. 5
( 33)


groups are similar to unions, they do not work in and Practices Web site at epp.glencoe.com and click
quite the same way. One such organization is a on Chapter 3”Student Web Activities for an activity
professional association”a group of people in a on the Better Business Bureau.
specialized occupation that works to improve the

to provide general information on companies, is
one of these. It maintains records on consumer
inquiries and complaints and sometimes offers
What™s in a Name? People often define themselves
various consumer education programs.
by the work they do. Many common English sur-
names are based on occupations. Examples are
Smith, Cooper, Carpenter, Weaver, Baker, and Potter.
Government is another nonprofit economic
organization. Sometimes government plays
Business Associations
a direct role in the economy, while at other times
Businesses also organize to promote their collec- the role is indirect.
tive interests. Most cities and towns have a chamber
of commerce that promotes the welfare of its mem-
Direct Role of Government
bers and of the community. The typical chamber
sponsors activities ranging from educational pro- Many government agencies produce and distrib-
grams to neighborhood clean-up campaigns to lob- ute goods and services to consumers, giving govern-
bying for favorable business legislation. ment a direct role in the economy. The role is
Many business organizations represent specific “direct” because the government supplies a good or
kinds of businesses. These are called industry or service that competes with private businesses.
trade associations. Trade associations are interested One example is the Tennessee Valley Authority
in shaping the government™s policy on such eco- (TVA). The TVA supplies electric power for almost
nomic issues as free enterprise, imports and tariffs, all of Tennessee and parts of Alabama, Georgia,
the minimum wage, new construction, and govern- Kentucky, Mississippi, North Carolina, and Virginia.
ment contracts for construction and manufacturing. This power competes directly with the power sup-
The Telecommunications Industry Association, for plied by other, privately owned, power companies.
instance, represents manufacturers and suppliers of Another example is the Federal Deposit Insurance
communications and information technology Corporation (FDIC), which insures deposits in our
products on issues affecting its members. nation™s banks. Because the insurance the FDIC
Some business associations help protect the supplies could be provided by privately owned
consumer. The Better Business Bureau, a non- insurance companies, the FDIC is also an example
profit organization sponsored by local businesses of the direct role of government.
Perhaps the best known of the government cor-
porations is the U.S. Postal Service (USPS).
Originally an executive department called the Post
Office Department, the USPS became a govern-
The Changing Workplace ment corporation in 1970.
In studying the workplace, some analysts feel
Many of these federal agencies are organized as
that certain trends will continue. People will
government-owned corporations. Like those of pri-
change jobs several times during their lifetimes.
vately owned businesses, these corporations have a
The compressed work schedule”working a
board of directors that hires a professional man-
shorter workweek with more hours per day”
agement team to oversee daily operations. These
will continue to make inroads. Analysts also
corporations charge for the products they produce,
believe that lifelong learning is a key to career
and the revenue goes back into the “business.” If
success. New jobs require advanced skills, edu-
the corporation has losses, however, they are cov-
cation, and training. Therefore, the need for
ered by funds supplied by Congress.
continuing to learn and develop new skills is
State and local governments provide police and
more important than ever before.
fire protection, rescue services, schools, and court
”Source: Computer Industry Almanac
systems. At the same time, all levels of government

help develop and maintain roads, libraries, and Promoting Interests
parks. In these ways, government plays a direct part
in the productive process.

Indirect Role of Government
The government plays an indirect role when it acts
as an umpire to make sure the market economy oper-
ates smoothly and efficiently. One such case is the
regulation of public utilities, investor- or municipal-
owned companies that offer important products to
the public, such as water or electric service.
Because many public utilities have few competi-
tors, people often want government supervision.
Methods Labor unions, professional and busi-
For example, government established regulatory
ness organizations, and interest groups draw
control over the cable television industry in 1993
from the financial resources and expertise of
because it felt that some operators were charging
their members. Who makes up the membership
too much. Without competition, utilities and other of a professional association?
companies having exclusive rights in certain areas
may not offer services at reasonable rates.
The government also plays an indirect role when they otherwise might not have”the power to
it grants money to people in the form of Social “vote” and to make their demands known in the
Security, veterans™ benefits, financial aid to college market. This power influences the production of
students, and unemployment compensation. Such goods and services that, in turn, affects the alloca-
payments give the recipients of these funds a power tion of scarce resources.

Checking for Understanding have joined. Research the history of the organ-
ization to find out how it began and its stated
1. Main Idea Using your notes from the graphic
goals. State the purpose of the organization,
organizer activity on page 75, describe the
and then compare its activities to profit-mak-
different types of cooperatives.
ing organizations. If your organization collects
2. Key Terms Define nonprofit organization,
more than it spends, what does it do with the
cooperative, co-op, credit union, labor union,
extra money?
collective bargaining, professional association,
chamber of commerce, Better Business
Bureau, public utility.
3. Identify the purpose of the different types of 6. Classifying Information Make a list of 10
nonprofit organizations. activities performed by your local govern-
4. Provide examples that illustrate the govern- ment. Classify each as to its direct or indi-
rect influences on the local economy.
ment™s direct and indirect roles as an eco-
nomic institution. 7. Making Comparisons Why do many people
prefer to deal with credit unions rather
Applying Economic Concepts
than banks?
5. Nonprofit Organizations Name a nonprofit
organization that you or one of your friends Practice and assess key social studies skills with
the Glencoe Skillbuilder Interactive Workbook,
Level 2.

Taking Notes
Effective note taking involves more than just writing facts in short phrases.
It involves breaking up the information into meaningful parts so that it can
be understood and remembered.

Practicing the Skill
Suppose you are writing a research report on the topic,
Business Organizations. First, identify main idea questions
about this topic, such as “What are the different kinds of
business organizations?” “How are they formed?” and
“What are their advantages and disadvantages?” Then find
material about each main-idea question.
Using this textbook as a source, read the material on
“Forms of Business Organization,” beginning on page 57.
Then, review the material and prepare notes like those
Business in the United States can be
organized in a number of ways.

Learning the Skill Topic: Business Organizations
To take good notes, follow these steps. Main Idea: Different kinds
1. The sole proprietorship is one kind of
• When taking notes on material presented in class,
bus. org.
write the key points, along with the important
facts and figures, in a notebook.
• Write quickly and neatly, using abbreviations and
Main Idea: Formation differs by kind of org.
• Copy words, statements, or diagrams drawn on 1.
the chalkboard.
• Ask the teacher to repeat important points you 3.
have missed or do not understand.
• When studying textbook material, organize your
notes into an outline. When outlining written
material, first read the material to identify the
main ideas. Next, identify the subheads. Place
details supporting or explaining subheads under
the appropriate head. Scan a local newspaper for a short editorial or an
article about an event pertaining to business or
• For a research report, take notes on cards. Note- the economy. Take notes by writing the main idea
cards should include the title, author, and the and supporting facts. Summarize the article using
page number of sources. only your notes.
Practice and assess key social studies skills with the
Glencoe Skillbuilder Interactive studies skills with2.
Practice and assess key social Workbook, Level the
Section 1 • Businesses can also expand through mergers. Most
mergers take place because firms want to become
Forms of Business Organization bigger, more efficient, acquire a new product, catch
up to or eliminate a competitor, or change its corpo-
(pages 57“66) rate identity.
• •
Sole proprietorships are small, easy-to-manage A horizontal merger takes place when two firms that
enterprises owned by one person. They are relatively produce similiar products come together. A vertical
numerous and profitable. Disadvantages include merger is one that involves two or more firms at dif-
raising financial capital and attracting qualified ferent stages of manufacturing or marketing.
• A conglomerate is a large firm that has at least four
• Partnerships are owned different businesses, none of which is responsible for
by two or more persons. a majority of sales.
Their slightly larger size
• A multinational can be an ordinary corporation or a
makes it easier to attract conglomerate, but it has manufacturing or service
financial capital and operations in several different
qualified workers. Disad- countries. Multinationals intro-
vantages include the duce new technology, generate
unlimited liability of each jobs, and produce tax revenues
general partner for the acts for the host countries.
of the other partners, the limited life of the partner-
ship, and the potential for conflict among partners.
Section 3
• Corporations are owned by shareholders who vote
to elect the board of directors. Shareholders have
Other Organizations (pages 75“79)
limited liability and are not liable for the actions or
debts of the corporation. The relatively large size of
• Nonprofit organizations function like a business,
the corporation allows for specialized functions and
but on a not-for-profit basis to further a cause or for
large-scale manufacturing within the firm.
the welfare of their members.
• Disadvantages of corporations include the cost of
• The cooperative, or co-op, is one of the major non-
obtaining charters, limited shareholder influence
profit organizations. The co-op can be organized to
over corporate policies, and having to deal with
provide goods and services, or to help producers.
some government regulations.
• Professional associations work to improve the work-
• The corporation is recognized as a separate legal
ing conditions, skill levels, and public perceptions of
entity and so must pay a separate corporate income
their profession.
tax not paid by proprietorships and partnerships.
• Businesses often form a chamber of commerce or a
Better Business Bureau to promote their collective
Section 2 interests.
• Government plays a direct role in the economy
Business Growth when it provides goods and services directly to con-
sumers; it plays an indirect role when it provides
and Expansion (pages 68“73) Social Security, veterans™ benefits, unemployment
• Businesses can grow by reinvesting their cash flows compensation, and financial aid to college students,
in plant, equipment, and new technology. or when it regulates businesses.

6. Explain why a corporation might choose to
become a conglomerate.

Section 3 (pages 75“79)
Self-Check Quiz Visit the Economics: Principles
and Practices Web site at epp.glencoe.com and
7. Describe the difference between a nonprofit insti-
click on Chapter 3”Self-Check Quizzes to prepare
tution and other forms of business organizations.
for the chapter test.
8. List three examples of cooperative associations.
9. Describe the purpose of a labor union.
Identifying Key Terms 10. Identify three types of business or professional
On a separate sheet of paper, classify each of the numbered
terms below into the following categories (some terms may 11. Compare the direct and the indirect roles of
apply to more than one category): government.
• Sole Proprietorships • Corporations
• Partnerships • Nonprofit Organizations
Thinking Critically
1. bond
2. stock 1. Making Comparisons If you were planning to
3. cooperative open your own business, such as a sportswear store
4. dividend or a lawn service, which form of business organiza-
5. unlimited liability tion would you prefer”sole proprietorship, part-
6. charter nership, or corporation? Give reasons for your
7. labor union answer. To help you organize your response, begin
8. professional association by setting up a diagram like the one below.
9. limited partner
10. credit union Type of Business

Reviewing the Facts Advantages Disadvantages

Section 1 (pages 57“66)
1. Explain the strengths of a sole proprietorship. 2. Drawing Conclusions Do you think mergers are
beneficial for the U.S. economy? Defend your
2. Identify the weaknesses of a partnership.
3. Explain the structure and strengths of a corporation.
3. Synthesizing Information List the strengths and
weaknesses of each type of business organization.
Section 2 (pages 68“73)
Then share the list with the owner of a business in
4. Explain how the firm obtains, and then disposes your community. Ask the owner which items on
of, its cash flow. the list were the most influential in deciding how
to organize his or her business. Write a report
5. Describe the difference between a horizontal and
summarizing your findings.
a vertical merger.

Applying Economic Concepts 3. In what year did sole proprietorships have the
largest net income as a percentage of business
1. Economic Institutions Cite a case in your commu- receipts? How did you find your answer?
nity where a cooperative would fulfill a definite eco-
nomic need. Explain why you think so, and then
Thinking Like an Economist
tell what kind of cooperative you would set up.
Identify two ways a firm™s cash flow can be used.
2. The Role of Government Which do you think is
Explain why these uses are a trade-off and explain
more appropriate”the direct or indirect role of
the opportunity costs of these choices in terms of
government? Defend your position.
the firm™s future growth.
3. Unlimited Liability What is the difference between
the unlimited liability of proprietorships and part-
Technology Skill
nerships, and the limited liability of corporations?
4. Business Growth What advantages might a multi-
Using the Internet With the increase in multina-
national bring to a host nation?
tional corporations, many American citizens are
5. Nonprofit Organizations In what ways does a con- interacting more and more with different cultures in
sumer cooperative differ from a service cooperative? other countries. Imagine that you and a partner have
set up a multinational corporation that operates in
the global economy. Select a country and use the
Math Practice Internet to research its culture in relation to business
protocol. Use the information to create a report that
Study the table that follows. Then answer the lists procedures and key words your employees will
questions. need to know in order to properly conduct business
in the country. Share your findings with the mem-
bers of your class.
Sole Proprietorships, 1985“1995
1985 1990 1995
540,045 730,606 807,364
Taking Notes Research to find out more
about an American entrepreneur and his or
Business 461,273 589,250 638,127 her role in shaping the U.S. economy. Before
you do any research, compile a list of ques-
tions to serve as a guide and to narrow your
Net Income
topic. Consider such questions as:
1. Whom shall I research?
In millions of dollars
2. What did he or she invent or promote?
Source: Statistical Abstract of the United States
3. How did he or she become a successful
1. What is the net income for each of the three years
4. What effect did this entrepreneur have on
listed? How did you find the answer? the U.S. economy?
2. In what year did sole proprietorships have the Use your notes to help you write a two-page
largest net income? typewritten sketch of the entrepreneur.

Practice and assess key social studies skills with
the Glencoe Skillbuilder Interactive Workbook,
Level 2.

Issues in Free

Issues in Free
Financial analysts called the 1990s “the decade of the megamerger,” and it™s easy to see why.
The decade saw an unprecedented number of “megamergers””multi-billion dollar deals that
combine already huge firms into even larger business giants.
In the oil industry, two giants”Exxon and Mobil”agreed to merge. The value of the deal? A
stunning $80 billion”Wall Street™s biggest deal ever. In the telecommunications industry, AT&T
acquired cable giant Tele-Communications, Inc. for $48 billion. Daimler-Benz AG, an auto indus-
try giant, acquired Chrysler Corporation in a $38 billion deal. In the financial industry, German
bank Deutshe Bank took over Bankers Trust Corporation (a $10 billion-plus deal), creating the
world™s largest bank.
These megamergers are only a few highlights of the trend toward megamergers in many
industries”a trend that shows no signs of stopping. But what are the consequences of

As you read the selections, ask yourself:
Are megamergers beneficial or harmful?

Big companies have disproportionate clout on
Megamergers national legislation. Our scandalously porous laws
P R O Are a Threat for campaign contributions leave little doubt that
megacompanies will exercise huge power over
politicians when it comes to such issues as envi-
ronmental standards, tax policy, Social Security,
The fierce competitive pressures forcing and health care. . . .
megamergers, such as cost-cutting and the need to Megacompanies are almost beyond the law,
achieve scale in the global economy, are under- too, because their deep pockets allow them to
standable. But the mergers raise a broad issue that stymie prosecutors in ways smaller defendants can-
goes beyond traditional concerns. . . . not. Or, if they lose in court, they can pay large
The big problem with these gigantic mergers is fines without much damage to their operations.
the growing imbalance between public and private Corporate giants will also exert massive pres-
power in our society. . . . [N]owadays an era of Big sure on America™s international behavior. Defense
Government is being superseded by the age of contractors such as Lockheed Martin, the result of
global goliaths. a 1995 merger, have successfully pushed for
Superlarge companies with interests and com- NATO expansion and for related military sales to
mitments stretching from Boston to Brisbane are Poland, the Czech Republic, and others.
unlikely to focus as intensely as smaller ones do on Combined entities such as Boeing-McDonnell
support for the local neighborhoods”the schools, Douglas will tighten their already formidable grip
the arts, the development of research activities, the on U.S. trade policy. Companies like Exxon-Mobil
training of potential workers. . . . Corp. will deal with oil-producing countries

almost as equals, conducting the most powerful services. When the typical market basket grows,
private diplomacy since the British East India producers of traditional goods become less impor-
Company wielded near-sovereign clout through- tant. . . .
out Asia. . . . Megamergers do not contradict this picture. One
The American economic system is at its best reason is that today™s merger is often tomorrow™s
when public and private needs are balanced. The bust-up. Some mergers fail because they™re driven
sheer magnitude of mergers is skewing the more by personal ambition than true efficiency. . . .
equilibrium. Some mergers may also be blatantly collusive.
Corporate executives regularly complain about
”Jeffrey E. Garten, Dean of the Yale School of Management
lost “pricing power”
(this may be a reason
inflation has stayed
tame). What better
way to restore it than
by buying a competi-
Megamergers tor? This is a genuine
CON antitrust worry, but
Are Harmless it™s wrong to see big-
ness as automatically
Sometimes it™s the
We are witnessing an interesting collision
other way around.
between history and headlines. The headlines her-
One reason manu-
ald a new era of menacing corporate power. . . .
facturers have held
Big business seems to be getting ever bigger and
down prices is that
more powerful.
their superstore cus-
Well, not exactly. The correct lesson from history
tomers”the Wal-
is just the opposite: corporate power is on the wane.
Marts and Home
If this seems counterintuitive, it™s also com-
Depots”have the
mon sense. Big business has been brought to
purchasing power to insist on low prices.
heel politically. Everything from child labor to
In truth, the inefficient firm”however big”is its
the environment has been regulated.
own worst enemy. Its inefficiency curbs its power.
Government is the final arbiter of business
Its products become vulnerable to competition; its
behavior, even if government is often arbitrary.
managers become vulnerable to takeover. . . .
This is an old story. Less recognized”or perhaps
forgotten”is the fact that companies have also ”Robert J. Samuelson, Washington Post Writers Group
lost much market power to set prices and deter-
mine what customers buy. . . .
We can all identify the major forces that have
corroded corporate market power: new technol- Analyzing the Issue
ogy (personal computers and cable TV); foreign
1. What is Garten™s basic objection to mega-
competition (automobiles); the end of legal
mergers? How does he support his position?
monopoly (telephones). But there is a less visible
force that subverts overall corporate power, and 2. What fundamental forces, in Samuelson™s
that is economic growth itself. As society becomes view, curb the power of giant corporations?
richer, people buy a greater array of goods and 3. Explain whose position you agree with, and
why, or explain your reasons for a third

Prices and Decision Making
Market Structures

As you read this unit, learn how the study
of economics helps answer the following

Why are tickets for some sporting
events sold out?
Why does the price of local farm
products such as corn and
tomatoes decrease during the

Buyers and sellers in the
stock market exemplify
the forces of supply and

To learn more about microeconomics through infor-
mation, activities, and links to other sites, visit the
Economics: Principles and Practices Web site at
In Chapter 4, you will
learn that demand is
more than a desire to buy
something: it is the ability and
willingness to actually buy it. To
learn more about how demand
operates in the marketplace,
view the Chapter 5 video lesson:
What is Demand?

People demonstrate demand by their
desire, ability, and willingness to pay.
Chapter Overview Visit the Economics: Principles
and Practices Web site at epp.glencoe.com and
click on Chapter 4”Chapter Overviews to preview
chapter information.
What Is Demand?
Main Idea Key Terms
Demand is a willingness to buy a product at a partic- demand, microeconomics, demand schedule, demand
ular price. curve, Law of Demand, market demand curve, mar-
ginal utility, diminishing marginal utility
Reading Strategy
Graphic Organizer As you read this section, use a
web diagram similar to the one below to note char- After studying this section, you will be able to:
acteristics of demand. 1. Describe and illustrate the concept of demand.
2. Explain how demand and utility are related.

Applying Economic Concepts
Demand You express your demand for a product
when you are willing and able to purchase it. Read
to find out how demand is measured.

Cover Stor y
eople sometimes think of demand as the
desire to have or to own a certain product. In
Forecasting Demand this sense, anyone who would like to own a
swimming pool could be said to “demand” one. In
s that he must pinpoi
Keith Clinkscales realize order for demand to be counted in the marketplace,
aze, is
if his new magazine, Bl
what his readers want however, desire is not enough; it must coincide with
to succeed. Blaze is the ability and willingness to pay for it. Only those
magazine for the hip ho people with demand”the desire, ability, and willing-
movement”focusing on ness to buy a product”can compete with others who
rap music and fashion. As
have similar demands.
reported in USA Today,
Demand, like many other topics in Unit 2, is a
Clinkscales watches th
microeconomic concept. Microeconomics is the
comings and goings of
Successful magazines gaug
teenagers at [nearby] area of economics that deals with behavior and deci-
Norman Thomas Hig sion making by small units, such as individuals and
School. H e studie firms. Collectively, these concepts of microeconom-
of course, their
es, hairstyles, and,
their cloth ics help explain how prices are determined and how
t™s amazing to watch
Clinkscales, 34, notes, “I
music. . . . individual economic decisions are made.
t their
passion they have abou
them and observe the
erall lifestyle. . . .”
music and fashion and ov ages 12 to 24. “Hip-
agazine targets readers
The m
An Introduction to Demand
re. We decided to
octane of the urban cultu
hop is the s on that culture,”
blication that will focu
create a pu A knowledge of demand is essential to
says Clinkscales. understand how a market economy works.
r 30, 1998
”USA Today, Decembe
As you read in Chapter 2, in a market economy
people and firms act in their own best interests to

ECONOMICS answer the WHAT, HOW, and FOR WHOM ques-
Figure 4.1
AT A GLANCE tions. Knowledge of demand is also important for
sound business planning. This is what an entrepre-
The Demand for neur like Keith Clinkscales must do: Find out what
type of magazine the hip-hop set is willing and able
Compact Digital Discs to buy in order for his project to become a success.

A Demand Schedule Demand Illustrated
To illustrate more fully how demand affects busi-
ness planning, imagine you are opening a bicycle
repair shop. Before you begin, you need to know
$30 0
where the demand is. You will want to set up your
shop in a neighborhood with many bicycle riders
25 0
and few repair shops.
20 1
After you identify an area in which to locate the
15 3 shop, how do you measure the demand for your
services? You may visit other shops and gauge the
10 5
reactions of consumers to different prices. You may
5 8 poll consumers about prices and determine demand
from this data. You could study data compiled over
past years, which would show consumer reactions to
higher and lower prices.
B Demand Curve
B All of these methods would give you a general
idea as to the desire, willingness, and ability of peo-
ple to pay. Gathering precise data on how con-
sumers actually behave, however, is not easy. Even
20 so, it is possible to treat the concept of demand in
a more formal manner.

Larry™s demand curve
15 a
The Individual Demand Schedule
5 To see how an economist would analyze
demand, look at Panel A of Figure 4.1. It shows the
amount of a product that a consumer, whom we™ll
0 1 3 5 8
call Larry, would be willing and able to purchase
over a range of possible prices that go from $5 to $30.
The information in Panel A is known as a demand
schedule. The demand schedule is a listing that
Using Graphs The demand schedule on the
shows the various quantities demanded of a partic-
top lists the quantity demanded at each and
ular product at all prices that might prevail in the
every possible price. The demand curve
market at a given time.
(below) shows the same information in the
As you can see, Larry would not buy any CDs at
form of a graph. The demand curve is down-
a price of $25 or $30, but he would buy one if the
ward sloping, which means that more will
price fell to $20, and he would buy three if the price
be demanded at lower prices, and fewer at
higher prices. How does the demand curve were $15, and so on. Just like the rest of us, he is
illustrate the Law of Demand? generally willing to buy more units of a product as
the price gets lower.

The Individual Demand Curve and simple observation are consistent with the Law
of Demand. This is the way people behave in normal
The demand schedule information in Panel A of
everyday life. People ordinarily do buy more of a
Figure 4.1 can also be shown graphically as the
product at a low price than at a high price. All we
downward-sloping line in Panel B. All we have to
have to do is to observe the increased traffic and pur-
do to is to transfer each of the price-quantity obser-
chases at the mall whenever there is a sale.
vations in the demand schedule to the graph, and
then connect the points to form the curve.
Economists call this the demand curve, a graph The Market Demand Curve
showing the quantity demanded at each and every
Figure 4.1 shows a particular individual™s demand
price that might prevail in the market.
for a product. Sometimes, however, we are more
For example, point a in Panel B shows that
concerned with the market demand curve, the
three CDs are purchased at a price of $15 each,
demand curve that shows the quantities demanded
while point b shows that five will be bought at a
by everyone who is interested in purchasing the
price of $10. The demand schedule and the
product. Figure 4.2 shows the market demand
demand curve are similar in that they both show
curve DD for Larry and his friend Curly, the only
the same information”one just shows the data in
two people whom (for simplicity) we assume to be
the form of a table while the other is presented in
willing and able to purchase CDs.
the form of a graph.

The Law of Demand
The Law of Demand
The prices and quantities illustrated in
Figure 4.1 point out an important feature of
demand: For practically every product or service,
higher prices are associated with a smaller amount
demanded. Conversely, lower prices are associated
with larger amounts demanded. This is known as
the Law of Demand, which states that the quantity
demanded of a good or service varies inversely with
its price. In other words, when the price goes up,
quantity demanded goes down. Likewise, when the
price goes down, quantity demanded goes up.

Foundations for the Law of Demand
Stating something in the form of a “law” may
seem like a strong statement for a social science like
economics to make, but there are at least two reasons
why economists prefer to do so. First, the inverse
relationship between price and quantity demanded is
something that we find in study after study, with peo-
ple almost always stating that they would buy more
of an item if its price goes down, and less if the price
Demand and Prices If the prices of televisions
goes up. Price is an obstacle, which discourages con-
drop, consumers will be better able and more
sumers from buying. The higher this obstacle, the
willing to buy. How does this situation reflect
less of a product they will buy; the lower the obsta- the Law of Demand?
cle, the more they will buy. Second, common sense

Figure 4.2

Individual and Market Demand Curves
$30 $30

25 25 to Curly™s demand
Add Larry™s demand
curve . . .
curve . . .
20 20

+ =

15 15

10 10

5 5

1 3 5 8
0 0 123 5 7
Quantity Quantity
Quantity of CDs Demanded by: D
Price Larry + Curly = Market to get the Market
Demand Curve.
$30 0 0 0
25 0 1 1

20 1 2 3
15 =
3 3 6
10 5 5 10 D
5 8 7 15
1 3 6 10 15

Using Graphs The market demand curve, DD, is the sum of all individual demand curves in the market.
The market demand curve, like the individual demand curve, is also downward sloping. How does
diminishing marginal utility help explain the shape of the demand curve?

To get the market demand curve is a simple The market demand curve in Figure 4.2 is very
matter. All we need to do is add together the similar to the individual demand curve in Figure 4.1.
number of CDs that Larry and Curly would pur- Both show a range of possible prices that might pre-
chase at every possible price, and then plot them on vail in the market at a given time. Both are downward
a separate graph. To illustrate, point a in Figure 4.2 sloping, showing that more will be bought at lower
represents the three CDs that Larry would pur- prices, and fewer at higher prices. The only real dif-
chase at $15, plus the three that Curly would buy ference between the two is that the market demand
at the same price. Likewise, point b represents the curve shows the demand for everyone that is interested
quantity of CDs that both would purchase at a in buying the product. Thus, the market demand
price of $10. curve shows the demand for everyone in the market.

Demand and Marginal Utility you buy a cola, why not buy two, or three, or even
more? The answer is that you get the most satisfac-
As you may recall from Chapter 1, econo- tion from the first purchase, and so you buy one.
mists use the term utility to describe the You get less satisfaction from the second purchase
amount of usefulness or satisfaction that someone and even less from the next”so you simply are not
gets from the use of a product. Marginal utility” willing to pay as much. When you reach the point
the extra usefulness or satisfaction a person gets where the marginal utility is less than the price, you
from acquiring or using one more unit of a prod- stop buying.
uct”is an important extension of this concept
because it explains so much about demand.
The reason we buy something in the first place
is because we feel the product is useful and that it
will give us satisfaction. However, as we use more
and more of a product, we encounter the principle
Housing Starts The number of housing starts
of diminishing marginal utility, which states that
shows the demand for new homes. Economists
the extra satisfaction we get from using additional
forecast housing starts by using the current
quantities of the product begins to diminish.
month™s permits as a predictor. Building permits
Because of our diminishing satisfaction, we are
tend to move in tandem with starts on a month-to-
not willing to pay as much for the second, third, month basis. They are also considered to be a lead-
fourth, and so on, as we did the first. This is why our ing indicator of the economy in general. Increases
demand curve is downward-sloping, and this is why in building permits and starts are common during
Larry and Curly won™t pay as much for the second periods following a drop in mortgage rates.
CD as they did for the first. This is something that
happens to all of us all the time. For example, when

Checking for Understanding differently if the price of each item was twice
as high? Would you have spent your money
1. Main Idea Using your notes from the graphic
differently if each of the items cost half as
organizer activity on page 89, write a defini-
much as it did? Explain your responses.
tion of demand in your own words.
2. Key Terms Define demand, microeconomics,
demand schedule, demand curve, Law of
Demand, market demand curve, marginal
utility, diminishing marginal utility. 6. Using Graphs Create your own demand
3. Describe the relationship between the schedule for an item you currently pur-
demand schedule and demand curve. chase. Next, plot your demand schedule on
a demand curve. Be sure to include correct
4. Describe how the slope of the demand curve
can be explained by the principle of diminish-
ing marginal utility. 7. Analyzing Information Analyze several
magazine or newspaper ads to determine
Applying Economic Concepts
how the ads reflect or use the law of dimin-
5. Demand Record the names and approximate
ishing marginal utility.
prices of the last two items you purchased. In
general, would you have spent your money Practice and assess key social studies skills with
the Glencoe Skillbuilder Interactive Workbook,
Level 2.

Wealth and Influence:
Oprah Winfrey

Oprah Winfrey”known to mil-
lions simply as “Oprah””is one of
the richest and most powerful
women in America. Most people
know her as a talk show host, but
she has other talents. As an actress,
she received an Oscar nomination
was hired as a reporter
for Best Supporting Actress in The
and anchor at WTVF-TV. complex, Harpo Productions, Inc.
Color Purple. As a businessperson,
In 1976 Winfrey moved to (Harpo is Oprah spelled backwards.)
she is the third woman in history
Baltimore, where she found her
(after Mary Pickford and Lucille
niche in television as co-host of a MAKING A DIFFERENCE
Ball) to own a major television and
Baltimore morning show, People
film studio. With an annual income Winfrey uses her wealth and
Are Talking. Winfrey™s successful
of about $100 million, she is poised influence to make a difference in
experience in Baltimore paved the
to become the country™s first the lives of others. Under her guid-
way for her to become the undis-
African American billionaire. ance, The Oprah Winfrey Show
puted “Queen of Talk” in Chicago.
avoids sensationalism, focusing
In 1984 Winfrey took over the
AGAINST ALL ODDS instead on issues of empowerment
ailing AM Chicago talk show on
and self-improvement.
Winfrey™s beginnings were WLS-TV. She turned it into a
Winfrey is also a staunch chil-
humble. She was born to unwed smash hit, driving the successful
dren™s rights activist. She proposed
teenage parents in rural Mississippi Phil Donahue Show to another city
a bill to create a national database
and grew up in poverty. A trou- and another time slot. In 1986 The
of convicted child abusers, which
bled childhood followed. Oprah Winfrey Show became nation-
President Clinton signed into law
Eventually, the teenager went to ally syndicated. Within months, it
in 1994.
live with her father, whose insis- was the third-highest-rated show in
tence on discipline and education syndication. It became the number-
soon turned her life around. one talk show, reaching up to ten
Examining the Profile
At the age of 17, Winfrey million people daily in more than
became a part-time radio news- 190 cities in 13 countries. 1. Drawing Conclusions Why is Oprah
caster at Nashville™s WVOL. Winfrey became the first African Winfrey considered one of the most
Two years later, while attending powerful women in America?
American woman to own her own
Tennessee State University, she television and film production 2. For Further Research Make an anno-
tated time line of Winfrey™s career,
highlighting her major achievements.

Factors Affecting Demand
Main Idea Key Terms
There are a number of factors that will cause change in quantity demanded, income effect,
demand to either increase or decrease. substitution effect, change in demand, substitutes,
Reading Strategy
Graphic Organizer As you read about the determi-
nants of demand, list each on a table similar to the After studying this section, you will be able to:
one below and provide an example of each. 1. Explain what causes a change in quantity
Determinants of Demand 2. Describe the factors that could cause a change in
Determinant Example

Applying Economic Concepts
Change in Demand Would you buy more clothes if
your employer doubled your salary? Read to find out
what causes a change in demand.

he demand curve is a graphical representa-
Cover Stor y tion of the quantities that people are willing
to purchase at all possible prices that might
prevail in the market. Occasionally, however, some-
Battle Over Games thing happens to change people™s willingness and
ability to buy, as exemplified in the cover story.
The meteoric
These changes are usually of two types: a change in
rise of PlayStation,
the quantity demanded, and a change in demand.
the games console
that swept aside
established rivals
Change in the Quantity Demanded
from Sega and
Nintendo and re- Point a on the demand curve in Figure 4.3
ignited profits at shows that six CDs are demanded when the
Sony, is at an end. price is $15. When the price falls to $10, however,
use a
Consumer preferences ca
[Sony] is now
10 CDs are demanded. This movement from point
change in demand.
facing increased
a to point b shows a change in quantity
competition from product, launched
e powerful Dreamcast demanded”a movement along the demand curve
Sega™s mor be introduced into
Japan and scheduled to that shows a change in the quantity of the product
last year in ar. [Sony] said that
and Europe later this ye purchased in response to a change in price.
the U.S. nsole in the year to
les of the PlayStation co We already know that the principle of dimin-
global sa year™s 21.6 million
00 would fall from last
March 20 ishing marginal utility provides an intuitive
units to 17 million. . . . explanation of why the demand curve is down-
ndon, April 28, 1999
”Financial Times of Lo ward sloping. As we will see below, the income
and substitution effects can also add to our
understanding of demand.

ECONOMICS The Substitution Effect
Figure 4.3
A lower price also means that CDs will be rela-
tively less expensive than other goods and services
A Change in such as concerts and movies. As a result, consumers
will have a tendency to replace a more costly item”
Quantity Demanded say, going to a concert”with a less costly one”
CDs. The substitution effect is the change in
$30 quantity demanded because of the change in the
relative price of the product. Together, the income
and substitution effects explain why consumers
increase consumption of CDs from 6 to 10 when
Decrease in quantity
20 demanded
the price drops from $15 to $10.

15 Note that whenever a change in price causes a
change in quantity demanded, the change appears
graphically as a movement along the demand
curve. The change in quantity demanded, as illus-
5 Increase in quantity
D trated in Figure 4.3, can be either an increase or a
decrease”but in either case the demand curve itself
0 15
1 3 6 10
does not shift.

Change in Demand
Using Graphs A change in price causes a
change in quantity demanded. When the Sometimes something happens to cause the
price goes down, the quantity demanded in- demand curve itself to shift. This is known as
creases. When the price goes up, the quantity a change in demand because people are now will-
demanded goes down. Both changes appear ing to buy different amounts of the product at the
as a movement along the demand curve. Why same prices. As a result, the entire demand curve
do price and quantity demanded move in
shifts”to the right to show an increase in demand
opposite directions?
or to the left to show a decrease in demand for the
product. Therefore, a change in demand results in
an entirely new curve.
The Income Effect A change in demand is illustrated in the sched-
When prices drop, consumers pay less for the ule and graph in Figure 4.4. Note that there is a new
product and, as a result, have some extra real column in the demand schedule showing that peo-
income to spend. At a price of $15 per CD, Larry ple are willing to buy more at each and every price.
and Curly spent $90 to buy six CDs. If the price At a price of $15, for example, consumers are now
drops to $10, they would spend only $60 on the willing to buy 10 CDs instead of 6, moving from
same quantity”leaving them $30 “richer” because point a to point a′. At $10, they are willing to buy
of the drop in price. They may even spend some of 15 CDs instead of 10, and so on. When this infor-
their savings on more CDs. As a result, part of the mation is transferred to the graph, the demand
increase from 6 to 10 units purchased is due to con- curve appears to have shifted to the right to show
sumers feeling richer. an increase in demand.
Of course, the opposite would have happened if The demand curve can change for several reasons.
the price had gone up. Larry and Curly would have When this happens, a new schedule or curve must be
felt a bit poorer and would have bought fewer. This constructed to reflect the new demand at all possible
illustrates the income effect, the change in quantity prices. Demand can change because of changes in
demanded because of a change in price that alters income, tastes, the price of related goods, expec-
consumers™ real income. tations, and the number of consumers.

PlayStation. The introduction of a new and supe-
rior product took customers away from Sony,
causing the number of units demanded at each and
every possible price to decline.
In addition, the development of new products
Student Web Activity Visit the Economics: Principles
can have an effect on consumer tastes. Years ago,
and Practices Web site at epp.glencoe.com and click
on Chapter 4”Student Web Activities for an activity many students carried slide rules to school to work
on change in demand. out math and science problems. Now they use
pocket calculators instead of slide rules. The
demand for calculators has increased while the
Consumer Income demand for slide rules has decreased.
Sometimes tastes and preferences change by
Changes in consumer income can cause a change
themselves over time. In recent years, consumer
in demand. When your income goes up, you can
concerns about health have greatly increased the
afford to buy more goods and services. As incomes
demand for healthier, less-fattening foods. Demand
rise, consumers are able to buy more products at
for smaller, more fuel-efficient cars has grown,
each and every price. When this happens, the
driven by a change in tastes.
demand curve shifts to the right. Suppose, for
example, that Larry and Curly get a raise, which
allows them to buy more CDs. Instead of Larry and
Curly each buying 3 for a total of 6, they can now
each buy 5”for a total of 10. If we find out how
many CDs would be purchased at every possible
price in the market, and if we plot the information
as a demand curve as in Figure 4.4, then it appears
Who will win the next
as if the curve has shifted to the right.
election? How many con-
Exactly the opposite could happen if there was a
sumers will buy a certain
decrease in income. If Larry and Curly™s raise
new product? People who
turned out to be temporary, then the loss in
try to answer such ques-
income would cause them to buy less of the good tions are statisticians.
at each and every price. The demand curve then
The Work
shifts to the left, showing a decrease in demand.
Statisticians work for the
government and in industry gathering and interpreting
Consumer Tastes data about the economy, health trends, and so on. They
Consumers do not always want the same things. also work for industries and public opinion research
organizations. One way statisticians gather information
Advertising, news reports, fashion trends, the intro-
is by taking samples. They cannot question all the adults
duction of new products, and even changes in the
in this country about their activities, but they can get a
season can affect consumer tastes. For example,
fairly accurate picture by asking a sample of a few hun-
when a product is successfully advertised in the
dred people.
media or on the Internet, its popularity increases
and people tend to buy more of it. If consumers Qualifications
want more of an item, they would buy more of it at To become a statistician, you should have an aptitude for
each and every price. As a result, the demand curve and an interest in mathematics and computers. Although
shifts to the right. some jobs are available for people with a bachelor's
On the other hand, if people get tired of a prod- degree, many jobs require a graduate degree in mathe-
uct, they will buy less at each and every price, caus- matics or statistics. If you think you want a career in sta-
ing the demand curve to shift to the left. This is tistics, you should take business, math, and science
exactly what happened to the demand for Sony™s courses.

Figure 4.4

A Change in Demand
Quantity Demanded D™
Price Old (DD) New (D™D™)
$30 0 1 D
25 1 3
Decrease in

a a™
20 3 6 demand
15 6 10
10 Increase in demand b b™
10 10 15
5 D D™
5 15 20

0 1 3 6 10 15 20

Using Graphs A change in demand means that a different quantity is demanded at each and every
possible price in the market. An increase in demand appears as a shift of the demand curve to the right. A
decrease appears as a shift to the left. What might cause a change in demand for CDs?

Substitutes fewer computers and less software. Thus, an
increase in the price of one good usually leads to a
A change in the price of related products can cause
decrease in the demand for its complement.
a change in demand. Some products are known as
Companies have made use of this relationship
substitutes because they can be used in place of
for a number of years. For example, the Gillette
other products. For example, butter and margarine
Corporation makes razor handles and razor blades.
are substitutes. A rise in the price of butter causes an
To generate a high demand for their products, the
increase in the demand for margarine. Likewise, a rise
price of razor handles is kept low. The profit
in the price of margarine would cause the demand
earned on each razor handle is small, but the razor
for butter to increase. In general, the demand for a
blades are sold at very profitable prices. As a result,
product tends to increase if the price of its substitute
the company is able to use the profits on the
goes up. The demand for a product tends to decrease
blades to more than offset the losses on the han-
if the price of its substitute goes down.
dles. Given the complementary nature of the two
products, it is unlikely that demand for Gillette
Complements blades would have been as high if the handles had
been more expensive.
Other related goods are known as complements,
because the use of one increases the use of the
other. Personal computers and software are two
Change in Expectations
complementary goods. When the price of comput-
“Expectations” refers to the way people think
ers decreases, consumers buy more computers and
about the future. For example, suppose that a leading
more software. In the same way, if the price of
maker of audio products announces a technological
computers spirals upward, consumers would buy

breakthrough that would allow more music to be
recorded on a smaller disk at a lower cost than
before. Even if the new product might not be avail- In colonial times, money was in short
Shelling Out
able for another year, some consumers might decide supply. Because of this, people often used shelled
to buy fewer musical CDs today simply because they corn to pay for goods and services. Although the
want to wait for a better product. Purchasing less at practice of using shelled corn as money has not sur-
each and every price would cause demand to decline, vived, the slang expression shell out”meaning pay
which is illustrated by a shift of the demand curve to
the left.
Of course, expectations can also have a very dif-
ferent effect on market demand. For example, if the
weather service forecasts a bad year for crops, people To illustrate, suppose Moe, one of Larry™s and
might stock up on some foods before they actually Curly™s old friends, now decides to purchase com-
become scarce. The willingness to buy more at each pact discs. If we add the number of CDs that Moe
and every price because of expected future shortages would demand at each and every possible price to
would cause demand to increase, which is demon- the others shown in Figure 4.2, the market
strated by a shift of the demand curve to the right. demand curve DD would shift to the right. This
would not affect the other individual demand
curves, of course, but, as we shall see later in
Number of Consumers Chapter 6, it will affect the prices that everyone
A change in income, tastes, and prices of related will pay for CDs. If Larry or Moe should leave the
products affects individual demand schedules and market the total number of CDs purchased at
curves”and hence the market demand curve, which is each and every price would decrease. This shifts
the sum of all individual demand curves. It follows, the market demand curve to the left. The result is
therefore, that an increase in the number of con- a decline in market demand whenever anyone
sumers can cause the market demand curve to shift. leaves the market.

Checking for Understanding Identify one substitute and one complement
for that product. What happened to your
1. Main Idea How does the income effect
demand for the substitute good when the
explain the change in quantity demanded
item you bought went on sale? What hap-
that takes place when the price goes down?
pened to your demand for the complemen-
2. Key Terms Define change in quantity
tary good when that item went on sale?
demanded, income effect, substitution effect,
change in demand, substitutes, complements.
3. Describe the difference between a change in
quantity demanded and a change in demand.
6. Understanding Cause and Effect What
4. Explain how a change in price affects the happens to the price and the quantity of
demand for a product™s substitute(s). goods and services sold when a store runs
a sale? How do these factors relate to the
Applying Economic Concepts
downward-sloping curve?
5. Change in Demand Name a product that you
recently purchased because it was on sale. Practice and assess key social studies skills with
the Glencoe Skillbuilder Interactive Workbook,
Level 2.

DECEMBER 14, 1998
McDonald™s opened its first restaurant in endangered menu item says Jack Greenberg,
CEO of McDonald™s: “No one can afford them.”
Des Plaines, Illinois, in 1955. In 1967
The company has
McDonald™s opened its first restaurants in
long tailored menus at
cities in other countries. Today, the com-
its 24,000 worldwide
pany operates nearly 25,000 McDonald™s restaurants to local
restaurants in 115 countries on six conti- tastes, though not out
of economic distress.
nents. Multinational companies, like
In other Asian markets
McDonald™s, are huge companies that
weakened currencies
carry out their activities on a global scale,
have made it cheaper
selling their products worldwide. Read to
to build new outlets:
find out how McDonald™s must adapt its 2,000 are anticipated
menu to local tastes. [by the year 2002].
But Indonesia™s situa-
tion is so disastrous,
says Greenberg, that
Holding the Fries McDonald™s will close
30 of its 100 stores
“At the Border” there.

Your stomach starts growling and you want a
quick fix, so you head to the nearest Gold Arches
for a Big Mac and . . . rice?
Rice is what you™ll probably end up with
these days if your local McDonald™s is in ”Reprinted from December 14, 1998 issue of Business Week, by special
Indonesia. With the collapse of the Indonesian permission, copyright © 1998 by The McGraw-Hill Companies, Inc.
currency, the rupiah, in 1998, potatoes, the
only ingredient McDonald™s imports
Examining the Newsclip
to the island nation, have quintu-
pled in price. That means rice is 1. Understanding Cause and Effect Why did
turning with an increasing fre- McDonald™s change its menu in Indonesia?
quency as an alternative to the 2. Synthesizing Information Did McDonald™s
french fry. In September 1998 introduce rice to its Indonesian menu in
McDonald™s introduced a rice response to a change in consumer tastes?
and eggs dish, and its value Explain your reasoning.
meals now consist of just 3. Making Predictions What will happen if
chicken and a drink”but no the change in the menu increases demand?
potatoes. It™s not hard to Explain your answer.
fathom why fries are an

Elasticity of Demand
Main Idea Key Terms
Consumers react differently to price changes depend- elasticity, demand elasticity, elastic, inelastic, unit elastic
ing on whether the good is a necessity or a luxury.
Reading Strategy After studying this section, you will be able to:
Graphic Organizer As you read about price elasticity, 1. Explain why elasticity is a measure of responsiveness.
complete a web like the one below to illustrate what 2. Analyze the elasticity of demand for a product.
effect a change in price has on products that are elas- 3. Understand the factors that determine demand
tic, inelastic, or unit elastic. elasticity.

Applying Economic Concepts
Change in price
Elasticity of Demand What are you willing to pay to
see a popular movie? Read to find out about the elas-
ticity of demand for a product and what factors influ-
ence your willingness and ability to pay for a product.

ause-and-effect relationships are important in
Cover Stor y the study of economics. For example, we
often ask, “if one thing happens, how will it
affect something else?” The software manufacturer in
Setting Prices the cover story used a cause-and-effect relationship to
It is always a diffi- set the price for its product.
cult problem know- An important cause-and-effect relationship in eco-
ing how best to price nomics is elasticity, a measure of responsiveness that
a product. . . . When tells us how a dependent variable such as quantity
the product is one in responds to a change in an independent variable such
Demand helps determine
a new and rapidly as price. Elasticity is also a very general concept. It
evolving industry, ci-


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