Chapter 7


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Chapter 7

  1. 1. Economics Chapter Seven Notes BUSINESS OF FREE ENTERPRISE
  2. 2. Impact of New Businesses <ul><li>Every new biz. contributes to the amount of goods & svcs in the market </li></ul><ul><ul><li>-Impacts both the demand and supply related to that biz </li></ul></ul>
  3. 3. Key to Becoming a Biz Owner <ul><li>How to become an entrepreneur: </li></ul><ul><ul><li>If you have a good idea, start developing, creating it & marketing it early! </li></ul></ul><ul><ul><li>Examine how to use common products differently--new uses. </li></ul></ul><ul><ul><li>Develop a new method to sell goods & svcs </li></ul></ul><ul><ul><li>Introduce new products (or old ones) to new markets--developing/3 rd world countries. </li></ul></ul><ul><ul><li>Don't leave &quot;good&quot;, but undeveloped ideas hanging. Stop procrastinating--&quot;Just Do It!&quot; </li></ul></ul>
  4. 4. Entrepreneur Strategies <ul><li>Look for unexpected opportunities </li></ul><ul><ul><ul><li>Goods & svcs that fail for one group, might work for others </li></ul></ul></ul><ul><li>Change Market Conditions </li></ul><ul><ul><ul><li>When one method of proving good & svcs isn't working, find another outlet </li></ul></ul></ul><ul><ul><ul><ul><li>i.e., walk-in clinics compete w/ hospitals </li></ul></ul></ul></ul><ul><li>Change techniques of getting goods & svcs </li></ul><ul><ul><ul><li>make things easier to use or gain </li></ul></ul></ul><ul><li>Introduce an alternative </li></ul><ul><ul><ul><li>Make a similar good or svcs easier to get </li></ul></ul></ul><ul><li>Know your buyers </li></ul><ul><li>Modify techniques & choices to fit the needs of consumers </li></ul>
  5. 5. Role of Small Business <ul><li>Small business is defined as one w/ less than $3.5 million in sales and fewer than 500 employees </li></ul><ul><li>Advantages of: </li></ul><ul><ul><ul><li>Ability to satisfy special market (“niche”) </li></ul></ul></ul><ul><ul><ul><ul><li>more able to intro. New products or try new methods </li></ul></ul></ul></ul><ul><ul><ul><li>Ability to adapt to change </li></ul></ul></ul><ul><ul><ul><ul><li>Having one owner = change easier </li></ul></ul></ul></ul><ul><li>Challenges of: </li></ul><ul><ul><ul><li>Poor Management </li></ul></ul></ul><ul><ul><ul><ul><li>Easier to mismanage when you are the only one(s) running the show </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Not all small biz fail because the owner messes up </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>They are just risky </li></ul></ul></ul></ul></ul><ul><li>Inadequate Financing </li></ul><ul><ul><ul><li>All businesses have plenty of expenses </li></ul></ul></ul><ul><li>Problems include: insufficient capital, slow sales, heavy tax burden </li></ul>
  6. 6. Sole Propietorship: 1-2 Owners (also “Mom & Pop”) <ul><li>Advantages : </li></ul><ul><li>All profits are yours </li></ul><ul><li>Little govt regulations </li></ul><ul><li>Tax breaks </li></ul><ul><li>Success is yours </li></ul><ul><li>Disadvantages : </li></ul><ul><li>Unlimited liability (all your risk) </li></ul><ul><li>Limited funds (personal or borrowed $) </li></ul><ul><li>Limited potential </li></ul><ul><li>Low $ flow, can't move easily, costly employee benefits </li></ul>
  7. 7. Partnership: owned by 2 or more people <ul><li>Advantages : </li></ul><ul><ul><li>Increased capital (pool $) </li></ul></ul><ul><ul><li>Multiple biz ideas </li></ul></ul><ul><ul><li>Easy to form </li></ul></ul><ul><ul><li>No special taxes to pay </li></ul></ul><ul><li>Disadvantages : </li></ul><ul><ul><li>Unlimited liability (all responsibility) </li></ul></ul><ul><ul><li>Limited life (partner dies = biz dies) </li></ul></ul><ul><ul><li>Limited funds </li></ul></ul><ul><ul><li>Shared responsibility = shared blame </li></ul></ul>
  8. 8. Corporation - Stocks (Equity) sold, needs Gov’t Charter <ul><li>Advantages : </li></ul><ul><li>Limited liability (own only part of company) </li></ul><ul><li>Easy to sell (sell your shared) </li></ul><ul><li>Unlimited life (not reliant on few people) </li></ul><ul><li>Receive tax breaks </li></ul><ul><li>Disadvantages : </li></ul><ul><li>Expensive to start (charter, legal costs) </li></ul><ul><li>Govt regulations </li></ul><ul><li>Limit action & require disclosure </li></ul><ul><li>Double taxation on earnings from profit & on stock dividends </li></ul>
  9. 9. Types of Businesses (cond.) <ul><ul><ul><li>&quot;S&quot; Corporation: stock holders pay tax on dividends </li></ul></ul></ul><ul><ul><ul><ul><li>no more than 35 stockholders & individual can't own more than 80% </li></ul></ul></ul></ul><ul><ul><ul><li>Not-For-Profit Corp.: serves education or charity purpose </li></ul></ul></ul><ul><ul><ul><ul><li>Not subject to tax </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Must cover expenses to run (can have $ reserve) </li></ul></ul></ul></ul><ul><ul><ul><ul><li>United Way </li></ul></ul></ul></ul><ul><ul><ul><li>Government-Owned Corp.: fed, state & local govt operated corp. </li></ul></ul></ul><ul><ul><ul><ul><li>US Postal Service (&quot;quasi-govt&quot; org) </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Fed. Deposit Insurance Corp. (FDIC)--protects $ in bank </li></ul></ul></ul></ul>
  10. 10. Types of Businesses (cond.) <ul><ul><ul><li>Limited Liability Companies: intended for high-risk biz. </li></ul></ul></ul><ul><ul><ul><ul><li>Ownership spread out among several owners (stocks) </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Taxed like a corp. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Increase liability insurance to conduct dangerous, hazardous, &quot;sensitive&quot; work </li></ul></ul></ul></ul><ul><ul><ul><li>Co-operative (Co-Op): is an association of people who contribute $ to a biz & then frequent that biz (membership) </li></ul></ul></ul><ul><ul><ul><ul><li>Pay dues to shop, but also get a little $ from profit </li></ul></ul></ul></ul><ul><ul><ul><li>Franchise: McDonalds, Carl's Jr., Allstate </li></ul></ul></ul><ul><ul><ul><ul><li>Indiv. ownership of a biz, governed by parent company's contract </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Sole proprietorship to sell parent company's product (e.g., Big Mac, car insurance) </li></ul></ul></ul></ul>
  11. 11. Vocabulary <ul><ul><ul><li>Board of Directors: elected by stockholders to run company on behalf of stockholders </li></ul></ul></ul><ul><ul><ul><li>Small Biz Administration: clearinghouse for info on starting biz (100 locations in cities in US) </li></ul></ul></ul>
  12. 12. Questions <ul><li>What are common advantages to the types of business structures in this lecture? </li></ul><ul><li>What are common disadvantages to types of business structures in this lecture? </li></ul>