model
of macroeconomics.

Jevons, W. Stanley. 1835-1882 an economist

who was part of the "Marginalist Revolution" in the
late nineteenth century.

Keynes, John Maynard. 1883-1946. the author

of the General Theory of Employment, Interest, and
Money (1936), the ideas of this British economist
have dominated the approach to macroeconomics for
most of the twentieth century.

Knight, Frank. 1885-1972. Knight taught at the

University of Chicago from 1928 until 1958, helping
to give the economics department at that institution
its special flavour.

Malthus, Thomas. 1766-1834. An English

economist who is remembered for his theory of
population, published originally in 1798 as Essay on
the Principle of Population.

Marshall, Alfred. 1842-1924. the most

influential economist at the end of the nineteenth and
the beginning of the twentieth century, his textbook
was the standard for several generations of students.
Marshall taught at Cambridge University in England
from 1885 until 1908.

Marx, Karl. 1818-1883. A German social

philosopher whose writings have had enormous
influence on the theory and practice of socialism. His
Communist Manifesto (1848) was a call to action,
while his Das Kapital, unfinished at his death,
contains his theoretical structure.

Mill, John Stuart. 1806-1873. the son of James

Mill (1773-1836) who was also an influential writer
in economics, John Stuart Mill's most important work
in economics was Principles of Political Economy
(1848).

Modigliani, Franco. Though born in Italy,

Modigliani has spent most of his professional career
teaching in American universities. He won the Nobel
Prize in economics in 1985 for several important
contributions to the field, one of which was the life-
cycle hypothesis of consumption.

Okun, Arthur. 1928-1980. An American

economist who came to prominence as a member and
then chair of the Council of Economic Advisors
during the Kennedy and Johnson Administrations
during the 1960s. Okun's Law is named after him. It
is a statistical regularity that says a 1% reduction in
unemployment yields a 3% increase in real GDP.

Pareto, Vilfredo. 1848-1923. - An Italian

economist and sociologist.

Popper, Karl. - An Austrian-born philosopher

whose writings on the methods of science have been
influential.

Rawls, John. Rawls is not an economist, but

rather a philosopher whose writing on justice, based
on a social contract model, have influenced many
economists.
 Ricardo, David. 1772-1823. Ricardo was the
most influential economist in the generation after
Adam Smith. His principle work was The Principles
of Political Economy and Taxation (1817). He made
important contributions in the understanding of
foreign trade, but his theory of value sent economics
down a blind alley that was not abandoned until the
1870s.

Robbins, Lionell. 1898-1984. - A British

economist prominent between World War I and II.

Say, Jean Baptiste. 1767-1832. This French

economist spread the message of Adam Smith in
France.

Schumpeter, Joseph. 1883-1950. This Austrian-

born economist was one of the giants among
economists in the first half of the twentieth century.
Schumpeter emphasized the dynamic nature of
market economies.

Smith, Adam. 1723-1790. A Scottish intellectual

who’s most important work was The Wealth of Nations
in 1776. Smith is often called the father of economics.
 Stigler, George. b. 1911. This Nobel Prize winner
of 1982 was one of the mainstays of the Chicago school
of economics. His work was in several fields of
microeconomics.

Stiglitz, Joseph. b. 1943. Stiglitz is well known for

his work in analyzing markets where price determines
quality rather than the reverse.

Thornton, Henry. 1760-1815. a banker,

philanthropist, and Member of Parliament, Thornton's is
now only remembered for as author of An Enquiry into
the Nature and Effects of the Paper Credit of Great
Britain (1802), which many economists consider the
most insightful work on monetary theory written prior to
the late nineteenth century.

Walras, Leon. (1834-1910). – He was one of the

first mathematical economists; a man who formally
developed the theory of general equilibrium.

Wicksell, Knut. 1851-1926. Wicksell was a

Swedish economist who wrote at the turn of the century
and had a profound influence on the Swedish economists
who came after him. His work only gradually was
recognized in the English-speaking world for its
originality and depth. He made important contributions
to the literature on business cycles and capital theory.

II. Selected Glossary of Microeconomic

Terms6

Adjustment process: Path by which a system

moves from a position of disequilibrium to one of
equilibrium.
Aggregation: A method of simplifying theory
by combining many markets into a large, composite
market.
Allocation: The determination of what goods
and services will be produced from available
resources. Allocation can be done with markets or
with hierarchy.
Antitrust policy: Policy that makes companies
act in a competitive manner by breaking up
companies that are monopolies, prohibiting mergers
that would increase market power, and finding and

6
After: English International Lyon – internet pages
fining companies that collude to establish higher
prices.
Arbitrage: Simultaneously buying in a cheap
market and selling in an expensive one.
Budget Constraint: A line that separates
outcomes that are affordable from outcomes that is
not affordable. Occasionally it is called a
consumption-possibilities frontier.
Change in demand: A shift in the demand
curve.
Change in quantity demanded: A change in
the amount people buy because a change in price
moves them along a stationary demand curve.
Change in quantity supplied: A change in the
amount sellers sell because a change in price moves
them along a stationary supply curve.
Change in supply: A shift in the supply curve.
Circular flow: The flow of products from
businesses to households and the flow of resources
from households to businesses.
Consumer Sovereignty: In a market economy,
it is ultimately the wants of the consumers, not the
preferences of the producers that determine what
goods and services are produced.
 Contingent behaviour: Behaviour that exists
when each person's actions depend on what he
expects others to do.
Cross-price elasticity (cross-elasticity): A
measure of whether goods are substitutes or
complements.
Demand curve: The relationship between price
and the amount of a product people want to buy.
Derived demand: The demand for a resource
depends on, or is derived from, the demand for the
things that the resource helps produce.
Disequilibrium: A condition that exists when a
system is not at rest and has a tendency to change.
Dollar voting: An explanation of how a market
economy determines what goods are produced made
with an analogy to the political process of voting.
Duopoly: A market in which there are two
sellers.
Economic efficiency: A situation in which
value is maximized. Given resources, technology,
and preferences, no changes will increase value. It is
also called the Pareto optimality.
Economic inefficiency: A situation in which
there is potential value that no one captures. Given
resources, technology, and preferences, there is some
change, which will improve the well-being on one
individual without harming anyone else.
Entrepreneur: An individual who creates new:
a new organization, market, or product, usually in the
quest for profit. Entrepreneurs are innovators.
Equilibrium: A condition that exists when a
system is at rest and has no further tendency to
change.
Externality: A cost or benefit that a decision
maker passes on to a third party. Pollution is an
example of a negative externality.
Excise tax: A sales tax on a specific item.
Fixed cost: Cost that does not change as output
changes.
Free rider: Person who does not pay for good
or service because there is no way to exclude those
who do not pay from using the good or service.
Game theory: An analysis of interactions in
which the outcome a person faces depends not only
on his strategy of action, but also on the strategies of
others.
Human capital: People’s assets in the form of
investment in themselves.
Inferior good: A good that people buy less
frequently if their incomes rise.
 Invisible hand: A phrase that expresses the
belief that the best interests of a society can be served
when individual consumers and producers compete to
achieve their own private interests.
Law of demand: The principle that there is an
inverse relationship between the price of a good and
the quantity that buyers are willing to purchase.
Law of diminishing returns: Adding more of
one input while holding other inputs constant
eventually results in smaller and smaller increases in
added output.
Lorenz Curve: A graphical way to illustrate the
equality or inequality of the distribution of income.
Marginal cost: The change in total cost caused
by a one-unit change in an activity, or the slope of the
total cost curve. In the case of a business, the change
in total cost is caused by a change in output.
Marginal rate of substitution: The ratio at
which people will trade good B for good A.
Marginal rate of transformation: Slope of the
production-possibilities frontier, which shows how
much of good B must be given up to produce more of
good A.
Marginal resource cost: The change in total
cost caused by a one-unit change in an input.
 Marginal revenue: The change in total
revenue resulting from a change in sales; the slope of
the total cost curve.
Marginal revenue product: The change in
total revenue resulting from a one-unit change in an
input.
Market failure: A situation in which a market
yields a result that is economically inefficient, that is,
there is value that is not captured.
Maximization principle: The rule that net
benefits are maximized when marginal benefit equals
marginal cost.
Monopoly: An industry with only one seller.
Monopolistic competition: An industry that
has easy entry and exit, but in which sellers are price
searchers.
Moral hazard: Insurance problems; when the
cost of a disaster is reduced with insurance, people
have less incentive to avoid the disaster.
Negative-sum game: In terms of game theory,
an interaction in which losses exceed winnings.
Normative analysis: An analysis based on a
judgment about what is desirable and what is
undesirable.
 Paradox of Value: The puzzle of why essential
items such as water are cheap while frivolous items
such as diamonds are expensive. The paradox is
easily resolved when one understands the difference
between total value and marginal value.
Pareto optimality: See Economic efficiency.
Present value: Money in the future is less
valuable than an equivalent amount of money now
because money in the future gives fewer options. The
comparison of money in different time periods is
made with a present value computation.
Price ceiling: Legally established maximum
price a seller can charge.
Price-discrimination: Charging different prices
for the same good or service.
Price floor: Legally established minimum price
a seller can be paid.
Price searcher: A seller (buyer) who can
influence price by the amount he sells (buys).
Price taker: A seller (buyer) who has no
control over price, but sells (buys) at the given price.
Principal-agent problem: The potential
conflict of interest when a person (the principal) has
someone (the agent) acting on his behalf.
 Producers' surplus: The difference between
the lowest price a producer will accept and the actual
price; also called economic rent.
Production function: The mathematical way of
stating that output depends on inputs.
Progressive tax: A tax that charges a higher
percentage of income as income rises.
Proportional tax: A tax that charges the same
percentage of income, regardless of the size of
income.
Public good: A good or service that, once
produced, has two properties: Benefits are available
to all and there is no way to bar people who do not
pay (free riders) from consuming the good or service.
Quota: Limit on the quantity of a good that
may be imported in any time period.
Regressive tax: A tax that charges a lower
percentage of income as income rises.
Rent seeking: Efforts to obtain value through
transfer without providing anything in return.
Scarcity: The condition in which human wants
exceed the available supply of goods, time, and
resources. In a world without scarcity, there would be
no economics.
 Shortage: The market condition existing when
quantity demanded exceeds quantity supplied.
Generally, an increase in price will eliminate a
shortage.
Speculation: Attempting to buy when the price
is low and sell when it is high.
Sunk cost: Is cost which cannot be recovered.
Surplus: The market condition existing where
the quantity supplied is greater than the quantity
demanded. Generally, a decrease in price will
eliminate a surplus.
Tariff: Excise tax on imported goods.
Tax incidence: Taxes can be shifted from those
who write the check to the government to others. The
study of tax incidence is the study of who ultimately
bears the burden of the tax.
Utility: An abstract variable, indicating goal-
attainment or want-satisfaction.
Utility function: A mathematical way of
saying that utility depends on consumption of goods
and services.
Zero-sum game: An interaction in which the
sum of winnings and losses equals zero.
 III. Adjective Intensifiers7

There are some words which can be used to

'intensify' many adjectives – 'very' 'really' 'totally'
'absolutely' 'completely' 'utterly' 'entirely'.
• It's very tall.
• We're really happy.
• She's totally exhausted.
• I'm absolutely horrified.
• He's completely hopeless.
• You look utterly miserable.
• I'm entirely satisfied.

Certain adjectives have their own 'special'

intensifiers which are often used with them. Here are
some common ones:

blind drunk
• He was blind drunk and behaved really
badly.
bone dry
• I must have a drink. I'm bone dry.
brand new
• I've just bought a brand new car.
7
After: English International Lyon – internet pages
crystal clear
• The sea near Rhodes is crystal clear.
dead easy
• That exam was dead easy. I've certainly
passed.
dead lucky
• He's won three lottery prizes this year. He's
dead lucky.
dead right
• I agree entirely. You are dead right.
dirt cheap
• I bought my car for a dirt cheap price from
an old lady who had hardly driven it.
fast asleep / sound asleep
• I was in bed and fast asleep by nine.
• I was sound asleep and I didn't hear
anything.
paper thin
• These office walls are paper thin. You can
hear everything said in the next office.
pitch black
• There's no moon. It is pitch black out there.
razor sharp
• Be careful with that knife- it is razor sharp.
 rock hard
• It's impossible to dig this soil – it is rock
hard.
stark naked
• The hotel door slammed behind me and I
was left standing stark naked in the middle
of the corridor.
stone deaf
• He can't hear a thing. He's stone deaf.
wide awake
• I was wide awake by six.
wide open
• Who left the door wide open?

IV. Food Phrases8

If you 'bolt down' food, you eat it very quickly.

This expression is informal.
• He bolted down the food. He really enjoyed
it.
• I'm so busy that I'm going to bolt down
some food and get straight back to work.

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From: http: // business – english. com
 If you 'wolf down' food, you also eat it quickly
but specifically because you are hungry. This is also
informal.
• Did you see the way she wolfed down that
food? She must have been ravenous.
• -After the marathon, I wolfed down some
fish and chips.
If you consume a lot of drink (usually alcohol)
quickly, you 'knock it back'. This is informal and is
often used quite negatively.
• He was knocking back the champagne at
the reception.
• We must watch Bill carefully in the bar
with the clients. He can really knock it
back.
If you eat an excessive amount of food, you
'pig out'. This is informal.
• I'm not hungry because I pigged out on
chocolate this afternoon.
• We really pigged out in the restaurant.
If you 'plough through' some food, you eat it
all but with some difficulty because there is a lot of it.
In American English, 'plough' can be written as
'plow'.
 • He served a huge plate of spaghetti and it
took me ages to plough my way through it.
• They served us snake. I didn't like it but I
plowed my way through it to be polite.
If you 'put away' food or drink, it can mean
you eat or drink a lot of it. (Obviously, it can also
mean that you place the food or drink in a fridge or
cupboard – the context of the sentence should make
clear the meaning.)
• Watch Peter. He's been putting away a lot
of beer and he sometimes turns aggressive
when he's drunk.
• He has put away some sandwiches but is
still hungry.
If you 'pick at' your food, you only eat a small
amount of it, usually because you are not hungry, you
are on a diet or because you are ill.
• She only picked at her food, even though it
was delicious.
• We were so busy talking that we only
picked at our food.
If you 'cut down' or 'cut back' on a particular
food or drink, you consume less of it.
• My doctor told me to cut back on the
amount of salt in my diet.
 • I need to cut down the amount of fried food
I eat.
If you 'eat up', you finish all your food.
• I don't like tripe but I ate it all up when it
was served to us by our hosts.
• Eat up. It's time to go.
If you 'drink up', you finish all your drink.
• We seem to have drunk up all the orange
juice.
• Drink up. It's time to go.
If you 'polish off' some food, you finish it
completely and quickly.
• The guests polished off all the food in the
first thirty minutes.
• He has just polished off two whole pizzas
and still says he is hungry.
If you 'dish up' some food, you put it onto
plates or dishes, ready to be served.
• I've heard she is going to dish up something
really special.
• Can you collect up the starter plates, while I
dish up the main course?
'Serve up' is another way of saying the same
thing as 'dish up'.
 • They served up a six-course meal for their
guests.
• It's no better than the food we serve up in
our canteen and twenty times more
expensive.
If you 'lay on' some food or drink, you provide
it.
• We've laid on a buffet lunch for our
visitors.
• They lay on a small drinks party for us.
If you make a meal very quickly and easily, you
'whip it up'. This is informal.
• Have a seat and I'll whip us up something
to eat.
• I could whip up a salad, if you are hungry.
If you make food quickly and without much
effort, you 'knock it up'.
• I knocked myself up a quick meal from what
was left in my fridge.
• Do you want me to knock up some lunch?
If you make food hot so that it can be eaten, you
'heat it up'.
• I've already prepared the food for the party.
All we need to do is to heat up the pizzas.
 • I could heat up a can of soup if you are
hungry.
If you 'warm up ' cold food, you are making it
hot again so that it can be eaten.
• I'll warm up that stew from last night.
• The canteen makes a large quantity once a
week and then just warms up the amount
needed every day.
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