SWS © 2011 1 MIDTERM (UNITS 1-8) SWS © 2011 2 Economics defined Economics is defined as the social science primarily concerned with the problems of using.

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MIDTERM(UNITS 1-8)

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Economics defined

Economics is defined as the social science primarily concerned with the problems of using scarce (limited) resources to attain maximum fulfillment of society’s unlimited wants.Without scarcity (limited resources) there

would be no reason to study economics.

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Macro- vs Micro- Economics

Macroeconomics (large scale): the study of national and global economies (highly “aggregated” units)

“AGGREGATED” = “TOTAL”

(EXAMPLES: USA, Britain, European Union) Microeconomics (small scale): the study of individual decisions and markets (narrowly defined units)

(EXAMPLES: you buy a movie ticket verses a pizza, single product markets like IPODS, and how prices for goods are set)

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1. Division of labor: -- breaks down the production of a commodity into a series of specific tasks performed by different workers.

What helps promote efficiency?

2. Specialization: increase output for three reasons:

– Specialization permits individuals to take advantage of their existing skills.

– Specialized workers become more skilled with time.

– Division of labor allows for the adoption of mass-production technology.

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Adam Smith(Famous Economist)

The Father of Modern Economics Free markets and private ownership will provide

jobs, profits, and an increasing standard of living. “Pure Capitalism” (Market economy = no government

regulation) All economic activity is governed by an “invisible

hand”. (If you leave a economy alone, people’s need for goods will be enough to keep the economy going)

PROBLEMS WITH CAPITALISM: Flow of information and goods is not balanced Unequal distribution of power and wealth

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The Foundation of Economics The overall objective of all economic

activity is to satisfy these diverse material wants (keeping in mind that resources used to make them are scarce)

The 3 fundamental economic questions individuals, businesses, and nations must ask:

1. What will be produced

2. How will it be produced

3. For whom will it be produced

REMEMBER: WHAT, HOW, FOR WHOM

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EXTERNALITIES OF PRODUCTION

What are externalities?

An externality occurs in economics when a decision causes costs or benefits to any person OTHER than the person making the decision or buying the good.

In other words, the decision-maker (buyer or producer) does not bear all of the costs or reap all of the gains from his/her actions.

These externalities cause either POSITIVE or NEGATIVE results

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1. Market economies

2. Command economies

3. Mixed economies (also called free enterprise)

Types of Economies

- A method or organization that allows unregulated prices and the decentralized decisions of private property owners to resolve the basic economic problems. (NO GOVERNMENT REGULATION)

- An economy where the government control the factors of production (TOTAL GOVERNMENT REGULATION) Examples: CUBA, Communism, etc.

- An economy where the government regulation AND private business control the factors of production Example: USA, Europe, most superpowers

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The Circular-Flow Diagram

Firms Households

Factor Market(Resource Market)

Firms Buy hereHouseholds Sell here

Product MarketFirms Sell here

Households Buy here

SpendingRevenue

Wages, rent, and

profit

Income

Goods & Services

sold

Goods & Services bought

Labor, land, and capital

Inputs for production

IMPORTANT!!

Example of question: What do households and firms do in the factor (resource)

market?

FLOW OF GOODS AND SERVICES

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The Foundation of Economics The four types of economic resources or

factors of production or inputs have one fundamental characteristic in common.– They are all scarce or limited in supply.

Review: THE FOUR FACTORS OF PRODUCTION

LAND

LABOR

CAPITAL

ENTREPRENEURSHIPRemember the word

“C.E.L.L.”

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- Inefficiency -

Production Possibilities Curvefor a Nation’s Economy (Given Limited Resources)

Outputof

Clothing

Outputof

Food

• Consider the economy of a nation which has limited resources to divide between the production of clothing and food.

• If the nation allocates all of its resources toward the production of clothing, then it can produce at point S.

• Mapping out all the possibilities of how the nation can divide its resources between these activities shows us the nation’s Production Possibilities Curve.

ProductionPossibilities

Curve

A

D B

COnly foodis produced

T

Only clothingis produced

SAll output

possibilities on the

frontier curve are efficient

• If the nation allocates all of its resources toward the production of food, then it can produce at point T.

• Output combinations A, B, and C are all on the PPC are therefore efficient allocations of resources.

• Output combination D is within the PPC and therefore represents an inefficient allocation of resources. Note that the nation could produce the same level of clothing while producing a greater quantity of food at point B.

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PRODUCTION POSSIBILITIES CURVE

Opportunity Cost: The value of the best possible alternative that is given in the decision to use a resource.

All attainable and unattainable combinations Full employment and unemployment Tradeoffs and free lunches

The PPF illustrates:

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1. When production is on the PPF, we face a tradeoff. To get more of one good we must give up some of the other good.

2. When production is inside the PPF, there is a free lunch. We can move to the PPF and get more goods without giving up either good.

TRADEOFF AND FREE LUNCH

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Why and How do we stabilize this business cycle?

1.Monetary Policy: The method of controlling the economy through changes in the SUPPLY OF MONEY, INTEREST RATES, and BANK REGULATIONS

2.Fiscal Policy: Another method is the use of TAXATION and GOVERNMENT SPENDING to control the economy.

How? Through the use of MONETARY and FISCAL policy

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Business Cycle

A TROUGH means that the economy is doing poorly and the Unemployment Rate is at its HIGHEST level

How does this cycle relate to unemployment rates?

A PEAK (or BOOM) means that the economy is doing very well and the Unemployment Rate is at its LOWEST level

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The Foundation of Economics In stating the first fact, what do we mean

by “material wants?”Answer. the desire of consumers to obtain

and use various goods and services that provide utility. Utility is defined as any good or service that

gives pleasure or satisfaction “utility = happiness”.

Some are necessities others are luxuries Economists believe that household attempt

to maximize their total utility first, then their income.

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As production increases, additional costs increase.

What does the Graph show?Law of Diminishing Marginal Returns

Price(monthly bill)

Quantity(of Cell Phone Subscribers)

140

120

100

80

60

5 10 15 20 25 30

SupplyBenefits > costs

Benefits < costs

(no more production)

•Basically for each additional unit produced the company had to hire more people and use more capital, which costs money.

• Therefore, even though the company is taking in more money the returns on each item decrease as a result of increased costs.

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Law of Demand Law of Demand: There is an inverse

relationship between the price of a good and the quantity consumers are willing to purchase.

As price of a good rises, consumers buy less. The availability of substitutes --goods that do

similar functions -- explains this negative relationship.

The LAW OF DIMINISHING MARGINAL UTILITY also explains the fact that people will demand less as the price increases because their utility is decreasing with each item bought.

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THE DETERMINANTS OF DEMAND

THE ONLY FACTORS THAT CAN CAUSE A DEMAND CURVE TO

SHIFT TO THE LEFT (decrease) OR RIGHT (increase).

1 5

$ Price

Quantity10

1.00

5.00

8.00

What specific things determine the position of the demand curve?

“P.O.I.N.T.”

1. Price of Related Products (Subs & Comps)

2. Outlook (Consumer Expectations)

3. Income

4. Number of consumers

5. Tastes

Position of the Demand Curve?

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Elastic and Inelastic Demand Curves

Elastic demand: quantity demanded is sensitive to small price changes.

Easy to substitute a good with elastic demand. Example: a good with many substitutes, such as bottle

water or cereal

Inelastic demand: quantity demanded is not sensitive to price changes.

Difficult to find substitutes to the good. Example: needed medication for and illness, such

as chemo-therapy or gasoline

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Elastic and Inelastic Demand Curves

2.00

1.25

2.00

1.25

Gasoline

Tacos

1 2 3 4 5 6 7 8 9 10

1 2 3 4 5 6 7 8 9 10

If the market price for gasoline was to rise from $1.25 to $2.00, the quantity demanded in the market decreases insignificantly (from 8 to 7 units).

If the market price for tacos rises from $1.25 to $2.00, the quantity demanded in the market decreases significantly (from 8 to 1 unit).

Taco demand is highly sensitive to price changes and can be described as elastic; gasoline demand is relatively insensitive to price changes and can be described as inelastic.

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Law of supply is the claim that, other things staying constant, (ceteris paribus) the quantity supplied of a good or service rises when the price of the good or service rises.

Law of SupplyLaw of Supply

$ = SUPPLY

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THE DETERMINANTS OF SUPPLY

THE ONLY FACTORS THAT CAN CAUSE A SUPPLY CURVE TO SHIFT TO THE LEFT (decrease) OR RIGHT

(increase).

1 5

$ Price

Quantity10

1.00

5.00

8.00

What specific things determine the position of the supply curve?

“G.O. S.P.I.T.”

Position of the Supply Curve?

1. Government Actions

2. Outlook of Future (by the producer)

3. Size of Industry (# of businesses)

4. Price of Related Product Lines

5. Input Costs

6. Technology

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1. Government Actionsa. decrease in business taxes = increase supplied (shift right) (cost to produce goes

down)b. mandating healthcare be provided to all employees= decrease supplied (shift left)

(cost to produce goes up)2. Input Costs

a. decrease in cost of a resource = increase supplied (shift right) (cost to produce goes down)

b. increase in cost of a resource = decrease supplied (shift left) (cost to produce goes up)3. Technology

a. Increase in technology = increase in amount supplied (shifts right)b. Decrease in technology = decrease in amount supplied (shift left)

4. Changes in the Price of other Goods that share the same resources

5. Supplier’s ExpectationsEX: Producer expectations about future profits or inflation

6. Number of Sellers

DETERMINANTS OF SUPPLY

EXAMPLE Pizza: price of rolls decreases (opportunity cost of making pizza declines) less likely to produce rolls and more likely to produce more pizza (supply curve shifts right)

a. Increase in # = increase in amount supplied (shifts right)b. Decrease in # = decrease in amount supplied (shift left)

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Elastic and Inelastic Supply CurvesELASTIC SUPPLY: quantity supplied is SENSITIVE

to small price changes

If the marginal costs to make an additional good are low, then the producer will be more likely to produce the good if the price changes.

If the marginal costs to make an additional good are high, then the producer will be less likely to produce the good if the price changes.

INELASTIC SUPPLY: quantity supplied is NOT SENSITIVE to small price changes

.

.

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Elastic and Inelastic Supply Curves

2.00

1.25

2.00

1.25

1 2 3 4 5 6 7 8 9 10

1 2 3 4 5 6 7 8 9 10

• If the market price for motor oil was to rise from $1.25 to $2.00, the quantity supplied in the market increases insignificantly (from 7 to 8 units).

• If the market price for burgers rises from $1.25 to $2.00, the quantity supplied in the market increases substantially (from 1 to 8 units).• Burger supply is highly

sensitive to price changes and can be described as elastic; motor oil supply is insensitive to price changes and can be described as inelastic.

INELASTIC

ELASTIC

Motor Oil

Burgers

Q

$

$

Q

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Elasticity in Short Run and Long Run

Short-Run - Firms don’t have enough time to adjust production in a short period of time (ie: stuck with current factory size). Supply tends to be inelastic in the short-run

for all goods

Long Run - Firms have enough time to adjust in a longer period of time (ie: build a larger factory, thus benefiting from mass producing a good).

Supply tends to be much more elastic in the long-run

.

.

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Time and Supply Elasticity

$20

$10

1 2 5 8 10 12

• A producer of birdhouses notices that the price per unit is rising from $10 to $20.

• Currently he only has enough resources to make 8 birdhouses. (ie. employees)

• Let us see what happens over time.

Supply$

Quantity Supplied

$5

TIMELINEP

resent

3 Months

6 Months

... at 3 Months (hired another employee)

... at 6 Months (purchased a larger workshop)

• Therefore, supply becomes more elastic over time as a company has more time to adjust to changes in price. Inelastic Elastic

Profit occurs when revenues are greater than all costs (variable and fixed).

To understand the law of supply, we must recognize that companies need profits.

• Variable Cost (VC) are cost that CAN change month to month depending on production• Fixed Cost (FC) are cost that CANNOT change month to month. They are steady regardless of the amount of production.

VC + FC = TOTAL COSTS

Role of Costs in Shaping the Supply Curve

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Equilibrium Price

Supply

Demand

Price

Quantity

EquilibriumPrice

EquilibriumQuantity

Equilibrium Price

(x marks the spot) This is the perfect price to

charge for a good.

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Price Floors

When the government imposes a price floor (a legal minimum on the price at which a good can be sold) two possible outcomes are possible:

1. The price floor is not effective.

2. The price floor is effective on the market and creates Surpluses

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Market Impacts of a Price Ceiling

A Price Ceiling creates shortages.

Examples:

Rent control for low income families Rent controls are price ceilings placed

on the rents that landlords may charge their tenants.

The goal of rent control policy is to help the poor by making housing more affordable.

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Price Ceilings and Floors

o

P

1

2

3

45

S

D

}}

SURPLUS

SHORTAGE

$6

PRICEFLOOR

PRICECEILING

DEMAND & SUPPLY

10 20 35 55 80

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A Price Ceiling Creates Shortages

Supply

Demand

Price

Quantity

PE

QE

PC

QS QD

Shortage

Illegal $

Legal $

Price Ceiling

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A Price Floor Creates a Surplus

Supply

Demand

Price

Quantity

PE

QE

PF

QS QD

Surplus

Illegal $

Legal $

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PRICE FLOOR: Minimum Wage

You can’t go below the floor! A Price Floor creates. . .

– Surpluses (i.e. Quantity Supplied > Quantity Demanded)

Examples:

Minimum Wage (can be used to protect workers)

Protects farmers (protects suppliers)

Market Impacts of a Price Floor

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Market Impacts of a Price Floor A government imposed market price floor

hinders the forces of supply and demand in moving toward the equilibrium.

One reason to establish a price floor is to protect the producer (such as a new farmer who is competing against larger farming corporations).

The price floor keeps the larger companies from charging a lower price than a smaller company that is struggling to get on its feet.

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Markets are classified by 4 structures

1. Pure (perfect) Competition

2. Monopolistic Competition

3. Oligopoly

4. Monopoly

What Are Markets?

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1. Perfect Competition

This is a theoretical situation. NO TRUE Perfectly Competitive Market

exists.

BEFORE WE BEGIN!!

IT IS ONLY A THEORY!

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The 5 conditions of perfect competition

1) LARGE number of SMALL firms. No single buyer or seller can influence the price.

2) Buyers and sellers deal in identical products. No product differences. (EXAMPLES: Salt, Flour, Commodity, Corn)

3) Unlimited Competition: so many firms, that suppliers lose the ability to set their own price.

4) No Barriers to Entry. Sellers are free to enter the market, conduct business and free to leave the market. (Low cost to enter)

5) Each firm is a PRICE-TAKER (more on this later)

CONSUMERS HAVE THE LARGEST SELECTION OF BUYERS TO BUY GOODS FROM BECAUSE NO SINGLE GOOD IS MORE APPEALING THAN ANOTHER.

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The 5 conditions of perfect competition

4) No Barriers to entry. Sellers are free to enter the market, conduct business and free to leave the market.

Perfect competition is the opposite of monopoly. Here, any firm can get into the market at very little cost.

The agricultural market is the best example of a perfectly competitive market.

Suppose there was a market for dandelions. Growing dandelions requires little start-up cost.

All you need are dandelion seeds, soil, water, and some sunlight.

There is no difference between one dandelion and another, so the market has a similar product.

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Perfect Competition

Each individual firm is to influence prices.

Price becomes fixed to everyone in the industry.

EXAMPLE: the price of a bushel of wheat is set only by the interaction of supply and demand.

too small

Generally speaking, wheat is the same per bushel in North Georgia

as it is in Florida.

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Perfect Competition

Firms in a perfectly competitive market are price takers. (they take the price they are given, they can’t change the price)

Since they have no control over their own prices, they have _______________________.

In other words, no one will buy an overpriced dandelion. Why should they?

A 4-cent dandelion is the same as the 3-cent one, so there is no reason to spend that extra penny.

NO MARKET POWERMARKET POWER = “the ability to set one’s OWN prices”

1) LARGE number of large companies (but fewer than perfect competition). Sellers can influence the price through creating a product identity (more on this later)

2) Products are NOT exactly identical, BUT VERY SIMILAR, so companies use PRODUCT DIFFERENTIATION

3) Heavy Competition: Firms must remain aware of their competitor’s actions, but they each have some ability to control their own prices.

4) Low Barriers to Entry: harder to get started because of the amount of competition.

5) Monopolistic competition takes its name and its structure from elements of monopoly and perfect competition. 46

Monopolistic Competition The 5 conditions of Monopolistic Competition

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Conditions of Monopolistic Competition

The point is that firms in Monopolistic Competition must use Product Differentiation & Non-price Competition to sell their products.

Product Differentiation: The real or imagined differences

between competing products in the same industry.

Differences may be real or imagined.

Differentiation may be color, packaging, store location, store design, store decorations, delivery, service….. anything to make it stand out!

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The point is that firms in Monopolistic Competition must use Product Differentiation & Non-price Competition to sell their products.

Conditions of Monopolistic Competition

Non-Price Competition: Non-Price Competition involves the advertising of a

product's appearance, quality, or design, rather than its price.

Advertising to help the consumer believe that this product is different and worth more money.

VS

Notice these commercials never

mention price.

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What is an Oligopoly?A market in which a two-three large sellers control

most of the production of a good or service and they work together on setting prices.

Conditions of an Oligopoly

1) Very few Sellers that control the entire market.

2) Products may be differentiated or identical (but they are usually standardized)

3) Medium barriers to entry: Difficult to Enter the market because the competitors work together to control all the resources & prices.

4) The actions of one affects all the producers.

5) Collusion = an agreement to act together or behave in a cooperative manner.

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A market in which a two-three large sellers control most of the production of a good or service and they

work together on setting prices.

What is an Oligopoly?

Conditions of Oligopoly5) Collusion = an agreement to act together or

behave in a cooperative manner.

It is also called Price Fixing: setting the same prices across the industry.

THIS IS IN VIOLATION OF ANTI-TRUST LAWS. WHY?

WHY DOES THE GOVERNMENT HAVE THE POWER TO STOP THIS?

Basically, the companies are acting a one large monopoly.

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2 Types of Price Behavior in an Oligopoly

Independent Pricing: policy by a competitor that ignores other producer’s prices.

Price Leader: independent pricing decisions made by a dominate firm on a regular basis that results in generally uniform industry-wide prices.

DISADVANTAGE: other firms shut you down by agreeing to set lower prices than yours.

ADVANTAGE: you are the company leading the price.

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Price Behavior in Oligopoly

Oligopolists would like to be Independent Price setters: a firm sets prices based on demand, cost of input

and other factors (not based on other companies prices).

Price Wars: Series of price cuts that competitors must follow or lose business. it is a fierce price competition between sellers, sometimes

the price is lower than the cost of production.Why is that bad??? (Business Failure)

Now, sometimes businesses do not agree with each other about the price, and if that happens, a WAR will result.

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Conditions of Monopoly

There is a single seller

No close substitute goods are available

High Barriers to Entry: Other sellers cannot enter the Market.

Exact Opposite of Pure Competition. A price maker. (set their own price, without regard to

supply and demand)

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1) Natural Monopoly: Where costs are minimized by having a single producer of the product.

Gas, water, electricity. Government creates Natural Monopolies by Franchising some utilities. Franchise: the right to produce or do business in a certain

area without competition. Government franchises come with government regulation.

Georgia PSC (Public Service Commission)WHY WOULD GOVERNMENT DO THIS???

Economies of Scale: As natural monopolies grow larger it reduces its production costs.

Because normally the more efficient its use of personnel, plant and equipment as a firm becomes larger. Example: It is cheaper for the Tennessee Valley Authority (TVA)

to provide power in Georgia than two or three companies.

4 Distinct Types of Monopolies:

Types of Monopolies

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2) Geographic Monopoly: The only business in a location due to size of market.

Decreasing in the U.S. because of mobility.

Types of Monopolies

EXAMPLE: Only person selling

water in the desert.

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3) Technological Monopoly: Firm has discovered a new process or product.

– Constitution gave government the right to grant technological monopolies.

– Patent: 17 years exclusive rights to a developed technology.

– Copyright: (Artists and writers) Life plus 50 years.

Types of Monopolies

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4) Government Monopoly: Retained by the government.

Liquor sales in some counties, uranium production, water, etc.

Types of Monopolies

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The Role of Government

1890 - Sherman Antitrust Act: law against those companies that hindered competition or made competition impossible because of the “restraint of trade” that was created.

Basically outlawing monopolies.

1887: Interstate Commerce Act

1887 PRESENT

1890: Sherman Antitrust Act

Antitrust Legislation

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The Role of Government

1914 - Federal Trade Commission Act: passed to enforce the Clayton Antitrust Act. It gave the authority to issue Cease and Desist Order.

1887: Interstate Commerce Act

1887 PRESENT

1890: Sherman Antitrust Act

Cease and Desist Order: FTC ruling requiring a company to stop an unfair business practice that reduces or limits competition.

1914: Federal Trade Commission Act

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MERGERS OF LARGE COMPANIES Sometimes companies fall victim to market failure. However,

not all businesses close their doors and empty their factories and stores.

Many get “swallowed up” by another company. This “take-over” or acquisition of a company is known as a merger.

There are THREE types of mergers: HORIZONTAL, VERTICAL, and CONGLOMERATE.

1.) HORIZONTAL: involve firms in the SAME market, such as between two oil companies.

EXAMPLE: steel company buys an automaker

Reason: Diversification

2.) VERTICAL: involve one firm buying a resource provider.

3.) CONGLOMERATE: a company buys a business in a UNRELATED industry.

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Sole Proprietorships The Role of Sole Proprietorships:

THE TYPES OF BUSINESSES ORGANIZATIONS

– A sole proprietorship is a business owned and managed by a single individual.

– That person earns all of the firm's profits and is responsible for all of the firm's debts.

– This type of firm is by far the most popular in the United States. According to the Internal Revenue Service, about 75 PERCENT of all businesses are sole proprietorships.

– Most sole proprietorships are small. Why?

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THE TYPES OF BUSINESSES ORGANIZATIONS

Sole Proprietorships Advantages of Sole Proprietorships:

1.) Easy to Start: While you need to do more than just hang out a sign to start your own business, a sole proprietorship is simple to establish.

With just a small amount of paperwork and legal expense, just about anyone can start a sole proprietorship. 1. Name: If not using this or her own name as the name of the

business, a sole proprietor must register a business name.

2. Authorization: Sole proprietors must obtain a business license.

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THE TYPES OF BUSINESSES ORGANIZATIONS

Sole Proprietorships Advantages of Sole Proprietorships:

2.) Few Regulations: A proprietorship is the least-regulated form of business organization.

– Most importantly, because they require little legal paperwork, sole proprietorships are usually the least expensive form of ownership to establish.

– Does this mean they have NO regulations?Even the smallest business, however, is subject to some regulation, especially industry-specific regulations.

For example, health codes

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THE TYPES OF BUSINESSES ORGANIZATIONS

Sole Proprietorships Advantages of Sole Proprietorships:

3.) Owner makes all profit: If the business succeeds, the owner does not have to share the success with anyone else.

4.) Total control of decisions: sole proprietors can run their businesses as they wish. –This means that they can respond quickly to changes

in the marketplace.

5.) Easy to Discontinue: Finally, if sole proprietors decide to stop operations and do something else for a living, they can do so easily.

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Sole Proprietorships Disadvantages of Sole Proprietorships:

THE TYPES OF BUSINESSES

1.) Unlimited Personal Liability: Sole proprietors are fully and personally responsible for all their business debts.

2.) Limited Access To Resources: Many small business owners use all of their available savings and other personal resources to start up their businesses. This makes it difficult or impossible for them to expand quickly.

Also, they may lack HUMAN CAPITAL, which would make their business suffer.

3.) When owner dies, the business dies: when owner dies or retires the company ceases to exist, unless given to someone else.

4.) No Fringe Benefits: No healthcare plan, dental coverage, 401k retirement plan, or paid vacations

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Partnerships Two or more owners who split

responsibility of the management of the company

THE TYPES OF BUSINESSES

1.) General Partnerships: Partners in a general partnership share equally in both responsibility and liability.

2.) Limited Partnerships: In a limited partnership, only one partner is required to be a general partner.

That is, only ONE partner has UNLIMITED personal liability for the firm’s actions. The remaining partner or partners contribute only money.

3.) Limited Liability Partnerships/Companies (LLP & LLC): In this type of partnership, all partners/companies are limited partners. An LLP functions like a general partnership, except that all partners are limited from personal liability from another partner’s mistakes.

Also the owners are taxed at a personal level, versus the entire company being taxed.

FOR THE MIDTERM: DO NOT WORRY ABOUT P.C.s 67

Partnerships (two or more owners who split responsibility of the management of the company)

Types of Partnerships: (each has a contract)

THE TYPES OF BUSINESSES

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1.) Easy to Start: Like proprietorships, partnerships are easy and inexpensive to establish. The law does not require a written partnership agreement. (FEW REGULATIONS)

2.) Little government regulation: Like sole proprietorships, partnerships are subject to little government regulation.

3.) Shared Decision Making and Specialization: divide up the work and the costs of the company.

4.) Pooling of capital: combine the money and human resources (intelligence) of two in order to get started.

5.) Not liable for other partners actions: if one partner screws up, then the other is not liable for the wrong-doing. (ONLY for an LP, LLP & LLC)

Advantages of Partnerships: Partnerships

THE TYPES OF BUSINESSES

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1.) Unlimited Liability: all partners are liable for actions of each other (only for General Partnership)

each partner could lose what they put into the partnership

2.) Loss of individual control: share decision-making

3.) Disagreements: if a conflict starts, then the business could suffer because of the disagreement

Disadvantages of Partnerships: Partnerships

THE TYPES OF BUSINESSES

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Corporations Larger and more complex

THE TYPES OF BUSINESSES

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Corporations defined:Corporations

THE TYPES OF BUSINESSES

The most complex form of a business organization is the corporation.

A corporation is a legal entity or being, owned by individual stockholders, each of whom faces limited liability for the firm’s debts.

Stockholders own stock, also called shares, which represent their portion of ownership in the corporation.

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Corporations defined:Corporations

THE TYPES OF BUSINESSES

The stock is registered with the Securities and Exchange Commission (SEC: the protector of investors)

The largest corporations are usually listed on the New York Stock Exchange (NYSE).

Some stocks for smaller companies many be listed National Association of Securities Dealers Automated Quotation (NASDAQ).

Selling stock is not the only way a corporation can raise capital to develop or expand.  It can also sell debt by issuing bonds.  – A bond promises to pay a stated rate of interest over a

stated period of time; it also promises to repay the full amount borrowed at the end of that time.

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Corporations defined:Corporations

THE TYPES OF BUSINESSES

Bonds: – Less risk because a bond promises to pay

interest and to repay the full amount borrowed.– You become the “bank” for the corporation

Stock:– More risk because your money is lost if the

company goes bankrupt.– It is more of a gamble.

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Corporation’s Structure:Corporations:

THE TYPES OF BUSINESSES

A corporation has the following general structure:

Board of Directors

(some of the board members ARE stockholder and some ARE NOT)

Stockholders

(owners of stock)

Chief Executive Officer (CEO)

Regional Managers

Regional Managers

Regional Managers

Regional Managers

COOCFOCIO CMO

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Two Types of Corporations:Corporations

THE TYPES OF BUSINESSES

1.) Private Corporations: Some corporations issue stock to only a few people, often family members. These stockholders rarely trade their stock, but pass it on within families.

2.) Publicly Traded Corporations: It has many shareholders who can buy or sell stock on the open market. – Stocks are bought and sold at financial markets called stock

exchanges, such as the New York Stock Exchange (NYSE).

– For the midterm: don’t worry about “S” corporations

1.) Very Little Liability: A corporation is defined as an "entity" because it has a legal identity separate from those of its owners. A corporation pays taxes, may engage in business, make contracts, sue other parties, and gets sued by others.

2.) Many Resources are Available: not only do corporations have more access to physical capital, they have access to human capital (well educated business leaders)

3.) Continues after death of Owner: a corporation will not cease to exist if the owner passes, or retires.

4.) Easy to Raise Money for it: through the sells of stock a company can raise money to fund operations. 76

Advantages of Corporations: Corporations:

THE TYPES OF BUSINESSES

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1.) Owner has little control: he/she has little control over the company. They have to listen to the Board of Directors and the stockholders.

2.) Does NOT React quickly to changes in the market: corporations are huge bureaucracies and they are not quick to response to the marketplaces.– Everything has to be approved by the Board of

Directors (which takes valuable time)

Disadvantages of Corporations: Corporations:

THE TYPES OF BUSINESSES

DON’T FORGET TO EMAIL ME ANY FURTHER

QUESTIONS YOU MAY HAVE.

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PRACTICE FOR MIDTERM

ANSWER THE FOLLOWING ON YOUR OWN PAPER

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PRACTICE FOR MIDTERMANSWER THE FOLLOWING ON YOUR OWN PAPER

1. What are the three basic questions that every economy must ask itself?

3. By moving from one point on the PPF to another point on the PPF you will experience what type of loss?

4. Draw the Demand and Supply curves together. What will happen to the equilibrium price & quantity if the demand curve shifts to the left?

Decrease in price and decrease in quantity

WHAT, FOR WHOM, HOW

2. What are two key indicators that can help a nation determine what stage of the business cycle it is in?

GDP (Gross Domestic Product) & Unemployment Rate

Opportunity Cost

5. An effective price ceiling will create a shortage or surplus?

Shortage

6. What economist stated that the markets should be free, but government should be allowed to step in and help promote stability?John Keynes

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PRACTICE FOR MIDTERMANSWER THE FOLLOWING ON YOUR OWN PAPER

7. What economist believed that the factors of production should be PRIVATE with little or no government involvement in the markets?

9. In what market do Households sell the factors of production to firms?

10. Using the PPF, tell what is the opportunity cost of moving from Point C to Point E. 7 Units of CDs

Adam Smith

8. What are the four factors of production?

Land, Labor, Capital, & Entrepreneurship

Factor Market

11. What is the definition of capital?The MAN-MADE goods used

to produced a consumer good

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a) a shift of the supply curve to the right.b) a shift of the demand curve to the left.c) a long-term loss of market revenues for

suppliersd) a price set below the current market price.

12. A price ceiling is characterized by:

PRACTICE FOR MIDTERMANSWER THE FOLLOWING ON YOUR OWN PAPER

13. Which of the following is not allowed in a command economy?

a) government regulation of the economyb) environmental controlsc) minimum waged) ownership of corporate stock

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a) the law of demandb) laissez-fairec) the law of

competitiond) the invisible hand

14. The statement ‘the quantity demanded of a product varies inversely with its price’ is a definition of:

PRACTICE FOR MIDTERMANSWER THE FOLLOWING ON YOUR OWN PAPER

15. Which of the following is a primary characteristic of a capitalist system? a) private ownership of property

b) governmental regulation of businessc) equal distribution of resourcesd) income tax

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16. In the graph, what information is determined by looking at the intersection of the supply and demand curves?

PRACTICE FOR MIDTERMANSWER THE FOLLOWING ON YOUR OWN PAPER

a) efficiency of production

b) amount supplied at a specific price

c) increase in demandd) equilibrium price

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17. In the graph, what information is determined by looking at the shift of the supply curve from S1 to S2?

PRACTICE FOR MIDTERMANSWER THE FOLLOWING ON YOUR OWN PAPER

a) Increase in resource costs

b) Increase in supplyc) Increases in demandd) Price has decreased

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