Chapter 6 Supply, Demand, and Government Policies Chapte.docx

Chapter 6: Supply, Demand, and Government Policies
Chapter Objectives
Little Picture: learning how price controls (floors, ceilings) and
taxes affect the prices
and quantities of goods and services sold in markets.
Big Picture: learning about the effects of price controls and
taxes to obtain a better
understanding of microeconomics, i.e., what forces determine
the price (and market
quantity) of a good or service.
This chapter is focused on the effect of price controls and taxes
on markets.
Price Controls
Early in the chapter, Mankiw uses the market model to explain
the effects of the two
different controls (price floors and ceilings) on market
performance.
Ceilings
A price ceiling is an upper barrier to price, a threshold above
which the government
does not want price to rise. A price ceiling will be imposed
below the level of

equilibrium price since one that is imposed above equilibrium
price makes no sense
because it will be economically irrelevant to the market (i.e.,
non-binding).
An effective (binding) price ceiling will cause a shortage, a
long-term market
condition in which the quantity demanded in the market exceeds
the quantity
supplied. (A common misstatement of this definition of a
shortage is, "when demand
is greater than supply," which makes no sense. If demand [i.e.,
the entire demand
curve] is greater than supply [i.e., the entire curve] in a
particular market, then supply
and demand do not intersect in that market, thus there is no
market price and no
quantity of goods traded, therefore really no market! The
situation is no different
when supply is greater than demand, such that no quantity or
price exists, and hence
there is [again] no real market. Think of a large Ferrari car
dealer--with its lowest-
priced car being the Ferrari California at about $200,000--
placed into tiny, off-the-

beaten-path Manes, Missouri.]
With ceilings and floors, the correct terminology and concepts
are "quantity
demanded" and "quantity supplied." "Demand" and "supply"
always refer to the
entire curves, whereas "quantity" refers to the number of goods
or services measured
along either the supply or demand curves.)
A shortage caused by a binding ceiling [panel (b) above] creates
frustration in a
market. The reason the shortage exists is that there are two
effects at work. One, at
the lower government-enforced price on the demand side,
additional consumers are
attracted to the market by the artificially low price. This
explains the portion of the
shortage that exists beyond the level that would prevail at free-
market equilibrium
[100 units in panel (a)]. To see this, notice that in panel (a)
above, the free-market
equilibrium quantity is at 100. Notice that with a shortage,

quantity demanded rises to
125. We can therefore conclude that 25 additional units are
demanded by new
consumers entering the market because the new consumers are
attracted by the
artificially low price of $2 set by the government. This is the
law of demand at
work: decrease price and you will see quantity demanded (not
demand) increase.
Now for the second component of the shortage. Notice that on
the supply side of the
market, from panels (a) to (b), quantity supplied drops from 100
to 75. Why? The
law of supply: at the artificially low price, sellers reduce the
quantity supplied to the
market as the price per unit falls. Thus, the entire shortage
arises because of the sum
of the effects on both the demand and supply sides of the
market.
Floors
Floors are the opposite of ceilings, but be careful. One common
misguided way
students try to memorize the differences between price floors
and ceilings is say to

themselves, "Okay, as I'm sitting here reading this in a room, I
look above me and see
a ceiling and look below me and see a floor. Therefore, ceilings
are above
equilibrium and floors are below it." Unfortunately, it's exactly
the opposite of
that. Instead, look at them on the graph and understand why
each is where it is with
respect to equilibrium. In economics, with only a few
exceptions, always try to
understand rather than memorize. If you forget something on an
exam, it's gone. If
you understand it instead, you can always reason your way
through the process to
arrive at the correct answer.
A floor is a government-mandated price set above market
equilibrium. Floors are a
threshold below which the government does not want price to
fall. A price floor will
always be imposed above the level of equilibrium price since
one that is imposed
below equilibrium price makes no sense because it is

economically irrelevant. An
effective (binding) price floor will cause a surplus, a long-term
condition in which
quantity supplied exceeds quantity demanded. (Again, the usual
mis-phrasing of this
definition of a surplus is, "when supply is greater than demand."
If supply is ever
greater than demand, the two curves will not intersect at a
market equilibrium, there
will be no price, no quantity demanded or supplied, and hence
no real market.)
With a surplus there is frustration in the market as well. It, like
a ceiling, exists
because of two effects at work. At the artificially higher
government-enforced price
on the supply side of the market, firms increase their output
because the higher price
makes each good produced more profitable. This explains the
portion of the surplus
that exists beyond the level that would prevail in a free market
[100 units in panel (a)
below].
Notice in panel (a) above that the free-market equilibrium

quantity is 100. With the
surplus illustrated in panel (b), quantity supplied rises to 120.
Therefore, 20
additional units are supplied to the market because of the
artificially high price. This
is the law of supply at work: at a higher price, producers will
supply a greater quantity
of the product to the market.
The second effect at work is on the demand side. From panels
(a) to (b), quantity
demanded drops from 100 to 80. At the artificially high price,
the product is less
attractive to consumers and therefore they purchase less. Thus,
the sum of the two
effects on both sides of the market is responsible for the
surplus.
Taxes
The second half of the chapter is devoted to the topic of taxes.
This analysis is no
more complicated than that of price controls. The difference is
that the deconstruction
is more vertical than horizontal. Let's look at a tax on buyers.
(The scenario of a tax
on sellers is covered by Mankiw but will be left to you to

examine.) Then we'll
examine the effects of a payroll tax and the distribution of the
tax burden in a market.
A 50-cent tax on a market equilibrium of 100 ice-cream cones
for $3.00 each (above),
reduces demand from D1 to D2. The shift in demand is 50 cents
in magnitude, the size
of the tax. (Notice that Mankiw refers to the decrease in
demand as a "downward"
shift. Although it doesn't ultimately matter, it's probably better
to think of it as a
leftward shift and think of shifts as "left" or "right" rather than
up or down since
market curves are derived from individual curves by horizontal
summation.)
Market quantity falls from 100 to 90 while price rises from
$3.00 to $3.30 for buyers
but falls from $3.00 to $2.80 for sellers. Notice that even
though the tax is levied on
buyers, both buyers and sellers bear the cost of the tax.
Notice especially this triangular area in the diagram above:

The top side of this triangle is formed by demand curve D1
while the bottom side is
formed by supply curve S1. The left side of the triangle is just
the dotted line that
extends up from the new tax-equilibrium quantity of 90. That
area is known as
deadweight loss, which is a social loss to both consumers and
firms from a sub-
optimal quantity of goods supplied to the market.
The graph immediately above is not of a goods or services
market, but of a labor
market. Notice the units of measurement on the axes of the
graph: "Quantity of
Labor" on the horizontal axis and “Wage” on the vertical axis.
This particular labor
market shows the effects of a payroll tax. Under such a tax,
even though the wage
that firms pay rises, the payroll tax creates a deadweight loss in
the labor market that

reduces employment and the wages workers take home. You
can see the deadweight-
loss triangle again in the graph immediately above. Here it is if
you're still having
trouble seeing it:
The top side of the triangle is formed by a segment of the labor-
demand curve while
the bottom side is formed by a segment of the labor-supply
curve. The third (vertical)
side is formed by the tax wedge that can be seen clearly in the
labor-market figure
immediately above.
The payroll tax is shared by both workers and firms regardless
of whether the tax is
levied on workers, firms, or is divided between the two.
The two market graphs above show how a tax burden is
distributed between
consumers and firms depending on elasticity. Graph (a) shows
that with relatively
inelastic demand and relatively elastic supply, tax incidence is

skewed toward
consumers. Graph (b) shows that with relatively elastic demand
and relatively
inelastic supply, tax incidence is skewed toward firms.
Chapter Case Studies
1. Lines at the Gas Pump
2. Rent Control in the Short Run and the Long Run
3. The Minimum Wage
4. Can Congress Distribute the Burden of a Payroll Tax?
5. Who Pays the Luxury Tax?
All five of the chapter case studies are must reading. In terms
of price ceilings on
gasoline, pay attention to who the American public blamed
versus economists.
In many cases rent control appears to be the most efficient
technique presently
known to destroy a city—except for bombing—Assar Lindbeck
This is Swedish economist Assar Lindbeck’s famous statement
about one of the long-
run effects of rent control: deterioration of urban areas to the
point where they look

like war zones.
The minimum wage: pay special attention to who it adversely
affects.
While the luxury tax was aimed at punishing the wealthy, they
escaped mostly
unscathed while middle-class skilled workers got hammered
with layoffs. Why? The
tax torched the sales of the private airplane and boating
industries, resulting in
layoffs. Beech Aircraft alone lost $130 million in sales and 480
jobs (Fortune, 9/6/93,
p. 40). One fact about the airplane component of the luxury tax
not mentioned by
Mankiw was that the tax was projected to bring in $6 million in
revenue. Instead, the
government only received $53,000 and ended up spending
$5,100,000 to collect that
sum, which ended up being a 9,522% loss for the government
(Business Week, 7/5/93,
p. 14)! Looks like some politicians in Congress could
desperately use some lessons
on elasticity and deadweight loss.

Discussion Topics (topics requiring examples are marked with
an asterisk *)
Please copy these topics exactly as written--shortening them can
cause you to
omit follow-up questions and thus lose points.
1. price floor (use a numerical example)*
2. binding constraints (use a numerical example)*
3. Complete and explain: When the government imposes a
_______ on a
competitive market, a ________ of the good arises, and sellers
must ration the
scarce goods among the large number of potential buyers.
4. Who did most Americans blame for long lines at U.S. gas
pumps in the early
1970s? In contrast, who did economists blame?
5. What effects does rent control have in the short run? The
long run?
6. What are the effects of the minimum wage? On which type
of worker does it
have the least effect? On which type of worker does it have the
most effect?
7. Coffee was a major staple and export crop for the Venezuelan
economy for
centuries until 2009. What happened to dry up almost all

production? What
has similarly happened to many other goods and services in the
Venezuelan
economy?
8. tax incidence (use a numerical example)*
9. How do taxes on buyers affect market outcomes? What is the
unexpected
implication?
10. What difficulties has the U.S. Congress encountered in
attempting to distribute
the burden of a payroll tax?
11. Complete and explain: A tax burden falls more heavily on
the side of the
market that is less ____.
12. Aimed at the rich, which class was much more affected by
the 1990 luxury
tax? What was the ultimate fate of the tax?
Case Assignment
Explain the Prisoner’s Dilemma game, the notion of dominant
strategy, and the
concept of Nash equilibrium and cooperation. Using these
concepts, then,

analyze the following duopoly game.
Philip Morris and R.J. Reynolds spend huge sums of money
each year to
advertise their tobacco products in an attempt to steal customers
from each other.
Suppose each year Philip Morris and R.J. Reynolds have to
decide whether or
not they want to spend money on advertising. If neither firm
advertises, each will
earn a profit of $2 million. If they both advertise, each will earn
a profit of $1.5
million. If one firm advertises and the other does not, the firm
that advertises will
earn a profit of $2.8 million and the other firm will earn $1
million.
If the two companies decide to collude to maximize profits,
what will each
company do? What profit will each company earn?
What is the dominant strategy for each company, and what
profit will each
company earn if they follow those strategies?
Is the solution you found in the first question a Nash
equilibrium?
Is the solution you found in the second question a Nash
equilibrium?
Assignment Expectations
In the Module 3 Case Assignment, you are expected to:
Describe the purpose of the paper and provide a conclusion.

Present information in a professional manner.
Answer the Case Assignment questions clearly and provide
necessary details.
Write clearly and correctly—that is, no poor sentence structure,
no spelling and
grammar mistakes, and no run-on sentences.
Provide citations to support your argument and place references
on a separate
page. (All the sources that you listed in the references section
must be cited in
the paper.) Use APA format to provide citations and references
Listen
.
1 of 2
Privacy Policy | Contact
[http://owl.english.purdue.edu/owl/resource/560/01/].
Type and double-space the paper.
Whenever appropriate, please use Excel to show supporting
computations in
an appendix, present economic information in tables, and use
the data to
answer follow-up questions.

..
2 of 2 7/3/2016 3:52 PM
Chapter 5: Elasticity and Its Application
Chapter Objectives
Little Picture: learning how price changes affect the quantity of
goods and services
sold in markets (i.e., elasticity).
Big Picture: learning about elasticity to obtain a better
understanding of
microeconomics, i.e., what forces determine the price (and
market quantity) of a good
or service.
This chapter is the most mathematical that you will encounter
this term. (Chapters
13-17 are more graphical and geometric than mathematical, so
by the time we reach
them, make sure you are ready for a good bit of spatial analysis.
Be sure to read
chapter 2's appendix, "Graphing: A Brief Review" if you
haven't already. If you have

read it, reviewing the points on which you are weakest and
practicing drawing graphs
with pen and paper won't hurt either. For example, graph your
utility, telephone, or
other bills over the months of the year to view any obvious or
not-too-obvious
relationships between the time of the year and spending. And
so on.)
Please read this chapter carefully. The good news is that in this
chapter we return to
studying the demand and supply sides of the market
individually. There are no shifts
of curves or more than one curve to deal with at a time.
However, as mentioned
above, there is some math: arithmetic and dividing fractions.
These calculations are
made for observing how a change in a variable such as price or
income affects the
quantity demanded, supplied, or both in a market. This concept
is known as
elasticity. It is of great interest to business owners or decision
makers (from
proprietors to CEOs) to investors to anyone else who is
interested in knowing the

extent to which product sales will be affected by changes in
variables such as product
price or consumer incomes.
Truth be told, elasticity was a concept stolen by economists
from the discipline of
physics. In Newtonian mechanics, the concept is used to
describe the extent to which
"rigid" bodies can have their dimensions altered by pulling,
pushing, twisting, or
compression. In microeconomics, the extent to which the
quantity of goods and
services sold can be pulled or pushed by a price change is of
interest. For example,
price elasticity of demand is concerned with observing how
much of a product
consumers purchase in response to a change in the product’s
price. On the supply side
of the market, elasticity refers to how much suppliers alter the
quantity of a product
they supply to the market in response to a change in the
product’s price.
(Other elasticities such as income and cross-price elasticity of
demand are

important, especially if you decide to enter a business field such
as market research
where consumer demand patterns are closely scrutinized.
However, given that it's
usually enough of a task for beginning students to understand
price elasticity of
demand, we will examine other elasticities besides price, but
not in great detail).
price elasticity of demand (simple formula) = % change in
quantity demanded
%
change in price
The way to read the fraction on the right side of the equation
above is, "a percentage
change in quantity demanded caused by a percentage change in
price." This is a good
way of emphasizing the relationship between price and quantity-
-quantity changes in
response to price. Notice the exact variables involved in the
ratio as well: percentage
change, not just “change” or “quantity demanded” divided by

price.
Remembering the law of demand ("price and quantity are
inversely related") and that
on the demand side of the market there is a negative
relationship between price and
quantity, we would expect the above formula to always produce
a number that is
negative (-) in value. We will follow the convention mentioned
by Mankiw of
dropping the minus sign.
After the simple version of elasticity is examined, the midpoint
method is introduced
and advertised by Mankiw as a "better way to calculate
percentage changes and
elasticities." (I leave it to you to answer as a discussion issue
as to why it is
better.) The midpoint formula at the end of section 5-1c looks
frightening enough and
you can read Mankiw's adequate explanation. However, in
terms of dividing one
fraction by another (red/blue in the formula immediately
below), for the purposes of
memorization an easier version of the midpoint formula is:

price elasticity of demand (midpoint formula) = Q2-
Q1
Average of
Q2 and Q1
P2-P1
Average of
P2 and P1
Remember: "Quantity over price, second minus first. Both
over their
averages." (You already know that an average of two numbers
is adding the two
numbers and dividing by the number two. This gets us a
slightly less scary-looking
equation with no "double-nested" fractions!)
Let's work an example from Figure 1, graph (d).
For the numbers provided in this graph of a price increase from
$4 to $5:
P1= 4
P2=5

Q1=100
Q2=50
Avg. of Q2 and Q1= 50 + 100 = 150/2 = 75
Avg. of P2 and P1= 5 + 4 = 9/2 = 4.5
Here is the calculation using the simpler version of the midpoint
formula:
50-100
75 =
-0.67 = -3.05 = 3.05
(dropping the minus sign)
5-4
0.22
4.5
Compare this to the answer produced using the simple formula:
= % change in quantity demanded
% change in price
= -67 = -3.0455 = 3.05
+22
In this example, the answers from the two formulas are equal

(3.05). Practice these,
as they will reappear on the next exam. By the way, in case
you're wondering, the
technical name for the numerical result of these formulas (3.05
in the two examples
above) is the elasticity coefficient. [Mankiw dances around
naming it, and math
majors who take the class always ask what the variable symbol
is (sometimes the
Greek letter nu, sometimes epsilon) and its technical name.
They know no one in
their right mind--even an economist--would represent a variable
symbolically with the
phrase "price elasticity of demand!"]
Take a look at the other four graphs (a, b, c, and e) in Figure 1
besides graph
(d). Remember, if the absolute value (value without the minus
sign) of the price
elasticity coefficient is:
< 1, then demand is inelastic
> 1, then demand is elastic

= 1, then demand is unit elastic
For the elasticity coefficient 3.05 calculated above, since 3.05 >
1, demand is
elastic. As you'll see later in Figure 5, the same applies for
price elasticity of supply,
although there's no issue of a minus sign attaching to the
coefficient because from the
law of supply, quantity supplied and price are positively
related.
By the way, here's a helpful little mnemonic (memory device)
for remembering the
relationship between the value of the elasticity coefficient and
what type of elasticity
prevails. Remember the abbreviation "i.e." (id est, from Latin
which means "that
is"). Jot down i.e. and put a number 1 between the "i" and the
"e" so you get
"i.
1
e." Viewed as if sitting on a number line, this should help you
remember that any
elasticity-coefficient value of less than one is a value that is
inelastic ("i.") and any
elasticity coefficient value greater than one ("e.") is elastic (1 is

the boundary between
inelastic and elastic).
Total Revenue and the Price Elasticity of Demand
Here's the second tricky area of the material in this chapter:
total revenue (price times
quantity or P*Q) depends on price elasticity and changes in
relation to it. If demand
is inelastic, an increase in price causes an increase in total
revenue. If demand is
elastic, an increase in price causes a decrease in total revenue.
Before ending, let's summarize all the relationships we've
covered so far in one table:
Type of
Demand
Elasticity
Coefficient
Value
Price and Total Revenue
inelastic < 1 move in same direction
elastic > 1 move in opposite direction

unit elastic = 1
total revenue doesn't change when
price changes
Discussion Topics (topics requiring examples are marked with
an asterisk *)
Please copy these topics exactly as written--shortening them can
cause you to
omit follow-up questions and thus lose points.
1. determinants of price elasticity of demand (choose one of the
four and provide
an example for it)*
2. price elasticity of demand (provide a numerical example
using either the simple
or midpoint formula)*
3. What purpose does the midpoint method serve?
4. elasticity coefficient*
5. Variety of Demand Curves (Figure 1--describe one of the five
with its elasticity
value, then provide a verbal example)*
6. In the seven elasticities from the real world, which of the

named goods are
elastic? Which are inelastic?
7. three general rules describing the relationship between total
revenue and the
price elasticity of demand (choose one, provide a numerical
example)*
8. Using income elasticity of demand, how does one recognize
an inferior good?
9. cross-price elasticity of demand*
10. price elasticity of supply*
11. Name and explain a key determinant of price elasticity of
supply in most
markets (provide a numerical example)*
12. Summarize how the price elasticity of supply is computed
and provide a
numerical example*
13. Variety of Supply Curves (Figure 5--describe one of the five
with its elasticity
value, then provide a verbal example)*
14. Explain how price elasticity of supply can vary along a
supply curve and
provide an example*

15. How can good news for farming be bad news for farmers?
16. Why did OPEC fail to keep the price of oil high?
17. Does drug interdiction increase or decrease drug-related
crime?
You're Not the Boss of Me! A Guide for Start-ups
Robert T. Kiyosaki
From the book Before You Quit Your Job
Weekend Today [on NBC]
Updated: 3:01 p.m. ET Oct. 21, 2005 [MSNBC.com]
Chapter 1: What is the Difference Between an Employee and an
Entrepreneur?
Starting with the Right Mind-Set
When I was growing up, my poor dad often said, “Go to school,
get good grades, so you can
find a good job with good benefits.” He was encouraging me to
become an employee.
My rich dad often said, “Learn to build your own business and
hire good people.” He was
encouraging me to become an entrepreneur. One day I asked my
rich dad what the

difference was between an employee and an entrepreneur. His
reply was, “Employees look
for a job after the business is built. An entrepreneur's work
begins before there is a
business.”
99% Failure Rate
Statistics show that 90% of all new businesses fail within the
first five years. Statistics also
show that 90% of the 10% that survive the first five years fail
before their tenth
anniversary. In other words, approximately 99% of all startup
businesses fail within ten
years. Why? While the reasons are many, the following are
some of the more critical ones.
1. Our schools train students to be employees who look for jobs,
rather than entrepreneurs
who create jobs and businesses.
2. The skills to be a good employee are not the same skills
required to be a good
entrepreneur.
3. Many entrepreneurs fail to build a business. Instead they
work hard building a job that
they own. They become self-employed rather than business
owners.

4. Many entrepreneurs work longer hours and are paid less per
hour than their employees.
Hence, many quit out of exhaustion.
5. Many new entrepreneurs start without enough real-life
experience and without enough
capital.
6. Many entrepreneurs have a great product or service but don't
have the business skills to
build a successful business around that product or service.
Laying the Foundation for Success
My rich dad said, “Starting a business is like jumping out of an
airplane without a parachute.
In midair the entrepreneur begins building a parachute and
hopes it opens before hitting the
ground.” He also said, “If the entrepreneur hits the ground
before building a parachute, it is
very tough climbing back into the plane and trying again.”
For those of you familiar with my series of rich dad, poor dad
books, you know that I have
jumped out of the plane many times and failed to build the
parachute. The good news is
that I hit the ground and bounced. This book will share with you
some of my jumps, falls,

and bounces. Many of my failures and successes were small
ones, so the bounce was not
that painful -- that is, until I started my nylon and Velcro wallet
business. I will go into
further detail throughout the book because I made many
mistakes and learned from them
along the way. The success of that business was sky high and so
was the fall. It took me
over a year to recover from that powerful bounce. The good
news is that it was the best
business experience of my life. I learned much about business
and about myself through the
process of rebuilding.
The Crack in the Dam
One of the reasons I fell so hard in the nylon surfer wallet
business was that I did not pay
attention to the little things. There is some truth to the age-old
statement, “The bigger they
are, the harder they fall.” My little surfer wallet business grew
so fast that the business was
a lot bigger than the capabilities of the three entrepreneurs who
created the business.

Instead of creating a business, we had created Dr.
Frankenstein's monster and did not
realize it. In other words, our sudden success was accelerating
our failures. The real
problem was we did not know we were failing. We thought we
were successful. We thought
we were rich. We thought we were geniuses. To the extent that
we bothered to consult
expert advisors (like patent attorneys), we did not listen to
them.
As three successful entrepreneurs in our late twenties and early
thirties, we took our minds
off the business and partied into the night. We actually thought
we had built a business. We
actually thought we were entrepreneurs. We actually believed
our own story of success. We
started bragging. Champagne started to flow. It was not long
before we each had fast
sports cars and were dating even faster women. Success and
money had blinded us. We
could not see the cracks forming in the wall of the dam.
Finally, the dam broke. The house of cards started tumbling
down around us. Our parachute
did not open.
Too Much Success

The point in sharing my entrepreneurial stupidity is that many
people think that it is the lack
of success that kills a business. And in many cases that is true.
The failure of my surfer
wallet business was a valuable experience because I found out
early in my career as an
entrepreneur that too much success can also kill a business. The
point I am making is that a
poorly conceived business can fail whether it is initially
successful or not.
Hard Work Covers Up Poor Design
A poorly conceived business startup may be able to survive as
long as the entrepreneur
works hard and holds the business together with sheer
determination. In other words, hard
work can cover up a poorly designed business and keep it from
failing. The world is filled
with millions of small business entrepreneurs who are able to
keep their leaky business
afloat with hard work, sheer willpower, duct tape, and baling
wire. The problem is, if they
stop working, the business breaks apart and sinks.
All over the world, entrepreneurs kiss their families good-bye
and head off to their own

businesses, their pieces of the rock. Many of them go to work,
thinking that working harder
and longer will solve their business problems--problems such as
not enough sales, unhappy
employees, incompetent advisors, not enough free cash flow to
grow the business,
suppliers' raising their prices, insurance premiums' going up,
landlords' raising the rent,
changing government regulations, government inspectors,
increasing taxes, back taxes,
unhappy customers, nonpaying customers, and not enough time
in the day, to name a few
of the daily challenges. Many entrepreneurs do not realize that
many of the problems their
businesses face today began yesterday, long before there was a
business.
One of the primary reasons for the high failure rate of small
businesses is sheer exhaustion.
It's tough to make money and to keep going when so much of
your time is tied up in
activities that do not make you any money or that cost you
money without offsetting
income. If you are thinking about starting your own business,

before you quit your job, you
might want to talk to an entrepreneur about how much time he
or she spends on non-
income producing activities to run his or her business. Also ask
how he or she handles this
challenge.
As a friend of mine once said, “I'm so busy taking care of my
business I don't have time to
make any money.”
Do Long Hours and Hard Work Guarantee Success?
A friend of mine quit his high-paying job with a large bank in
Honolulu and opened a tiny
lunch shop in the industrial part of town. He had always wanted
to be his own boss and do
his own thing. As a loan officer for the bank, he saw that the
richest customers of the bank
were entrepreneurs, and he wanted a piece of the action, so he
quit his job and went for his
dreams.
Every morning, he and his mom would get up at four o'clock to
begin preparing for the
lunch crowd. The two of them worked very hard, scrimping,
cutting corners, in order to
serve great-tasting lunches with generous portions at low prices.

For years I would stop by, have lunch, and find out how they
were doing. They seemed very
happy, enjoying their customers and their work. “Someday we'll
expand,” said my friend.
“Someday we'll hire people to do the hard work for us.” The
problem was that someday
never came. His mom passed away, the business closed, and my
friend took a job as a
manager of a fast-food franchise restaurant. He returned to
being an employee. The last
time I saw him he said, “The pay isn't great but at least the
hours are better.” In his case,
his parachute did not open. He hit the ground before he built a
business.
Now I can hear some of you saying, “At least he went for it.”
Or, “It was just bad luck. If his
mom had lived, they might have expanded and gone on to make
a lot of money.” Or, “How
can you criticize such good, hardworking people?” And I agree
with these sentiments. My
intent is not to criticize them. Although not related to them, I
loved the two of them dearly.
I knew they were happy yet it pained me to see them work so
hard and not get ahead, day

after day. I only relate this story to make the same point. The
business began to fail before
there was a business. It was poorly conceived before he quit his
job.
Excerpted from Rich Dad's Before You Quit Your Job: 10 Real-
Life Lessons Every
Entrepreneur Should Know About Building a Multimillion-
Dollar Business by Robert T.
Kiyosaki and Sharon L. Lechter C.P.A. Copyright © 2005,
Robert T. Kiyosaki with Sharon L.
Lechter.
Only 44 percent of small firms hit Year 4
Transportation, apparel, restaurants among toughest industries
to crack
By Maureen Farrell
Forbes
Updated: 3:02 p.m. ET Feb. 16, 2007
The numbers aren't pretty.
While some two-thirds of small firms make it past the two-year
mark, just 44 percent can hack it
for four years, according to the latest data from the Bureau of
Labor Statistics. And by "hack it,"
we're just talking survival rates here: Plenty of those
"survivors" are choking down ramen

noodles to keep the lights on.
If those odds don't scare you off, consider too that some
industries may be inherently tougher to
crack than others. Your friends might think that you rival Mario
Batali in the kitchen, or that you
can go sole for sole with the likes of Kenneth Cole. But the
sober truth is that it takes more than
talent to run a restaurant, a clothing boutique and a host of
other ventures. Sadly, some of the
most enticing industries are also the riskiest.
Good data on business failures are hard to find. At first blush,
BLS figures suggest that failure
rates are consistent across industries. Yet those industry
groupings are very broad, capturing the
entire universe of small companies in just 10 general buckets.
For example, restaurants are
lumped into the larger "leisure and hospitality" bucket,
including more stable outfits like hotels.
Some economists chalk up failure rates to other factors, such as
location, the experience level of
management teams and whether companies are able to nab
venture funding.
But a closer look by the folks at Fair Isaac, a business research

firm and father of the FICO credit
score, suggests that some industries are indeed riskier than
others.
To assess an industry's inherent risk, Fair Isaac collected reams
of financial data from various
internal and other proprietary sources, including credit-tracking
agencies such as Dun &
Bradstreet and Equifax. "The weird thing about industry
classification is that, depending on the
sources we look at, there are varying rates of risk," says Cordell
Wise, a Fair Isaac product
manager.
To be sure, choice of industry is not the only predictor of a
startup's chances for success. Fair
Isaac weighs up to 20 variables when modeling a small fry's risk
profile. After a business has
been up and running for more than two years, Fair Isaac drops
the industry variable from its risk
model altogether; at that point, things like cash flow and debt
load become more critical factors.
Still, out of a universe of 89 industries (still somewhat broad,
but a lot better than the BLS
classifications), 10 stood out as the riskiest. Five of them
follow.

Transportation
Take vehicles for hire. All operators pay high insurance
premiums, suffer during oil spikes and
have tons of competition. And each mode of transportation has
its own risks too. In New York
City, where the number of taxis has been fixed since 1937, the
price of a taxi license is upward
of $400,000 — a stiff entry price to do battle, even in a $1.8
billion market. Then you have to
find trustworthy drivers to pull in revenue — unless you enjoy
working grueling 10-plus-hour
shifts yourself. As for liveries, their welfare depends on
connections with local hotels and
businesses. Network poorly and you're done.
Apparel
Clothing retailers don't have it much easier. Last year's bubble
skirts might have looked great on
http://www.forbes.com/2007/01/18/fairisaac-nordstrom-verizon-
ent-fin-cx_mf_0118risky_slide_2.html
you, but your customers may not have found them so flattering.
Retail's risky — it only takes one
slow season to end up swimming in inventory. And

differentiating your shop among a cadre of
giants, from Nordstrom to Urban Outfitters, is no mean feat
even with a healthy marketing
budget, which most entrepreneurs don't have. "There has to be
some special reason that you're
there," says Howard Dawidowitz, a New York-based retail
consultant. (For more on starting a
clothing retailer, see "The Fundamentals of Retailing.")
Restaurants and bars
Budding restaurateurs have an uphill slog too. "Food businesses
in general are deceptively
familiar," says Clark Wolf, a New York-based food and
restaurant consultant. "That's part of the
magic and part of the serious danger." Restaurants often fail
because they are undercapitalized:
Getting ready for opening day — from fitting out the kitchen to
complying with city health codes
— can run in the hundreds of thousands of dollars. Once you
open your doors, get ready for your
staff to walk out through them at a moment's notice. And oh,
yeah: Most food-service vendors
like cash on delivery, so a slow week can make it hard to buy
next week's ingredients or alcohol.

Communications
How about a purveyor of handy-dandy cell phones and other
PDAs? Even the smallest towns in
the U.S. have several companies hawking mobile devices,
including telecom giants such as
Verizon and Sprint Nextel. Low margins plus established
competitors equals high risk for
independent dealerships.
Which industries are a better fit for the faint of heart?
Surprisingly, real estate — including
landlords, agents and developers — has a relatively low risk
profile, according to Fair Isaac's
data. Professional services and licensed trades score well too:
Think insurance brokers, doctor's
offices and law firms.
Yes, the world is full of lawyers. Too bad people actually need
them.
© 2007 Forbes.com
Part A. Questions
1. Please answer each question with at least one complete
sentence.

2. In your answers, please do not "copy and paste"
material from the article but use your own words.
3. Put your question answers for Part B below your two
(2) concepts for the week for Part A on a single posted
page [remember: post-first rules are now in effect, plus
posting two (2) separate pages is more work than
necessary]. In fact, use the copy and paste-able
template provided on the assignment sheet.
4. On more subjective questions there is no right or
wrong answer, just make sure to adequately support your
position, whatever it is.
1. Kiyosaki's poor dad encouraged him to become an
employee. What did his rich dad encourage him to be and
what did the rich dad say was the difference between the
two? [Use a complete sentence in answering.]
2. Looking at the six (6) critical reasons Kiyosaki lists

as to why most new businesses fail, how does Kiyosaki
feel that schools have played a role in terms of not
effectively preparing students?
3. According to Kiyosaki, one of the primary reasons for
the high rate of failure of small businesses is
exhaustion. He then recommends that before you quit your
job to start a business, you talk to an entrepreneur
about what two issues?
4. Out of 89 industries, Maureen Farrell's article
(second article above) lists five of the ten
riskiest. Of what relevance could such information have
been to Kiyosaki's friend before he quit his safe job at
a bank to open a lunch shop that later failed?

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