Econ Ch8 Businesses

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Econ Ch8 Businesses

  1. 1. Chapter Businesses 8
  2. 2. Chapter Objectives <ul><li>Students will learn: </li></ul><ul><li>How firms function financially </li></ul><ul><li>The advantages and disadvantages of different business structures. </li></ul>
  3. 3. Business Firms <ul><li>Firm =business organization that brings together the factors of production to produce and distribute good and services. </li></ul><ul><li>Roles of Firms: </li></ul><ul><ul><li>Produce good and services </li></ul></ul><ul><ul><li>Buyers of goods and services </li></ul></ul>
  4. 4. Risk-Taking <ul><li>50% of all small businesses fail within the first four years. </li></ul><ul><li>Entrepreneurs take risks in the hope of making a profit . </li></ul><ul><li>Companies minimize risk of failure by controlling their expenses. </li></ul>
  5. 5. Profit-Making <ul><li>Profit --amount of money from sales after paying expenses. </li></ul><ul><li>Expense --costs of using the factors of production. </li></ul><ul><li>Income Statement --a report showing a businesses sales, expenses, and profit. </li></ul><ul><li>Net Income --amount of money left after expenses and taxes. </li></ul><ul><li>Interest --fees paid to lender for borrowing money. </li></ul><ul><li>Depreciation --cost of wear and tear on capital resources. </li></ul><ul><li>Cash Flow --net income + depreciation </li></ul>
  6. 6. Growth <ul><li>Reinvested cash flow must be larger than depreciation in order to grow. </li></ul><ul><li>Franchises : contract from a company for other companies & individuals to use its name and business model and sell its products and services in return for a fee. </li></ul><ul><li>Singer Sewing Machine (1 st franchise) </li></ul>
  7. 8. Efficiency and Growth <ul><li>Efficient=company receives maximum output from a given amount and combination of resources </li></ul><ul><li>How businesses improve efficiency: </li></ul><ul><ul><li>Licensing franchises </li></ul></ul><ul><ul><li>Purchasing other companies </li></ul></ul><ul><ul><li>Merging with other companies </li></ul></ul><ul><ul><ul><li>Diversification reduces risk </li></ul></ul></ul><ul><ul><ul><li>Eliminates competitors </li></ul></ul></ul>
  8. 9. Sole Proprietorships <ul><li>Organization </li></ul><ul><li>The Owner: </li></ul><ul><ul><li>Makes all decisions </li></ul></ul><ul><ul><li>Has day to day responsibilities </li></ul></ul><ul><ul><li>Receives all profits </li></ul></ul><ul><ul><li>Is responsible for all losses </li></ul></ul><ul><ul><li>Is the business </li></ul></ul><ul><li>Advantages </li></ul><ul><li>Easiest and least expensive way to start a business </li></ul><ul><li>Control </li></ul><ul><li>Simplicity </li></ul><ul><li>No double taxation </li></ul><ul><li>Disadvantages </li></ul><ul><li>Unlimited Liability </li></ul><ul><li>Limited fund-raising ability </li></ul><ul><li>Limited life of business </li></ul>Business owned by only one person 70% of all businesses in the USA
  9. 10. Partnerships <ul><li>Organization </li></ul><ul><li>Partners: </li></ul><ul><ul><li>Share ownership and decision making </li></ul></ul><ul><ul><li>Have shared or focused responsibilities </li></ul></ul><ul><ul><li>Split profits </li></ul></ul><ul><ul><li>Have written agreements </li></ul></ul><ul><li>Advantages </li></ul><ul><li>Easy and inexpensive way to start a business </li></ul><ul><li>Control </li></ul><ul><li>Simplicity </li></ul><ul><li>Greater ability to raise funds </li></ul><ul><li>No double taxation </li></ul><ul><li>Disadvantages </li></ul><ul><li>Potential for disagreements </li></ul><ul><li>Limited fund-raising ability </li></ul><ul><li>Limited life of business </li></ul><ul><li>Unlimited liability </li></ul>Business owned by two or more people Least common businesses organization in the USA
  10. 11. Corporations <ul><li>Organization </li></ul><ul><li>Legal arrangement </li></ul><ul><li>Need permission from the state </li></ul><ul><li>Register and file articles of incorporation </li></ul><ul><li>State grants corporate charter </li></ul><ul><li>Can sell stock </li></ul><ul><li>Common stockholders elect a board of directors </li></ul><ul><li>Board hires the company’s managers to run the business </li></ul><ul><li>Advantages </li></ul><ul><li>Limited Liability </li></ul><ul><li>Greater ability raise money (stocks & bonds) </li></ul><ul><li>Professional Management </li></ul><ul><li>Unlimited Life </li></ul><ul><li>Able to grow rapidly </li></ul><ul><li>Disadvantages </li></ul><ul><li>Lack of simplicity </li></ul><ul><li>Government oversight </li></ul><ul><li>Double Taxation </li></ul>Business owned by many people but treated by the law as if it were a person.

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