Economics Chapters 3 5. Business Organizations and Supply and Demand.

Chapter Three: Forms of Business

Organizations

Sole ProprietorshipAdvantages

1. Easy to get started.

2. Ease of mtg.

3. One person gets all profits.

4. Ordinary taxes.

5. Easy to get out of business.

Disadvantages1. Unlimited

liability.

2. Hard to raise money.

3. Size/Efficiency issues.

4. Hard to find employees. Why?

5. Limited life of co.

Partnerships: Two or More Owners

Advantages1. Easier to mtg.

2. Ease of est.

3. No corp. taxes.

4. Easier to get loans.

Disadvantages1. Fully responsible

for other partner.

2. Potential for conflict.

3. Life of co. limited.

CorporationsAdvantages

1. Easier to raise money. Stocks/Bonds.

2. Professional mtg.

3. Limited liability.

4. Possible long life. Coke?

Disadvantages1. State charter.

2. Double taxation.

3. More government regulations.

How Can Corporations Grow?

1. Borrow money from banks.

2. Venture capitalists.

3. Reinvest profits.

4. Acquisitions.

4. Issue bonds.

5. Go public. Issue stock.

6. Have a merger.

Reasons for Corporation Mergers?

1. Better efficiencies. Walmart?

2. Acquire new product lines. Drug co.

3. Acquire copy rights or patents.

4. Eliminate rivals.

5. Get access to new/bigger markets. CVS?

Horizontal & Vertical Mergers

1. Horizontal: Two co. that are in the same business. Two banks become one. H.P. and Compac.

2. Vertical: A co. that owns a business from raw materials to finished product.

Conglomerates1. A co. that owns at least four

businesses that do unrelated things.

2. Examples: General Electric, Samsung, or Tyco.

Multinationals

1. A corporation that has markets and productions in two or more countries.

2. All conglomerates and any corporation of any size are multinational.

Other Organizations…1. Non-Profits.

2. Cooperatives.

3. Labor Unions.

4. Professional assn. AMA.

5. Business assn.

Chapter Four

Microeconomics:

The study of individual elements of the economy with the study of consumer and business behavior.

Demand:

The desire, ability, and willingness to buy a product or service.

Demand Curve or Schedule

Demand Curve

1. D.C. is the illustrated/graphic PICTURE that shows the relationship between demand and price.

Demand Schedule

1. D.S. is a listing or table showing the relationship between price and demand.

What direction does the demand curve ALWAYS

go?

Down and to the right!

Law of Demand1. Higher the price, the lower

demand.

2. The lower the price, the higher demand.

3. Duhhhhhhhh!

Demand and Marginal Utility

Diminishing Marginal Utility: The more we have of any one item, the less value each INDIVIDUAL item has to us.

Shifts in Demand

1. A shift in demand is a major change in consumer spending for a good or service.

2. A shift in demand can be cause by many reasons, such as:

Factors That Affect Demand

1. Price.

2. Anticipation of FUTURE price.

3. Income.

4. Market size.

5. Compliments.

6. Substitutes.

7. Seasons.

8. Fads/Fashion.

Substitution Effect1. Sustained high prices of a product will

cause consumers to “Substitute” to another.

2. Japanese cars in the 1970’s.

3. Beef. Early 1970’s.

4. Coffee. Early 1980’s.

ELASTICTY OF DEMAND

How sensitive is the product or service to price change?

What Determines Elasticity?

1. Can purchase be delayed?

2. Possible substitutes?

3. Is it a big chunk of your income?

4. Can a product change from inelastic to elastic?

Inelastic Demand1. For some goods and services price do

not affect demand.

2. Why does price not affect the demand for insulin or heart-by-pass surgery?

3. Does price have an impact paperclips?

4. What does an inelastic graph look like?

What is Supply?

Supply

The amount that of a product or service that can be offered at all possible prices.

Law of Supply

The higher the price paid, the more that producer will offer.

Supply Curve & ScheduleSupply Curve

Graphic that shows all products offered at all possible prices.

Supple Schedule

A listing or table of products offered at all possible prices.

What two direction does the supply curve ALWAYS

go?

1.UP and to the right!

Changes in Supply1. Cost of inputs.

2. Productivity.

3. Technology

4. Taxes and subsidies.

5. Expectations.

6. Gov’t regulations.

7. Number of sellers.