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Economics 3.2

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  • 1. Chapter 3, part 2
  • 2. 3-2: Business Growth and Expansion
    1. Growth Through Reinvestment
    Business owners can use their profits to update and expand their firms.
    Keep track of business operations with financial statements.
    Income statement – report showing sales, expenses, net income, and cash flows over a given period.
    Net income – profits determined by subtracting all expenses from revenues.
    Depreciation – gradual wear on capital goods
    Cash flow – total amount of new funds a business generates from operations.
  • 3. Income Statement
    Sales of goods and services $1,000
    Less: Cost of goods sold 400
    Wages and salaries 250
    Interest payments 50
    Depreciation 100
    Earnings before taxes $200
    Less: Taxes at 40% 80
    Net Income $120
    Plus: Depreciation 100
    Cash Flow $220
    Generates
    Investment in new plant, equipment and technology
    Allows
    Stockholder Dividends
  • 4. 2. Growth Through Mergers
    Two businesses decide to join together into one business.
    One of the businesses must give up its separate legal identity, but the name of the new company will often reflect the identities of both.
    Horizontal Merger – Two firms that produce the same kind of product join forces.
    Vertical Merger – Companies involved in different stages of manufacturing or marketing join together.
    Reasons for merging:
    Grow faster
    Become more efficient
    Acquire or deliver a better product
    Eliminate a rival
    Change image
  • 5. Conglomerates
    Firm that has at least four businesses, each making unrelated products, and none responsible for a majority of its sales.
    Multinationals
    Corporation that has manufacturing or service operations in a number of different countries.
  • 6. 3-3: Nonprofit Organizations
    Organization that works in a business like way to promote the collective interests of its members rather than to seek financial gain for its owners.
    Community Organizations
    • Schools, churches, hospitals, welfare groups, adoption agencies, etc.
    • 7. Many are legally incorporated to take advantage of unlimited life and limited liability.
    • 8. Similar to profit-seeking businesses, but do not issue stock, pay dividends, or pay income taxes.
    • 9. Revenues are reinvested to further their work.
  • Cooperatives
    • Voluntary association formed to carry on some kind of economic activity that will benefit its members
    Labor Unions
    • Organization of workers formed to represent its members interests in various employment matters
    Professional Associations
    - Consists of people in a specialized occupation interested in improving the working conditions, skill levels, and public perceptions of the profession
    Business Associations
    - Businesses also organize to promote their collective interests
  • 10. Government
    • Many government agencies produce and distribute goods and services to consumers, giving government a direct role in the economy
    • 11. Government owned corporations, such as USPS
    • 12. State governments provide colleges and universities, retirement plans, state police
    • 13. Local governments provide fire and police protection and schools.
    • 14. Public Utilities are municipal or investor-owned companies that offer products such as water, sewerage, and electric service to the public.

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