Economics 3/28/11 OBJECTIVE: Begin examination of the 3 types of business organizations. I....

Economics 3/28/11 http://mrmilewski.com

• OBJECTIVE: Begin examination of the 3 types of business organizations.

• I. Chapter#2 Test

• II. Journal #8 pt.A-Read “Profiles in Economics” p.67

-Answer question #1 p.67

• III. Journal #8 pt.B-notes on business organizations

• NOTICE: Journals 1-10 Due Thursday!

Types of Firms• Sole proprietorship – a business owned and run

by one person. • In 2000, 73% of all businesses in the U.S. were

sole proprietorships.• Advantages of sole proprietorships:

-easy start-up-flexible (can make decisions quickly)-the profits are yours-you are your own boss-easy exit

Disadvantages of sole proprietorships-unlimited liability – you are responsible for everything

-it’s hard to borrow money

-diseconomies of scale (expensive inventory)

-limited management experience

-hard time finding qualified employees

-limited life – business dies when you die

Partnerships• Partnerships – business jointly owned by two or

more persons.• In 2000, partnerships accounted for 7.1% of

business organizations in the U.S.• There are two types of partnerships:

*general partnerships – all partners actively run the business*limited partnership – at least one partner is not active in running the business

Forming a Partnership

• It’s sort of like getting a marriage pre-nup.

• Legal papers are drafted that specify:

-how profits are divided.

-how new partners may join.

-how property is divided if the partnership ends.

WarningWarning – You are responsible for the debts of your partners!

Advantages of partnerships:-easy to start

-easy to manage

-you get your share of the profits

-can attract financial capital easier than sole proprietorships

-larger, so some economies of scale present

-easier to attract qualified employees

Disadvantages of partnerships:-responsible for the acts of all the other partners

-if you are a limited partner, not involved in daily activity, you only lose your original investment

-when a partner dies, a new partnership has to be drawn up

-conflict between partners

-bankruptcy – if you’re not a limited partner, any debts you have to pay!

Corporations• Corporation – a form of business organization

that is recognized by the law as having all the legal rights of an individual.

• They have the right to buy & sell property, enter into legal contracts, and to sue & be sued.

• In 2000, corporations were 19.9% of business organizations, but were responsible for 88.8% of all sales.


• OBJECTIVE: Examine the structure of corporations.

• I. Journal #9 pt.A-Examine the Chart on p.64-Answer the caption question on p.64

• II. Quiz#5• III. Return of Chapter#2 Test• IV. Journal #9 pt.B

-notes on corporations

• NOTICE: Journals 1-10 Due Thursday!

Corporations• Corporation – a form of business organization

that is recognized by the law as having all the legal rights of an individual.

• They have the right to buy & sell property, enter into legal contracts, and to sue & be sued.

• In 2000, corporations were 19.9% of business organizations, but were responsible for 88.8% of all sales.

How a corporation is formed1.) Must ask the permission of the government.

2.) If approved, a charter is issued.

*charter – a government document that gives permission to create a corporation.

3.) The charter states the name of the company, the address of the business, how many shares of stock can be issued, and other specific features of the business.

Stock?

• Stock – a certificate of ownership in a firm.

• Stockholders – a.k.a. – shareholders – investors in a corporation (they own stock).

• The money from the stockholders (investors) is used to set up the firm. This money is called financial capital.

Types of Stock• Common stock – basic form of ownership

in a corporation. Each share is worth one vote for the board of directors, who run the company.

• Preferred Stock – non-voting shares of stock, but these shareholders receive profits before common stockholders.

Advantages of Corporations• Easy to raise financial capital

1.) sell stock2.) issue bondsbond – a written promise to repay the amount borrowed in the future

• Hire professional managers• Limited liability – shareholders only lose money

invested if something goes terribly wrong.• Unlimited life – the firm doesn’t die when a

shareholder does.

Disadvantages of Corporations• Difficult to start

• Shareholders have little say about how the business is run

• Double taxation – the firms profits are taxed and then the profit that is distributed to shareholders is also taxed.

• Subject to government regulation.

The Role of Government• The state governments began regulating

corporations in the mid-1800’s.• Corporations in states with a lot of regulation

moved to states with less, so as a result state regulations began to be lifted.

• In the early 1900’s, consumer groups demanded regulation of giant corporations.

• Regulations of electric companies, insurance companies, the phone company, and transportation companies (Railroads & Airlines)

Era of Deregulation• In the 1980’s, a wave of government

deregulation swept through Congress and state legislatures.

• States competed for corporations to move to their state for the reasons of job creation and tax revenue.


• OBJECTIVE: Examine the deregulation of corporations.

• I. Administrative Stuff-attendance

• II. Commanding Heights Day#2-questions on the rise & fall of planning

• NOTICE: Journals 1-10 Due Tomorrow!


• OBJECTIVE: Examine Business Growth & Expansion.

• I. Journal #10 pt.A-Read “The Global Economy” p.70-Answer questions (1-2) p.70

• II. Journal #10 pt.B-notes on mergers & conglomerates

• III. Journal #10 pt.C-NBR questions

• IV. Journals 1-10 Due!

Business Growth• Businesses can grow in the following

ways:

• 1.) Reinvestment

• 2.) Merger

• Income statement – shows how much money the business makes and spends.

Reinvestment• Net income – business pre-profit.• Depreciation – non-cash charge the firm

takes for the general wear and tear on its capital goods.

• Bottom line – cash flow, a.k.a. profit.• When cash flows are reinvested, the firm

can produce additional products which will generate additional profits.

Why Merge?• 1.) Grow faster

• 2.) Become more efficient

• 3.) Acquire or deliver a better product

• 4.) Eliminate a rival

• 5.) Change image

Types of Mergers• Horizontal merger – when two or more firms that

make the same product join forces.• Example: Nextel + Sprint = Sprint-Nextel• Vertical merger – when firms involved in different

steps of the manufacturing or marketing join together.• Example: Time Warner Incorporated(a major cable operation)

+ Turner Corporation (which produces CNN, TBS and other programming) = Time Warner/AOL

• Conglomerate – a firm that has at least four businesses each making unrelated products.

• Example: RJ Reynolds + Nabisco = RJR Nabisco

Samsung

Multinational• Multinational - can be an ordinary corporation or a

conglomerate, but it has manufacturing or service operations in several different countries.

• Multinationals introduce new technology, generate jobs, and produce tax revenues for the host countries.

NBR:• 1.) What was the problem with Tickle Me Elmo?• 2.) What was the problem in the former Soviet

Union?• 3.) Why does the government put some

restrictions on business?• 4.) How does Carnival come up with the money

to build new ships?• 5.) What is the franchise system?


• OBJECTIVE: Examine Nonprofits and Cooperatives.

• I. Journal #11 pt.A-Read the“Business Week Newsclip” p.74

-Answer questions (1-2) p.74

• II. Quiz#6• III. Journal #11 pt.B

-notes on non-profits and cooperatives

• IV. Mindjogger

Nonprofits• Firms use scarce resources to produce goods and

services in order to make a profit for their owners.

• Other organizations operate on a “not-for-profit” basis

• A nonprofit organization operates in a businesslike way to promote the collective interests of its members rather than to seek financial gain for its owners

Nonprofits• Examples: schools, churches, hospitals, welfare

groups, and adoption agencies.• Many of these organizations are legally

incorporated to take advantage of unlimited life and limited liability.

• They are similar to profit-seeking businesses, but do not issue stock, pay dividends, or pay income taxes.

• They use scarce factors of production to serve many needs.

Goal of Cooperatives• Producer and worker cooperatives are

associations in which the members join in production and marketing and share the profits.

• Cooperative - a voluntary association of people formed to carry on some kind of economic activity that will benefit its members.

Cooperatives• The consumer

cooperative is a voluntary association

• They buy bulk amounts of goods such as food and clothing on behalf of its members.

• The goal is lower prices for members.

Credit Unions

• An example of a cooperative is a credit union• It is a financial organization that accepts deposits

from, and makes loans to, employees of a particular company or government agency.

Professional Associations• Many workers belong to professional societies,

trade associations, or academies. For example: ABA, ADA, etc…

• These associations also seek to influence government policy on issues that are important to them.

Business Organizations

• Most cities and towns have a chamber of commerce that promotes the welfare of its members and of the community.

• The Better Business Bureau, a nonprofit organization sponsored by local businesses to provide general information on companies, is one of these.

Direct & Indirect Role of Government• The role is “direct” because the government supplies a

good or service that competes with private businesses.

• Many federal agencies are organized as government-owned corporations.

• The government plays an indirect role when it acts as an umpire to make sure the market economy operates smoothly and efficiently.

• One such case is the regulation of public utilities, investor- or municipal-owned companies that offer important products to the public, such as water or electric service.

Small Business Film Questions1.) Who is the entrepreneur of this short film?

2.) What is his business?

3.) What game does the entrepreneur suggest be played instead of the waiting game?

4.) Who is the entrepreneur’s competition?

5.) What type of business organization do the rivals decide to form?

Economics 3/28/11 OBJECTIVE: Begin examination of the 3 types of business organizations. I....

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