Solution Manual For
Essential Economics for Business, 7th edition John Sloman, Elizabeth Jones
Answers to
End-of-Chapter Questions
Chapter 1
1. Compare and contrast the relative strengths and weaknesses of the partnership and the public
limited company.
Partnerships, where two or more people own a business, in most cases have unlimited liability
(there are, however, some limited liability partnerships). With unlimited liability the business’s
losses are the partners’ losses. Such partnerships should then be avoided where there is a high risk
of business failure and/or large amounts of capital are required to get the business going.
Nevertheless, with unlimited liability, partners may have a greater commitment to the success of
the business.
Public limited companies by contrast are legally separate from their owners, and hence a
business’s debts belong to the business and not its owners. In a public limited company, owners
hold shares in the company and through share issues the business is able to raise finance to fund
its growth and investment. Such companies can, however, be subject to merger and takeover.
2. Explain why the business objectives of owners and managers are likely to diverge. How might
owners attempt to ensure that managers act in their interests and not in the managers’ own
interests?
The business objectives of owners and managers can often diverge because each group is likely to
be pursuing its own interests. Owners are assumed, in traditional theory, to be profit maximisers,
and would thus require their managers to pursue strategies which were consistent with this.
Managers, however, might wish to pursue other goals, such as the maximisation of growth. Profits
might consequently be sacrificed in the short term as managers attempt to acquire a greater share
of the market. In order to ensure that managers act in the owners’ best interests, owners will
attempt to ensure that managerial salaries are closely linked to the business’s profitability, and
that managerial decision making is closely monitored.
3. What is the Standard Industrial Classification (SIC)? In what ways might such a classification
system be useful? Can you think of any limitations or problems such a system might have over
time?
The Standard Industrial Classification (SIC) is the formal means of classification of firms into
industries. It is used by the government as a means of collating data on business and industry
, trends. Such a system of classification is most useful in identifying changing patterns in industrial
structure and concentration. The SIC needs regular revision if it is to remain up to date, as it must
reflect changing industrial structure and the emergence of new products and industries.
4. Consider a country other than the UK and investigate the changes in its industrial structure. Are
the changes similar to or different from those in the UK?
The major changes in the UK’s industrial structure in recent times have been reflective of the
process of deindustrialisation. These include:
the decline/stagnation in the contribution to output of the primary and secondary industrial
sectors;
the growth in the contribution to output of the tertiary sector;
the decline in employment in the primary, and most particularly, the secondary industrial
sector;
the growth in employment in the tertiary sector.
Trends in industrial concentration reveal that manufacturing industry is dominated by big
business. In other areas such as construction and the service sector, employment and turnover is
predominantly provided by small and medium-sized enterprises. These differences in
concentration between the sectors reflect both the economies of scale possible in manufacturing,
and the greater flexibility and product variety offered by those businesses in the construction and
service sectors.
Many other developed nations have seen similar trends, though some countries, such as
Germany, have maintained a significant presence in manufacturing, especially in industries like
cars, machinery and precision equipment. Germany has also moved towards the service sector,
which does contribute a growing amount to the economy and in a similar trend to countries like
the UK, agriculture makes up a fairly significant portion of total output.
In China, manufacturing still makes up a significant proportion of total output, contributing
around 28 per cent to GDP (the global average is around 12 per cent). Major industries include
mining of various metals, textiles, toys, electronics and telecommunications. Another key
difference is not in the concentration of industry in each of the sectors, but the dominance of state-
owned enterprises. Although manufacturing is still more significant in China than in other nations
discussed, services is taking an increasing proportion of GDP.
5. Outline the main determinants of business performance. In each case, explain whether it is a
micro- or macroeconomic issue.
The main determinants of business performance include the following:
Microeconomic issues: market structure; managerial aims; business organisation and the systems
it uses; access to, and use of, market information; managerial competence; the quality of labour.
These are microeconomic determinants, as they are concerned with individual products, firms,
markets or industries.
Macroeconomic issues: economic growth; stability in the economy; the value of the exchange
rate; interest rates; the strength of the global economy. These are macroeconomic concerns as
they look at factors that affect the whole economy.
6. Virtually every good is scarce in the sense we have defined it, but are water and air exceptions? If
they are not scarce, explain whether it would be possible to charge for them. Does the way in
which you define water and air determine whether they are scarce or not?
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, (a) Water. Whether water is abundant depends on where you live. It also depends on what the
water is used for. Water for growing crops in a country with plentiful rain is abundant. In
such cases, it would be possible only for the government to charge for it (e.g. by a tax per
unit of consumption, or per hectare, or per tonne of crop harvested). In drier countries,
resources have to be spent on irrigation. Water for drinking is not abundant. Reservoirs have
to be built. The water has to be piped, purified and pumped. Clearly, in these cases it is
possible for a charge to be made for water by those supplying these services.
(b) Air. In one sense air is abundant. There is no shortage of air to breathe for most people for
most of the time. In such cases, it would not be possible to charge for air. But if we define
air as clean, unpolluted air, then in some parts of the world it is scarce. In these cases,
resources have to be used to make clean air available. If there is pollution in cities or near
industrial plants, it will cost money to clean it up. The citizen may not pay directly – the
cleaned-up air may be free to the ‘consumer’ – but the taxpayer or industry (and hence its
customers) will have to pay. Think about the restrictions that were placed on traffic in
Beijing in the years before of the Beijing 2008 Olympics. Another example is when
extractor fans have to be installed to freshen up air in buildings. Even if you live in a non-
polluted part of the country, you may well have spent money moving there to escape the
pollution. Again there is an opportunity cost to obtain the clean air.
7. Which of the following are macroeconomic issues, which are microeconomic ones and which
could be either depending on the context?
(a) Inflation.
(b) Low wages in certain service industries.
(c) The rate of exchange between the pound and the euro.
(d) Why the price of cabbages fluctuates more than that of cars.
(e) The rate of economic growth this year compared with last year.
(f) The decline of traditional manufacturing industries.
(a) Macro. It refers to a general rise in prices across the whole economy.
(b) Micro. It refers to specific industries
(c) Either. In a world context it is a micro issue, since it refers to the price of one currency in
terms of one other. In a national context it is more of a macro issue, since it refers to the
euro exchange rate at which all UK goods are traded internationally. (This is certainly less
clear-cut than cases (a) and (b) above.)
(d) Micro. It refers to specific products.
(e) Macro. It refers to the general growth in output of the economy as a whole.
(f) Micro (macro in certain contexts). It is micro because it refers to specific industries. It could,
however, also help to explain the macroeconomic phenomena of high unemployment or
balance of payments problems.
8. Make a list of three things you did yesterday. What was the opportunity cost of each?
The opportunity cost was the next best thing you sacrificed doing in each case. If it was
something you purchased, then it would be the next best thing that you could have purchased for
the same money. If it was something you did (such as coming to a class) then the opportunity cost
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, was the next best thing you could have done with your time (such as working in the library, or
staying at home and watching TV).
9. Provide some examples of choices that (a) individuals (b) firms and (c) governments had to make
during the pandemic. Why were they economic choices?
Individuals had to make many choices, even when the strictest measures were in place. Should
you follow lockdown rules? Some people followed every rule, while others were more willing to
break or bend the rules. When restrictions were relaxed or lifted, people had to decide whether to
continue wearing masks in shops. Should you meet family? If so, should it be inside or outside?
How often should you go shopping and where? Should you book for online delivery? Should you
stock up on any products?
Firms also faced choices. How much should they order of particular items? Should they require
shoppers to wear masks? How would they limit the number of people in the shop? Could they
diversify; what about investing in websites to cater for online shopping? Should they make
workers redundant or keep paying them?
Governments also had key decisions: how much more investment should go into healthcare? How
would they cope with additional demand for hospital beds? Would they approve a vaccine and for
who? How should they allocate PPE? Should they provide financial support for businesses and if
so, which ones and how much? Should taxes be cut?
These are all economic decisions, some at a micro level and others at a macro level. Whether you
are an individual, a firm or government, you are having to weigh up the costs and benefits and
then make a decision based on your personal assessment.
10. How would you use the principle of weighing up marginal costs and marginal benefits when
deciding whether to (a) buy a new car; (b) study for an extra hour? How would a firm use the
same principle when deciding whether to (c) purchase a new machine; (d) offer overtime to
existing workers?
(a) If the extra benefit you gain from purchasing and driving the new car (happiness, envy from
friends, savings on petrol if the new car is more efficient, more engine power that might
save you time, lower servicing costs, etc.) is greater than the extra cost of that purchase
(what else you could have done with the money and thus are sacrificing by using the money
to buy the car), then it would be a rational decision for you to buy the car.
(b) When deciding whether or not to study for an extra hour, you will weigh up the costs and
benefits of doing so. Every extra hour you study will increase your knowledge and give you
more confidence in your exams, thus improving the possibility of getting a high mark and
potentially a good job – these are the benefits from doing the extra studying. You will need
to weigh these up against the costs of the extra studying, such as giving up your leisure time,
perhaps spending even more time revising a subject you dislike. If you find that the extra
benefits of the extra studying are greater than the costs, then it is rational to study for an
extra hour, as the marginal benefit exceeds the marginal cost.
(c) If the new machine added more to the firm’s revenue over any given time period (increased
output and/or produced better quality products) than it cost to buy (including any associated
costs, such as raw materials, repairs), it would be profitable for the firm to buy the new
machine: the marginal benefit from the machine would exceed the marginal cost.
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