Taking care of bidness. “The business of America is business.” – President Calvin Coolidge.

Taking care of bidness.Taking care of bidness.

““The business of America is The business of America is business.” business.” – President Calvin Coolidge.– President Calvin Coolidge.

Section 1 VocabularySection 1 Vocabulary Sole proprietorship proprietorship unlimited liability inventory limited life partnership limited partnership bankruptcy corporation charter stock stockholder shareholder dividend bond principal interest double taxation*

3 Types of Business’s3 Types of Business’s

Sole proprietorship Partnership Corporation.*

Proprietorship• A sole proprietorship

is a business run by one person.

• It is the smallest type of business organization in size, yet the most numerous and profitable. *

Proprietorship - Advantages

Ease of start-up Ease of management Owner gets all the profits Business itself pays no

income taxes Taxes only on the owner’s

personal income Psychological satisfaction

of owning one’s business Ease of closing the

business.*

Proprietorship -Disadvantages• Owner has unlimited liability

• Hard to raise financial capital

• Owner may not be able to hire enough personnel or stock enough inventory to operate efficiently

• Owner may have limited managerial experience

• Hard to attract qualified employees

• Business has limited life and legally stops existing when the owner dies or sells the business.*

PartnershipsPartnerships A partnership is a

business jointly owned by two or more persons.

It is the least common type of business.

Second smallest proportion of sales and net income.*

Types of PartnershipsTypes of Partnerships General partnerships - all

partners are involved in the management and finances.

Limited partnership - at least one partner is not involved in management. This partner may have helped to finance the business.

Articles of the partnership document spell out how the partners divide up the profits or losses.*

Partnerships - Partnerships - AdvantagesAdvantages

Ease of start-up Ease of management No special taxes on a

partnership Easier to raise capital

through bank loans or new partner

Larger size aids efficient operations

Easier to attract skilled employees*

Partnerships - Partnerships - DisadvantagesDisadvantages partners are responsible

for the acts of each and every partner (except in a limited partnership where the limits are spelled out)

limited life of partnerships ends if a partner leaves

potential for partner conflicts*

CorporationsCorporations A corporation is a business

organization recognized by law as a separate legal entity with all the rights of an individual.*

More corporationsMore corporations Corporations receive a

charter, or government permission to create a corporation, which includes details about stock ownership.*

More corporations…More corporations…

• Investors who buy common or preferred stock in a corporation become owners of the firm.

• Usually common stock has voting rights while preferred stock has first claim to earnings and assets.*

Figure 3.2Stock OwnershipFigure 3.2Stock Ownership

Corporate AdvantagesCorporate Advantages Ease of raising capital Professionals may run

the firm instead of the owners (shareholders)

Owners have limited liability

Business’s life is unlimited

Easy to transfer ownership.*

How they workHow they work Typical Structure A board of directors,

elected by owners of common stock, sets broad policies and goals.

The board hires a professional management team to run the business on a daily basis.*

How it worksHow it worksFigure 3.3Ownership, Control, and Organization of a Typical CorporationFigure 3.3Ownership, Control, and Organization of a Typical Corporation

Corporate DisadvantagesCorporate Disadvantages Charter is expensive Ownership and

management are separated so shareholders have little say in running the business

Corporate income is taxed twice

Subject to government regulation*

The BiggunsThe Bigguns

Each year, Fortune magazine provides a list of the top 500 U.S. companies, called the “Fortune 500.” The companies are ranked by sales revenue. In 2002, the top ten companies were:

6. Citigroup

7. Chevron Texaco

8. International Business Machines

9. American International Group

10. Verizon Communications

1. Wal-Mart Stores 2. General Motors

3. Exxon Mobil

4. Ford Motor

5. General Electric

Source: Fortune Magazine

Will this be you?

Market Structure

Section 2

Section 4

Chapter 7 Chapter 7 Section 1 VocabularySection 1 Vocabulary Laissez-faireLaissez-faire market structure market structure perfect competition perfect competition imperfect competitionimperfect competition monopolistic monopolistic

competition competition product product

differentiation differentiation nonprice competition nonprice competition oligopolyoligopoly collusion collusion price-fixing price-fixing monopoly monopoly natural monopoly natural monopoly economies of scale economies of scale geographic monopoly geographic monopoly technological monopoly technological monopoly government monopolygovernment monopoly

Laissez-faireLaissez-faire

Remember Adam SmithRemember Adam Smith The philosophy that government should The philosophy that government should

not interfere with commerce or tradenot interfere with commerce or trade Literally means “allow them to do”Literally means “allow them to do” Under laissez-faire, the role of government Under laissez-faire, the role of government

is confined to protecting private property, is confined to protecting private property, enforcing contracts, settling disputes, and enforcing contracts, settling disputes, and protecting businesses against increased protecting businesses against increased competition from foreign goodscompetition from foreign goods

Finding Market StructureFinding Market Structure

Today, economists classify markets according Today, economists classify markets according to conditions that prevail in them.to conditions that prevail in them. How many buyers and suppliers are there?How many buyers and suppliers are there? How large are they? How large are they? Does either have any influence over price? Does either have any influence over price? How much competition exists between firms? How much competition exists between firms? What kind of product is involved–is everyone trading What kind of product is involved–is everyone trading

the exact same product, or are they simply similar? the exact same product, or are they simply similar? Is it easy or difficult for new firms to enter the Is it easy or difficult for new firms to enter the

market?market?

Market StructureMarket Structure

market structuremarket structure, or the nature and , or the nature and degree of competition among firms degree of competition among firms operating in the same industry.operating in the same industry.

Economists group industries into four Economists group industries into four different market structures–perfect different market structures–perfect competition, monopolistic competition, competition, monopolistic competition, oligopoly, and monopoly.oligopoly, and monopoly.

Competition and Market Competition and Market StructuresStructures

Perfect CompetitionPerfect Competition Perfect competition is when a Perfect competition is when a

large number of buyers and large number of buyers and sellers exchange identical sellers exchange identical products under five conditionsproducts under five conditions There should be a large number There should be a large number

of buyers and sellers.of buyers and sellers. The products should be identical.The products should be identical. Buyers and sellers should act Buyers and sellers should act

independently.independently. Buyers and sellers should be well-Buyers and sellers should be well-

informed.informed. Buyers and sellers should be free Buyers and sellers should be free

to enter, conduct, or get out of to enter, conduct, or get out of business.business.

Perfect Competition Perfect Competition Contd..Contd..

Under perfect competition, Under perfect competition, supply and demand set the supply and demand set the equilibrium price, and each equilibrium price, and each firm sets a level of output firm sets a level of output that will maximize its profits that will maximize its profits at that price.at that price.

Imperfect competition refers Imperfect competition refers to market structures that to market structures that lack one or more of the five lack one or more of the five condition of perfect condition of perfect competition.competition.

Monopolistic CompetitionMonopolistic Competition

Monopolistic Monopolistic competition meets all competition meets all conditions of perfect conditions of perfect competition except for competition except for identical productsidentical products

Monopolistic Monopolistic competitors use competitors use product differentiationproduct differentiation

Monopolistic Competition Monopolistic Competition Contd.Contd. Monopolistic competitors sell within a Monopolistic competitors sell within a

narrow price range but try to raise the price narrow price range but try to raise the price within that range to achieve profit within that range to achieve profit maximization.maximization.

Monopolistic competitors use nonprice Monopolistic competitors use nonprice competition, the use of advertising, competition, the use of advertising, giveaways, or other promotional campaigns giveaways, or other promotional campaigns to differentiate their products from similar to differentiate their products from similar products in the marketproducts in the market

OligopolyOligopoly

Oligopoly is a market structure in which a few Oligopoly is a market structure in which a few very large sellers dominate the industry.very large sellers dominate the industry.

Oligopolists typically prefer non price Oligopolists typically prefer non price competition.competition.

CollusionCollusion

Oligopolists may all agree formally to Oligopolists may all agree formally to set prices, called collusion, which is set prices, called collusion, which is illegal (because it restricts trade).illegal (because it restricts trade).

Two forms of collusion include:Two forms of collusion include: price-fixing, which is agreeing to charge a set price-fixing, which is agreeing to charge a set

price that is often above market priceprice that is often above market price ddividing up the market for guaranteed sales.ividing up the market for guaranteed sales.

Oligopoly Contd...Oligopoly Contd...

OligopolistsOligopolists can engage in price wars, or a can engage in price wars, or a series of price cuts that can push prices lower series of price cuts that can push prices lower than the cost of production for a short period of than the cost of production for a short period of time.time.

Oligopolists’ final prices are likely to be higher Oligopolists’ final prices are likely to be higher than under monopolistic competition and much than under monopolistic competition and much higher than under perfect competition.higher than under perfect competition.

MonopolyMonopoly

A monopoly is a A monopoly is a market structure with market structure with only one seller of a only one seller of a particular product.particular product.

The monopolist is The monopolist is larger than a perfect larger than a perfect competitor, allowing it competitor, allowing it to be the price maker to be the price maker versus the price takerversus the price taker

Natural and Geographic Natural and Geographic MonopoliesMonopolies Natural monopoly occurs Natural monopoly occurs

when a single firm when a single firm produces a product or produces a product or provides a service provides a service because it minimizes the because it minimizes the overall costs (public overall costs (public utilities).utilities).

Geographic monopoly Geographic monopoly occurs when the location occurs when the location cannot support two or cannot support two or more such businesses more such businesses (small town drugstore).(small town drugstore).

Technological and Technological and Government MonopoliesGovernment Monopolies

Technological monopoly occurs when a Technological monopoly occurs when a producer has the exclusive right through patents producer has the exclusive right through patents or copyrights to produce or sell a particular or copyrights to produce or sell a particular product (an artist’s work for his lifetime plus 50 product (an artist’s work for his lifetime plus 50 years)years)

Government monopoly occurs when the Government monopoly occurs when the government provides products or services that government provides products or services that private industry cannot adequately provide private industry cannot adequately provide (uranium processing)(uranium processing)

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