Chapter Two

The Evolution of Business

© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.

McGraw-Hill/IrwinIntroduction to Business

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Division of Labor in a Tribe

Figure 2.1

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The Emergence of the Hierarchy

• Hierarchy of authority - the ranking of people according to their

relative rights and responsibilities to control and utilize resources

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Hierarchy and Property Rights

• Property rights - the right of people to own, use, or sell

valuable resources

• Aristocracy - people given the right by a ruler to control a

country’s resources, including its land and labor

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The Hierarchy of English Aristocrats

Figure 2.3

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Feudalism

• Feudalism - the business or economic system in which

one class of people, aristocrats, controls the property rights to all valuable resources, including people

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Feudalism, Mercantilism, and Capitalism

Figure 2.4

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From Barter to Money

• Double coincidence of wants - each person has to want the product that

the other person has to offer for the exchange to be successful

• When people agree to use money to buy and sell products it increases the profitability of trade

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Money as a Standard of Value

Figure 2.5

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From Money to Capital

• Interest rate - the price at which capital will be loaned

• Risk - the possibility of incurring future financial

losses because of one’s investment decisions

See current interest rates at money-rates.com

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Mercantilism: Trade and Enterprise

• Mercantilism - the business system in which a product’s

price differences are exploited by trading the product across markets and countries

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Feudalism, Mercantilism, and Capitalism

Figure 2.4

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The Growth of Enterprise

• Merchant - a trader who uses the discrepancy between

the value and price of a product in one market and another to trade goods for profit

• Bankers - the people who estimate the risks

associated with a new venture and determine the way profits from a venture should be shared

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Craft Guilds and Occupational Specialization

• Craftspeople - workers or artisans with the skills to

produce higher-quality goods and services

• Craft guild - a group of skilled artisans organized to

control and govern different aspects of its trade

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The Industrial Revolution

• Industrial Revolution - an era in the 18th and 19th centuries that

marked improved production and trade brought about by advances in technology

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Capitalism, Unionization, and the Modern Class System

• Capitalism - the economic or business system in which

the private ownership of resources becomes the basis for the production and distribution of goods and services

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Feudalism, Mercantilism, and Capitalism

Figure 2.4

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Capitalism, Unionization, and the Modern Class System

• Capitalists - people who personally own or control the

physical capital of industrial production such as machinery, factories, distribution networks, raw materials, and technology

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Capitalism, Unionization, and the Modern Class System

• Proletariat - the class of unskilled workers who have no

capital and only possess the rights to sell their own labor

• Trade union - an organization that lobbies on behalf of its

members (workers) to increase their bargaining power in work-related negotiations

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Capitalism, Unionization, and the Modern Class System

• Class system - a social ranking of people based upon the

amount of their capital and wealth, and because of factors such as heredity, kinship, fame, and occupation

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The Class System in Capitalism

Figure 2.6

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Changing Forms of Business Organization

Figure 2.7

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The Partnership and Sole Proprietorship

• Partnership - two or more skilled professionals who

agree to pool their talents and capital to establish a company in which they are the stockholders and owners

• Sole proprietorship - a non-incorporated business entirely owned

by one person