Friday, June 12, 2009

HISTORY of ADS

Archaeologists have found evidence of advertising dating back to the 3000s bc, among the Babylonians. One of the first known methods of advertising was the outdoor display, usually an eye-catching sign painted on the wall of a building. Archaeologists have uncovered many such signs, notably in the ruins of ancient Rome and Pompeii. An outdoor advertisement excavated in Rome offers property for rent, and one found painted on a wall in Pompeii calls the attention of travelers to a tavern situated in another town.

In medieval times word-of-mouth praise of products gave rise to a simple but effective form of advertising, the use of so-called town criers. The criers were citizens who read public notices aloud and were also employed by merchants to shout the praises of their wares. Later they became familiar figures on the streets of colonial American settlements. The town criers were forerunners of the modern announcer who delivers radio and television commercials.

Although graphic forms of advertising appeared early in history, printed advertising made little headway until the invention of the movable-type printing press by German printer Johannes Gutenberg about 1450. This invention made the mass distribution of posters and circulars possible. The first advertisement in English appeared in 1472 in the form of a handbill announcing a prayer book for sale. Two hundred years later, the first newspaper ad was published offering a reward for the return of 12 stolen horses. In the American colonies, the Boston News-Letter, the first regularly published newspaper in America, began carrying ads in 1704, and about 25 years later Benjamin Franklin made ads more readable by using large headlines.

In the United States, the advertising profession began in Philadelphia, Pennsylvania, in 1841 when Volney B. Palmer set up shop as an advertising agent, the forerunner of the advertising agency. Agents contracted with newspapers for large amounts of advertising space at discount rates and then resold the space to advertisers at a higher rate. The ads themselves were created by the advertisers. In 1869 Francis Ayer bought out Palmer and founded N. W. Ayer & Son, an agency that still exists today. Ayer transformed the standard agent practice by billing advertisers exactly what he paid to publishers plus an agreed upon commission. Soon Ayer was not only selling space but was also conducting market research and writing the advertising copy.

Advertising agencies initially focused on print. But the introduction of radio created a new opportunity and by the end of the 1920s, advertising had established itself in radio to such an extent that advertisers were producing many of their own programs. The early 1930s ushered in dozens of radio dramatic series that were known as soap operas because they were sponsored by soap companies.

Television had been introduced in 1940, but because of the high cost of TV sets and the lack of programming, it was not immediately embraced. As the American economy soared in the 1950s, so did the sale of TV sets and the advertising that paid for the popular new shows. Soon TV far surpassed radio as an advertising medium.

The tone of the advertising was also changing. No longer did advertising simply present the product benefit. Instead it began to create a product image. Bill Bernbach, founder of Doyle Dane Bernbach in New York City; Leo Burnett, founder of the Leo Burnett agency in Chicago, Illinois; and David Ogilvy, founder of Ogilvy & Mather in New York City, all came to prominence in the late 1950s and 1960s and led what has been called the "creative revolution." Bernbach's agency captured the spirit of the new age. Bernbach believed that advertising had to be creative and artistic or it would bore people. He also believed that good advertising began with respect for the public's intelligence. The ads his agency created were understated, sophisticated, and witty.

For example, when Bernbach's agency picked up the account for the Henry S. Levy Bakery in Brooklyn, a borough of New York City, the agency created an ad that entertained New Yorkers and provided fodder for many conversations. The ad showed a Native American eating a slice of the bakery's rye bread with the headline, "You don't have to be Jewish to love Levy's." But it was the advertising for Volkswagen that made the agency's reputation. At a time when American cars were getting bigger and bigger and the advertising for them trumpeted that bigger was better, Doyle Dane Bernbach created a magazine ad that showed a small picture of the Volkswagen Beetle surrounded by a sea of white space with the headline, "think small." An equally unconventional ad carried the headline "lemon" beneath a photo of an apparently flawed Volkswagen. The ad's copy explained that "this Volkswagen missed the boat. The chrome strip on the glove compartment is blemished and must be replaced…We pluck the lemons; you get the plums." In an era of hype and bombast, the Volkswagen ads stood out because they admitted failure in a witty way and gave facts in a believable manner that underlined the car's strengths. This wit together with a conversational and believable style was a hallmark of the advertising created by Doyle Dane Bernbach and that style became highly influential.

The creative foundation established by Bernbach and others has been critical to the success of contemporary advertising. The introduction of the TV remote control and access to hundreds of cable channels mean that today advertising must interest and entertain consumers or else they will simply use the remote to change the channel. New digital devices even threaten to make it possible to edit out commercials. The development of interactive television, combining the functions of a computer with access to high-speed transmission over cable lines or optical fibers, will likely enable consumers to select from a vast video library. Consumers will be able to determine not only when they watch something, but also, to a greater extent than ever before, what they will watch. Some industry observers believe that as consumers gain greater control over their viewing activities, they will find it easier to avoid advertising.

No one can predict what new forms advertising may take in the future. But the rapidly increasing cost of acquiring new customers makes one thing certain. Advertisers will seek to hold onto current customers by forming closer relationships with them and by tailoring products, services, and advertising messages to meet their individual needs. So while advertising will continue to encourage people to consume, it will also help provide them with products and services more likely to satisfy their needs.

Business

INTRODUCTION
Business, organized approach to providing customers with the goods and services they want. The word business also refers to an organization that provides these goods and services. Most businesses seek to make a profit—that is, they aim to achieve revenues that exceed the costs of operating the business. Prominent examples of for-profit businesses include Mitsubishi Group, General Motors Corporation, and Royal Dutch/Shell Group. However, some businesses only seek to earn enough to cover their operating costs. Commonly called nonprofits, these organizations are primarily nongovernmental service providers. Examples of nonprofit businesses include such organizations as social service agencies, foundations, advocacy groups, and many hospitals.

Business plays a vital role in the life and culture of countries with industrial and postindustrial (service- and information-based) free-market economies such as the United States. In free-market systems, prices and wages are primarily determined by competition, not by governments. In the United States, for example, many people buy and sell goods and services as their primary occupations. In 2001 American companies sold in excess of $10 trillion worth of goods and services. Businesses provide just about anything consumers want or need, including basic necessities such as food and housing, luxuries such as whirlpool baths and wide-screen televisions, and even personal services such as caring for children and finding companionship.

TYPES OF BUSINESSES

There are many types of businesses in a free-market economy. The three most common are (1) manufacturing firms, (2) merchandisers, and (3) service enterprises.

Manufacturing Firms: Manufacturing firms produce a wide range of products. Large manufacturers include producers of airplanes, cars, computers, and furniture. Many manufacturing firms construct only parts rather than complete, finished products. These suppliers are usually smaller manufacturing firms, which supply parts and components to larger firms. The larger firms then assemble final products for market to consumers. For example, suppliers provide many of the components in personal computers, automobiles, and home appliances to large firms that create the finished or end products. These larger end-product manufacturers are often also responsible for marketing and distributing the products. The advantage that large businesses have in being able to efficiently and inexpensively control any parts of a production process is known as economies of scale. But small manufacturing firms may work best for producing certain types of finished products. Smaller end-product firms are common in the food industry and among artisan trades such as custom cabinetry.

Merchandisers: Merchandisers are businesses that help move goods through a channel of distribution—that is, the route goods take in reaching the consumer. Merchandisers may be involved in wholesaling or retailing, or sometimes both.

A wholesaler is a merchandiser who purchases goods and then sells them to buyers, typically retailers, for the purpose of resale. A retailer is a merchandiser who sells goods to consumers. A wholesaler often purchases products in large quantities and then sells smaller quantities of each product to retailers who are unable to either buy or stock large amounts of the product. Wholesalers operate somewhat like large, end-product manufacturing firms, benefiting from economies of scale. For example, a wholesaler might purchase 5,000 pairs of work gloves and then sell 100 pairs to 50 different retailers. Some large American discount chains, such as Kmart Corporation and Wal-Mart Stores, Inc., serve as their own wholesalers. These companies go directly to factories and other manufacturing outlets, buy in large amounts, and then warehouse and ship the goods to their stores.

The division between retailing and wholesaling is now being blurred by new technologies that allow retailing to become an economy of scale. Telephone and computer communications allow retailers to serve far greater numbers of customers in a given span of time than is possible in face-to-face interactions between a consumer and a retail salesperson. Computer networks such as the Internet, because they do not require any physical communication between salespeople and customers, allow a nearly unlimited capacity for sales interactions known as 24/7—that is, the Internet site can be open for a transaction 24 hours a day, seven days a week and for as many transactions as the network can handle. For example, a typical transaction to purchase a pair of shoes at a shoe store may take a half-hour from browsing, to fitting, to the transaction with a cashier. But a customer can purchase a pair of shoes through a computer interface with a retailer in a matter of seconds.

Computer technology also provides retailers with another economy of scale through the ability to sell goods without opening any physical stores, often referred to as electronic commerce or e-commerce. Retailers that provide goods entirely through Internet transactions do not incur the expense of building so-called brick-and-mortar stores or the expense of maintaining them.

Service Enterprises: Service enterprises include many kinds of businesses. Examples include dry cleaners, shoe repair stores, barbershops, restaurants, ski resorts, hospitals, and hotels. In many cases service enterprises are moderately small because they do not have mechanized services and limit service to only as many individuals as they can accommodate at one time. For example, a waiter may be able to provide good service to four tables at once, but with five or more tables, customer service will suffer.

In recent years the number of service enterprises in wealthier free-market economies has grown rapidly, and spending on services now accounts for a significant percentage of all spending. By the late 1990s, private services accounted for more than 21 percent of U.S. spending. Wealthier nations have developed postindustrial economies, where entertainment and recreation businesses have become more important than most raw material extraction such as the mining of mineral ores and some manufacturing industries in terms of creating jobs and stimulating economic growth. Many of these industries have moved to developing nations, especially with the rise of large multinational corporations. As postindustrial economies have accumulated wealth, they have come to support systems of leisure, in which people are willing to pay others to do things for them. In the United States, vast numbers of people work rigid schedules for long hours in indoor offices, stores, and factories. Many employers pay high enough wages so that employees can afford to balance their work schedules with purchased recreation. People in the United States, for example, support thriving travel, theme park, resort, and recreational sport businesses.

FORMS OF BUSINESS OWNERSHIP

There are a number of different forms of business ownership. These include (1) sole proprietorships, (2) partnerships, (3) corporations, (4) joint ventures, and (5) syndicates.

Sole Proprietorship: The most common form of ownership is a sole proprietorship—that is, a business owned by one individual. At the beginning of the 21st century, there were more than 17 million sole proprietorships in the United States. These businesses have the advantage of being easy to set up and to dissolve because few laws exist to regulate them. Proprietors, as owners, also maintain direct control of their businesses and own all their profits. On the other hand, owners of proprietorships are personally responsible for all business debts and, because they are constrained by the limits of their personal financial resources, they may find it difficult to expand or increase their profits. For those reasons, sole proprietorships tend to be small, primarily service and retail businesses.

Partnership: A partnership is an association of two or more people who operate a business as co-owners. There are different types of partners. A general partner is active in the operation of a business and is liable for all of its debts. In small businesses with only two or three owners, all typically will be general partners. A limited partner, by contrast, invests in a business but is not involved in its daily operations. Partnerships, like sole proprietorships, are relatively easy to establish. Furthermore, partners can pool financial resources to fund expansion and can divide their duties and responsibilities according to personal expertise and abilities. For example, one partner may be very good at selling, while another has a knack for maintaining good financial records. As with sole proprietorships, however, partnerships may entail substantial financial risks, as all of the general partners are liable for the debts of the business. And unlike proprietorships, disagreements among partners can harm partnership businesses.

Corporation: A corporation is a legal entity that exists as distinct from the individuals who control and invest in it. As a result, a corporation can continue indefinitely through complete changes of ownership, leadership, and staffing. Current owners can sell their holdings to other individuals or, if they die, have their assets transferred to heirs. This is possible because a corporation creates shares of stock that are sold to investors. One strength of the corporate business structure is that stockholders have limited liability, as opposed to the unlimited liability of general partners, so they cannot lose more than their initial investment. Investors may also easily buy and sell stocks of public corporations through stock exchanges. By offering stock publicly, a corporation enables anyone with some money to buy the stock and become a part-owner of the company. As a result, corporations can more easily raise capital for business expansion than can sole proprietorships and most partnerships.

Investors control a corporation through the election of a managing body, known as a board of directors. In a large corporation, investors collectively decide who will oversee the operation of the enterprise. In turn, the board chooses a president, who decides on the key company personnel and helps formulate company strategy.

Many corporations are highly successful business organizations, with profits far exceeding those of many sole proprietorships and partnerships. However, they traditionally have higher tax burdens than other kinds of businesses. Also, the fees involved in creating and organizing a corporation can be expensive.

Joint Ventures and Syndicates: In joint ventures and syndicates, individuals or businesses cooperate to create a single product or service package. A joint venture is a partnership agreement in which two or more individual- or group-run businesses join together to carry out a single business project. For example, U.S.-based General Motors Corporation and Toyota Motor Corporation, based in Japan, have a joint venture called New United Motor Manufacturing, Inc., created for the purpose of producing cars in California.

A syndicate is an association of individuals or corporations formed to conduct a specific financial transaction such as buying a business. Quite often syndicates are created for the purpose of buying sports franchises. For example, the Miami Heat basketball team and the New York Yankees baseball team are each owned by syndicates of individuals. Each member of these syndicates is also involved in the operation of other businesses.

BUSINESS OPERATIONS

A variety of operations keep businesses, especially large corporations, running efficiently and effectively. Common business operation divisions include (1) production, (2) marketing, (3) finance, and (4) human resource management.

Production: Production includes those activities involved in conceptualizing, designing, and creating products and services. In recent years there have been dramatic changes in the way goods are produced. Today, computers help monitor, control, and even perform work. Flexible, high-tech machines can do in minutes what it used to take people hours to accomplish. Another important development has been the trend toward just-in-time inventory. The word inventory refers to the amount of goods a business keeps available for wholesale or retail. In just-in-time inventory, the firm stocks only what it needs for the next day or two. Many businesses rely on fast, global computer communications to allow them to respond quickly to changes in consumer demand. Inventories are thus minimized and businesses can invest more in product research, development, and marketing.

Marketing: Marketing is the process of identifying the goods and services that consumers need and want and providing those goods and services at the right price, place, and time. Businesses develop marketing strategies by conducting research to determine what products and services potential customers think they would like to be able to purchase. Firms also promote their products and services through such techniques as advertising and personalized sales, which serve to inform potential customers and motivate them to purchase. Firms that market products for which there is always some demand, such as foods and household goods, often advertise if they face competition from other firms marketing similar products. Such products rarely need to be sold face-to-face. On the other hand, firms that market products and services that buyers will want to see, use, or better understand before buying, often rely on personalized sales. Expensive and durable goods—such as automobiles, electronics, or furniture—benefit from personalized sales, as do legal, financial, and accounting services.

Finance: Finance involves the management of money. All businesses must have enough capital on hand to pay their bills, and for-profit businesses seek extra capital to expand their operations. In some cases, they raise long-term capital by selling ownership in the company. Other common financial activities include granting, monitoring, and collecting on credit or loans and ensuring that customers pay bills on time. The financial division of any business must also establish a good working relationship with a bank. This is particularly important when a business wants to obtain a loan.

Human Resource Management
Businesses rely on effective human resource management (HRM) to ensure that they hire and keep good employees, and that they are able to respond to conflicts between workers and management. HRM specialists initially determine the number and type of employees that a business will need over its first few years of operation. They are then responsible for recruiting new employees to replace those who leave and for filling newly created positions. A business’s HRM division also trains or arranges for the training of its staff to encourage worker productivity, efficiency, and satisfaction, and to promote the overall success of the business. Finally, human resource managers create workers’ compensation plans and benefit packages for employees.

FREE MARKET ECONOMY

BUSINESS IN A FREE MARKET ECONOMY
The economy of the United States, as well as that of most developed nations, operates according to the principles of the free market. This differs from the economies of Socialist or Communist countries, where governments play a strong role in deciding what goods and services will be produced, how they will be distributed, and how much they will cost (see Socialism; Communism). Businesses in free-market economies benefit from certain fundamental rights or freedoms. All people in free-market societies have the right to own, use, buy, sell, or give away property, thus permitting them to own and operate their own businesses as private, profit-seeking enterprises. Business owners in free markets may choose to run their businesses however they like, within the limits of other, mostly non-business-oriented laws. This right gives businesses the authority to hire and fire employees, invest money, purchase machinery and equipment, and choose the markets where they want to operate. In doing so, however, they may not violate or infringe on the rights of other businesses and people. Free-market businesses also have the right to keep or reinvest their profits.

All free-market economies, however, keep the rights of businesses in check to some degree through laws and regulations that monitor business activities. Such laws vary from country to country, but they generally encourage competition by protecting small businesses and consumers from being hurt by more powerful, large enterprises. For example, in the United States the Sherman Antitrust Act, enacted in 1890, and the Clayton Antitrust Act of 1914 forbid business agreements that impede interstate and most international commerce. The Clayton Antitrust Act also protects against unfair business practices aimed at creating monopolies and guarantees the rights of labor to challenge management practices perceived as unfair. The U.S. Federal Trade Commission Act of 1914 prohibits businesses from attempting to control the prices of its products or services, among other provisions. Other laws prohibit mergers that decrease competition within an industry and require large merging companies to notify the Federal Trade Commission (FTC) for approval.

CURRENT TRENDS

CURRENT TRENDS
Business activities are becoming increasingly global as numerous firms expand their operations into overseas markets. Many U.S. firms, for example, attempt to tap emerging markets by pursuing business in China, India, Brazil, and Russia and other Eastern European countries. Multinational corporations (MNCs), which operate in more than one country at once, typically move operations to wherever they can find the least expensive labor pool able to do the work well. Production jobs requiring only basic or repetitive skills—such as sewing or etching computer chips—are usually the first to be moved abroad. MNCs can pay these workers a fraction of what they would have to pay in a domestic division, and often work them longer and harder. Most U.S. multinational businesses keep the majority of their upper-level management, marketing, finance, and human resources divisions within the United States. They employ some lower-level managers and a vast number of their production workers in offices, factories, and warehouses in developing countries. MNCs based in the United States have moved many of their production operations to countries in Central and South America, China, India, and nations of Southeast Asia.

Mergers and acquisitions are also becoming more common than in the past. In the United States, for example, America Online, Inc. (AOL) and Time Warner merged in 2000 to form AOL Time Warner, Inc., a massive corporation that brought together AOL’s Internet franchises, technology and infrastructure, and e-commerce capabilities with Time Warner’s vast array of media, entertainment, and news products. Internationally, a growing number of mergers and acquisitions have been taking place, including Daimler Benz’s acquisition of Chrysler to form DaimlerChrysler AG and Ford Motor Company’s acquisition of Volvo’s automobile line.

With large mergers and the development of new free markets around the world, major corporations now wield more economic and political power than the governments under which they operate. In response, public pressure has increased for businesses to take on more social responsibility and operate according to higher levels of ethics. Firms in developed nations now promote—and are often required by law to observe—nondiscriminatory policies for the hiring, treatment, and pay of all employees. Some companies are also now more aware of the economic and social benefits of being active in local communities by sponsoring events and encouraging employees to serve on civic committees. Businesses will continue to adjust their operations according to the competing goals of earning profits and responding to public pressures for them to behave in ways that benefit society.

Business Cycle

INTRODUCTION
Business Cycle, term used by economists to designate a periodic increase and decrease in an economy’s production and employment. Ever since the Industrial Revolution of the 1800s, the overall level of production in industrialized capitalist countries has varied from high output and employment to low output and employment. Economists study business cycles because they have a significant impact on all aspects of an economy.

BUSINESS CYCLE CHARACTERISTICS
A business cycle has a period of expansion and a period of contraction. Although each business cycle has its own unique characteristics, all business cycles share certain similarities. For example, in the expansion phase, production increases while employment, wages, and business profits also rise. During the contraction phase of the business cycle, production, employment, wages, and business profits all fall. These phases sometimes go by different names. Expansions are referred to as recoveries, booms, upturns, periods of prosperity, and upswings. Contractions are variously called recessions, downturns, downswings, and liquidations. The word “depression” also applies to business cycle contractions but is normally reserved for the worst or most severe contractions.

All business cycles also have peaks and troughs, words that economists use for the turning points in a business cycle. A peak marks the end of an expansion and the beginning of a contraction, while a trough marks the end of a contraction and the beginning of an expansion.

In the typical business cycle expansion, business firms will exhibit optimism about the economic outlook. They will express this optimism by investing in facilities, thereby expanding their ability to produce goods and services. The firms will also hire more people to work in their stores, factories, and offices. Consumers will also be optimistic during an expansion. Their optimism leads them to increase their purchases, typically resorting to additional borrowing to finance the acquisition of more goods and services.

As the upswing continues, however, obstacles begin to develop that hinder further expansion. For example, production costs may increase, shortages of raw materials may develop, interest rates will start to rise, and prices will begin to increase, or, if already increasing, will start to rise more rapidly. Consumers react to higher prices and higher interest rates by buying less. As purchases begin to lag behind production, business firms begin to accumulate inventories (the merchandise or goods that a company or store has on hand). Producers begin to cut back on investment in facilities and reduce employment. Despite these adjustments, profits fall and further cutbacks are made. The economy now enters the contraction phase of the business cycle.

Several different factors can trigger a recovery from a contraction, including an increase in consumer demand, the depletion of inventories, or government action to stimulate the economy. Although generally slow and uneven at the start, the recovery soon gathers momentum. Production and employment begin to increase again, putting additional purchasing power into the hands of consumers. Investment expands in industries that make goods or machinery for sale to other businesses, rather than directly to consumers—industries that are known as capital goods industries. Optimism returns, old businesses expand, and new businesses are created. A new cycle has started.

Business cycles are important not just for their economic consequences but also for their broader social consequences. Several studies have shown that declines in economic activity coincide with declines in birth rates and increases in death and divorce rates. The higher unemployment rates caused by recessions are also associated with higher suicide rates and higher crime rates.

MEASURING THE BUSINESS CYCLE
Economists use contractions as a way to document the beginning and end of a business cycle. They can determine when a contraction, or recession, has begun by using a variety of measurements. The common definition of a recession is two consecutive quarterly declines in the gross domestic product (GDP, the total of all goods and services produced within a country). Many economists, however, regard this definition as simplistic because it measures national economic performance according to a single, although important, economic statistic. In short, by looking at only one aspect of national economic activity—the GDP—an evaluation is made of the whole economy.

A more detailed definition of a recession is the one used by the National Bureau of Economic Research (NBER), a nonprofit organization regarded as the official agency for the measurement of business cycles. According to the NBER, a recession is “a period of significant decline in total output, income, employment, and trade, usually lasting from six months to a year, and marked by widespread contractions in many sectors of the economy.”

Using this definition, the NBER has identified nine complete business cycles during the period from 1945 to 1991. The average duration of these business cycles, measured from trough to previous trough—that is, from the end of one recession to the end of the previous recession—is 53 months. During these cycles the average contraction lasted 18 months, and the average expansion lasted 35 months. For the current business cycle an expansion began in March 1991 and ended in March 2001. This expansion covering 120 months was the longest in United States economic history. As of November 2002, the NBER had not declared an official end to the recession that began in March 2001.

Besides differing in length, business cycles differ considerably in degree, especially in the severity of contractions. The most significant contraction in American economic history occurred during the 1930s. This contraction was so severe that it became known as the Great Depression. The NBER marks August 1929 as the start of the Great Depression with an initial contraction that lasted for 43 months. During this downturn the unemployment rate rose from about 3 percent to 25 percent while the production of goods and services fell by 30 percent. A very modest recovery began in March 1933, but the economy experienced another contraction that began in 1937 and lasted for another 13 months. A true economic recovery did not begin until 1941.

CAUSES OF BUSINESS CYCLES
A variety of explanations have been offered for business cycles. The Austrian American economist Joseph Schumpeter published his innovation theory in the late 1930s. He related upswings in the business cycle to new inventions, which stimulate investment in capital-goods industries. Because new inventions develop unevenly, business conditions alternate between expansion and contraction, according to Schumpeter’s theory.

In the early 1960s American economist Milton Friedman offered another explanation of the business cycle, known as a monetarist theory. In a careful review of American economic history Friedman and his collaborator Anna Schwartz found that turning points in the growth rate of the money supply (the total amount of money circulating in the economy) preceded business cycle turning points. They also found that the sources of the changes in the money supply’s growth rate—for example, the spread of commercial banking and the output of gold during the 19th century—were independent of the changes in economic activity. This finding indicated that the money supply was the primary cause of changes in business conditions.

Some business cycle analysts, including statistician Edward Tufte, have argued that politics plays a major role in the business cycle. These analysts believe that elected officials manipulate monetary and fiscal policies in an effort to win reelection. According to this viewpoint, as a presidential election approaches, officeholders seek to stimulate the economy with reductions in taxes, increases in government spending, and decreases in interest rates. The elected officials do this because they believe voters, enjoying the favorable economic conditions, will reward them by reelecting them to office. But in the process they may be stimulating an expansion that cannot be sustained and so may lead soon to a contraction.

Still another explanation for business cycles, advanced by American economist Robert E. Lucas, Jr., and others, examines misperceptions about the movements of wages and prices. In this view producers mistakenly perceive an overall increase in the level of prices in the economy as increased demand for their products. They respond by expanding production and employment within their firms. If enough firms make the same mistake, overall business activity will accelerate, followed by a contraction when the firms realize that they were mistaken in perceiving a growing demand.

A fifth explanation for business cycles is known as real business cycle theory and was developed in the 1980s by American economist Edward C. Prescott and others. It looks beyond political, monetary, and perception considerations to “real” factors, such as significant changes in technology and productivity.

Some business cycle analysts believe that there is no single consistent cause of business cycles. Instead they study what might be called shocks to the economy—a positive shock promoting a business expansion and a negative shock pushing the economy into recession. World War II (1939-1945) might be considered a positive economic shock that ended the Great Depression, whereas the events leading up to the 1991 Persian Gulf War represented a negative shock that explained the recession of 1990-1991. Other negative shocks might include agricultural failures associated with droughts. Discoveries of precious resources such as oil or gold would represent positive shocks. So these economists view the history of business cycles as a history of alternating positive and negative shocks.

REGULATING THE BUSINESS CYCLE
Because of the severity of the Great Depression, action was taken during the 1930s to both promote recovery and to reduce the likelihood and severity of future business downturns. Legislation known as New Deal programs created federal unemployment insurance, the Social Security system, the Federal Deposit Insurance Corporation (FDIC), and the Securities and Exchange Commission (SEC).

Unemployment insurance provides workers with income when they are laid off. Social Security furnishes some income to retired or disabled persons. These two programs thus provide greater income stability because people retain some purchasing power even when they are no longer working. The FDIC gives consumers confidence in their financial institutions and helps prevent a repeat of the massive withdrawals of funds or bank panic that led to the collapse of several thousand banks during the Great Depression. The SEC helps prevent financial fraud by requiring corporations that publicly trade their stock to report accurate financial information.

Other aspects of New Deal legislation also helped promote economic stability. The New Deal’s National Industrial Recovery Act of 1933 enabled workers to bargain collectively in trade unions. Although not as powerful as they once were, labor unions help prevent spiraling wage declines that have worsened previous downturns. Similarly, government support of crop prices shields farmers from disastrous loss of income. Whether or not these changes represent all or part of the explanation, the fact remains that since the Great Depression all economic contractions have been significantly less severe.

Beyond these structural changes, the government can also engage in direct intervention to counter a recession. Two main counter-cyclical policy options are available: monetary policy and fiscal policy. Economists disagree on the effectiveness of these options.

Monetary policy involves control of the money supply and interest rates by a central bank. In the United States the central bank is known as the Federal Reserve System, or simply the Fed. These controls determine the amount of credit available to businesses and consumers and the cost of that credit. By reducing the rate of money supply growth and allowing interest rates to rise, the Fed reduces the amount of available credit and increases the cost of borrowing in order to slow an economic expansion. This practice is known as contractionary monetary policy. Alternatively, expansionary monetary policy involves increasing the rate of growth in the money supply and lowering interest rates. In this fashion the Fed increases the availability of credit and lowers the cost of borrowing in an effort to stimulate the economy.

Fiscal policy consists of changes in government spending or taxation or both. If the government seeks to constrain an economic expansion by engaging in contractionary fiscal policy, it can lower its purchases of goods and services, reduce the amount of money it spends on social services and subsidies, or increase taxes. Expansionary fiscal policy involves the opposite actions—namely, increases in purchases of goods and services, increases in social service spending and subsidies, or reductions in taxes—in an effort to stimulate production and employment.

In discussing the relative merits of monetary and fiscal policies as counter-cyclical tools, economists often argue over which policy to pursue. Some economists note that changes in monetary policy can be implemented quickly whereas changes in fiscal policy take much longer. The Fed’s Open Market Committee, for example, makes decisions regarding the money supply and interest rates. All that is needed to change monetary policy is a vote by this committee. Fiscal policy, on the other hand, typically requires the approval of both the legislative and executive branches of the federal government. For example, a lowering of taxes needs approval from both the U.S. House of Representatives and Senate as well as the approval of the U.S. president, approvals that sometimes may take longer than a year to secure.

However, many economists also note that it takes fiscal policy less time than monetary policy to have an impact on the economy once a specific action has been implemented. For example, a fiscal-policy reduction in the personal income tax will show up immediately in higher take-home pay for workers. By contrast, consumers and business firms may take awhile before they modify their spending in response to a monetary-policy change, such as a reduction in interest rates. For example, not everyone goes out to buy a new car just because the interest rate on car loans has decreased.

Recognition of the delays involved with both monetary and fiscal policies has led some economists to conclude that policy actions may actually contribute to economic instability and make the business cycle worse. According to these economists, the best strategy for monetary policy is the provision of steady growth in the money supply and credit, and the best strategy for fiscal policy is efficient and effective tax and spending programs.

Inflation and Deflation

INTRODUCTION
Inflation and Deflation, in economics, terms used to describe, respectively, a decline or an increase in the value of money, in relation to the goods and services it will buy.

Inflation is the pervasive and sustained rise in the aggregate level of prices measured by an index of the cost of various goods and services. Repetitive price increases erode the purchasing power of money and other financial assets with fixed values, creating serious economic distortions and uncertainty. Inflation results when actual economic pressures and anticipation of future developments cause the demand for goods and services to exceed the supply available at existing prices or when available output is restricted by faltering productivity and marketplace constraints. Sustained price increases were historically directly linked to wars, poor harvests, political upheavals, or other unique events.

Deflation involves a sustained decline in the aggregate level of prices, such as occurred during the Great Depression of the 1930s; it is usually associated with a prolonged erosion of economic activity and high unemployment. Widespread price declines have become rare, however, and inflation is now the dominant variable affecting public and private economic planning.


KINDS OF INFLATION

When the upward trend of prices is gradual and irregular, averaging only a few percentage points each year, such creeping inflation is not considered a serious threat to economic and social progress. It may even stimulate economic activity: The illusion of personal income growth beyond actual productivity may encourage consumption; housing investment may increase in anticipation of future price appreciation; business investment in plants and equipment may accelerate as prices rise more rapidly than costs; and personal, business, and government borrowers realize that loans will be repaid with money that has potentially less purchasing power.

A greater concern is the growing pattern of chronic inflation characterized by much higher price increases, at annual rates of 10 to 30 percent in some industrial nations and even 100 percent or more in a few developing countries. Chronic inflation tends to become permanent and ratchets upward to even higher levels as economic distortions and negative expectations accumulate. To accommodate chronic inflation, normal economic activities are disrupted: Consumers buy goods and services to avoid even higher prices; real estate speculation increases; businesses concentrate on short-term investments; incentives to acquire savings, insurance policies, pensions, and long-term bonds are reduced because inflation erodes their future purchasing power; governments rapidly expand spending in anticipation of inflated revenues; and exporting nations suffer competitive trade disadvantages forcing them to turn to protectionism and arbitrary currency controls.

In the most extreme form, chronic price increases become hyperinflation, causing the entire economic system to break down. The hyperinflation that occurred in Germany following World War I, for example, caused the volume of currency in circulation to expand more than 7 billion times and prices to jump 10 billion times during a 16-month period before November 1923. Other hyperinflations occurred in the United States and France in the late 1700s; in the USSR and Austria after World War I; in Hungary, China, and Greece after World War II; and in a few developing nations in recent years. During a hyperinflation the growth of money and credit becomes explosive, destroying any links to real assets and forcing a reliance on complex barter arrangements. As governments try to pay for increased spending programs by rapidly expanding the money supply, the inflationary financing of budget deficits disrupts economic, social, and political stability.


CAUSES OF INFLATION
Demand-pull inflation occurs when aggregate demand exceeds existing supplies, forcing price increases and pulling up wages, materials, and operating and financing costs. Cost-push inflation occurs when prices rise to cover total expenses and preserve profit margins. A pervasive cost-price spiral eventually develops as groups and institutions respond to each new round of increases. Deflation occurs when the spiral effects are reversed.

To explain why the basic supply and demand elements change, economists have suggested three substantive theories: the available quantity of money; the aggregate level of incomes; and supply-side productivity and cost variables. Monetarists believe that changes in price levels reflect fluctuating volumes of money available, usually defined as currency and demand deposits. They argue that, to create stable prices, the money supply should increase at a stable rate commensurate with the economy's real output capacity. Critics of this theory claim that changes in the money supply are a response to, rather than the cause of, price-level adjustments.

The aggregate level of income theory is based on the work of the British economist John Maynard Keynes, published during the 1930s. According to this approach, changes in the national income determine consumption and investment rates; thus, government fiscal spending and tax policies should be used to maintain full output and employment levels. The money supply, then, should be adjusted to finance the desired level of economic growth while avoiding financial crises and high interest rates that discourage consumption and investment. Government spending and tax policies can be used to offset inflation and deflation by adjusting supply and demand according to this theory. In the U.S., however, the growth of government spending plus “off-budget” outlays (expenditures for a variety of programs not included in the federal budget) and government credit programs have been more rapid than the potential real growth rate since the mid-1960s.

The third theory concentrates on supply-side elements that are related to the significant erosion of productivity. These elements include the long-term pace of capital investment and technological development; changes in the composition and age of the labor force; the shift away from manufacturing activities; the rapid proliferation of government regulations; the diversion of capital investment into nonproductive uses; the growing scarcity of certain raw materials; social and political developments that have reduced work incentives; and various economic shocks such as international monetary and trade problems, large oil price increases, and sporadic worldwide crop disasters. These supply-side issues may be important in developing monetary and fiscal policies.


EFFECTS OF INFLATION
The specific effects of inflation and deflation are mixed and fluctuate over time. Deflation is typically caused by depressed economic output and unemployment. Lower prices may eventually encourage improvements in consumption, investment, and foreign trade, but only if the fundamental causes of the original deterioration are corrected.

Inflation initially increases business profits, as wages and other costs lag behind price increases, leading to more capital investment and payments of dividends and interest. Personal spending may increase because of “buy now, it will cost more later” attitudes; potential real estate price appreciation may attract buyers. Domestic inflation may temporarily improve the balance of trade if the same volume of exports can be sold at higher prices. Government spending rises because many programs are explicitly, or informally, indexed to inflation rates to preserve the real value of government services and transfers of income. Officials may also anticipate paying larger budgets with tax revenues from inflated incomes.

Despite these temporary gains, however, inflation eventually disrupts normal economic activities, particularly if the pace fluctuates. Interest rates typically include the anticipated pace of inflation that increases business costs, discourages consumer spending, and depresses the value of stocks and bonds. Higher mortgage interest rates and rapidly escalating prices for homes discourage housing construction. Inflation erodes the real purchasing power of current incomes and accumulated financial assets, resulting in reduced consumption, particularly if consumers are unable, or unwilling, to draw on their savings and increase personal debts. Business investment suffers as overall economic activity declines, and profits are restricted as employees demand immediate relief from chronic inflation through automatic cost-of-living escalator clauses. Most raw materials and operating costs respond quickly to inflationary signals. Higher export prices eventually restrict foreign sales, creating deficits in trade and services and international currency-exchange problems. Inflation is a major element in the prevailing pattern of booms and recessions that cause unwanted price and employment distortions and widespread economic uncertainty.

The impact of inflation on individuals depends on many variables. People with relatively fixed incomes, particularly those in low-income groups, suffer during accelerating inflation, while those with flexible bargaining power may keep pace with or even benefit from inflation. Those dependent on assets with fixed nominal values, such as savings accounts, pensions, insurance policies, and long-term debt instruments, suffer erosion of real wealth; other assets with flexible values, such as real estate, art, raw materials, and durable goods, may keep pace with or exceed the average inflation rate. Workers in the private sector strive for cost-of-living adjustments in wage contracts. Borrowers usually benefit while lenders suffer, because mortgage, personal, business, and government loans are paid with money that loses purchasing power over time and interest rates tend to lag behind the average rate of price increases. A pervasive “inflationary psychology” eventually dominates private and public economic decisions.

STABILIZATION MEASURES
Any serious antiinflation effort will be difficult, risky, and prolonged because restraint tends to reduce real output and employment before benefits become apparent, whereas fiscal and monetary stimulus typically increases economic activity before prices accelerate. This pattern of economic and political risks and incentives explains the dominance of expansion policies.

Stabilization efforts try to offset the distorting effects of inflation and deflation by restoring normal economic activity. To be effective, such initiatives must be sustained rather than merely occasional fine-tuning actions that often exaggerate existing cyclical changes. The fundamental requirement is stable expansion of money and credit commensurate with real growth and financial market needs. Over extended periods the Federal Reserve System can influence the availability and cost of money and credit by controlling the financial reserves that are required and by other regulatory procedures. Monetary restraint during cyclical expansions reduces inflation pressures; an accommodative policy during cyclical recessions helps finance recovery. Monetary officials, however, cannot unilaterally create economic stability if private consumption and investment cause inflation or deflation pressures or if other public policies are contradictory. Government spending and tax policies must be consistent with monetary actions so as to achieve stability and prevent exaggerated swings in economic policies.

Since the mid-1960s the rapid growth of federal budget spending plus even greater percentage increases in off-budget outlays and a multitude of federal lending programs have exceeded the tax revenues almost every year, creating large government deficit borrowing requirements. Pressures to provide money and credit required for private consumption and investment and for financing the chronic budget deficits and government loan programs have led to a rapid expansion of the money supply with resulting inflation problems. Effective stabilization efforts will require a better balance and a more sustained application of both monetary and fiscal policies.

Important supply-side actions are also required to fight inflation and avoid the economic stagnation effects of deflation. Among the initiatives that have been recommended are the reversal of the serious deterioration of national productivity by increasing incentives for savings and investment; enlarged spending for the development and application of technology; improvement of management techniques and labor efficiency through education and training; expanded efforts to conserve valuable raw materials and develop new sources; and reduction of unnecessary government regulation.

Some analysts have recommended the use of various income policies to fight inflation. Such policies range from mandatory government guidelines for wages, prices, rents, and interest rates, through tax incentives and disincentives, to simple voluntary standards suggested by the government. Advocates claim that government intervention would supplement basic monetary and fiscal actions, but critics point to the ineffectiveness of past control programs in the United States and other industrial nations and also question the desirability of increasing government control over private economic decisions. Future stabilization policy initiatives will likely concentrate on coordinating monetary and fiscal policies and increasing supply-side efforts to restore productivity and develop new technology.

Marketing

INTRODUCTION
Marketing, the process by which a product or service originates and is then priced, promoted, and distributed to consumers. In large corporations the principal marketing functions precede the manufacture of a product. They involve market research and product development, design, and testing.

Marketing concentrates primarily on the buyers, or consumers. After determining the customers’ needs and desires, marketers develop strategies that are designed to educate customers about a product’s most important features, persuade them to buy it, and then to enhance their satisfaction with the purchase. Where marketing once stopped with the sale, today businesses believe that it is more profitable to sell to existing customers than to new ones. As a result, marketing now also involves finding ways to turn one-time purchasers into lifelong customers.

Marketing includes planning, organizing, directing, and controlling the decision-making regarding product lines, pricing, promotion, and servicing. In most of these areas marketing has overall authority; in others, as in product-line development, its function is primarily advisory. In addition, the marketing department of a business firm is responsible for the physical distribution of the products, determining the channels of distribution that will be used, and supervising the profitable flow of goods from the factory or warehouse.

TAILORING THE PRODUCT
Merchandise that is generally similar in style or design, but may vary in such elements as size, price, and quality is collectively known as a product line. Most marketers believe that product lines must be closely correlated with consumer needs and wants.

Firms tend to change product items and lines after a period of time to gain a competitive advantage, to respond to changes in the economic climate, or to increase sales by encouraging consumers to buy a new model. For example, if the economy weakens, a manufacturer might use cheaper parts to make a product more affordable. Sometimes, however, manufacturers will alter the style rather than the quality of the item. Hemlines on dresses, for example, might go up or down, or the appearance or functionality of an automobile might be altered. The practice of changing the appearance of goods or introducing inferior parts or poor workmanship in order to motivate consumers to replace products is known as planned obsolescence. Some people object that this practice leads to waste or can be unethical. Manufacturers reply that consumers are conditioned to expect such changes and welcome the variety they offer, or they deny that poor quality was intentional.

The popularity of all products eventually wanes. In fact, successful products go through what is called a product life cycle, which describes the course of a product’s sales from its introduction and growth through maturity and decline. Some fad products such as Beanie Babies go through all four stages in a very short period. For others, such as phonograph records, the stages extend over decades.

Because products are always aging and sales of even the most successful products eventually decline, firms must continually develop and introduce new items. One study found that over 13,000 new products are introduced each year. But despite the millions of dollars that United States and Canadian companies invest in product research and consumer testing, it is estimated that more than 30 percent of new products fail at launch and 60 percent are never fully accepted by consumers and disappear after a few years. The high failure rate influences the pricing of successful products because profits from these products must help cover the development costs of products that fail.


PRICING THE PRODUCT
The two basic components that affect product pricing are costs of manufacture and competition in selling. It is unprofitable to sell a product below the manufacturer’s production costs and unfeasible to sell it at a price higher than that at which comparable merchandise is being offered. Other variables also affect pricing. Company policy may require a minimum profit on new product lines or a specified return on investments, or discounts may be offered on purchases in quantity.

Attempts to maintain resale prices were facilitated for many years in the United States under federal and state fair trade laws. Since 1975, however, these laws have been nullified, thereby prohibiting manufacturers from controlling the prices set by wholesalers and retailers. Such control can still be maintained if the manufacturers wish to market directly through their own outlets, but this is seldom feasible except for the largest manufacturers.

Attempts have also been made, generally at government insistence, to maintain product-price competition in order to minimize the danger of injuring small businesses. Therefore, the legal department of a marketing organization reviews pricing decisions.

PROMOTING THE PRODUCT
Advertising, personal (face-to-face) or direct selling, sales promotion, and relationship building are the primary methods companies use to promote their products.

Advertising

Advertising is often used to make consumers aware of a product’s special low price or its benefits. But an even more important function of advertising is to create an image that consumers associate with a product, known as the brand image. The brand image goes far beyond the functional characteristics of the product. For example, a soft drink may have a particular taste that is one of its benefits. But when consumers think of it, they not only think of its taste, but they may also associate it with high energy, extreme action, unconventional behavior, and youth. All of those meanings have been added to the product by advertising. Consumers frequently buy the product not only for its functional characteristics but also because they want to be identified with the image associated with the brand.

By adding meaning to a product, advertising also adds value. For example, when Philip Morris Companies Inc. purchased Kraft Foods, Inc. in 1988 for nearly $13 billion, Philip Morris paid 600 percent more than Kraft’s factories and inventory were worth. Over 80 percent of the purchase price was for the current and future value of the Kraft brand, a value that was created in large part by advertising. Advertising plays such an important role in promoting products and adding value to brands that most companies spend considerable sums on their advertising and hire specialized firms, known as advertising agencies, to develop their advertising campaigns.

Advertising is most frequently done on television, radio, and billboards; in newspapers, magazines, and catalogs; and through direct mail to the consumers. In recent years, numerous advertising agencies have joined forces to become giant agencies, making it possible for them to offer their clients a comprehensive range of worldwide promotion services.