Chapter 7 8


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Chapter 7 8

  1. 1. Business Operations Chapter 7
  2. 2. Three Types of Business Firms <ul><li>Sole Proprietorship </li></ul><ul><li>Partnership </li></ul><ul><li>Corporation </li></ul>
  3. 3. Business Firm <ul><li>Business Firm – an organization that uses resources to produce goods and services that are sold to consumers, other firms, or the government </li></ul><ul><li>Business firms need bosses and employees: people who give orders and people who carry out orders </li></ul><ul><li>Shirking – the behavior of a worker who is putting forth less than the effort than they agreed to </li></ul>
  4. 4. Sole Proprietorship <ul><li>A business that is owned by one individual, who makes all of the business decisions, receives all the profits or takes the losses, and is legally responsible for the debts </li></ul><ul><ul><li>Advantages: </li></ul></ul><ul><ul><li>Sole proprietorships are easy to form and to dissolve </li></ul></ul><ul><ul><li>All decision making resides with the owner </li></ul></ul><ul><ul><li>Profits are considered your personal income and only personal income taxes apply, you do not have to pay income taxes </li></ul></ul><ul><ul><li>Disadvantages: </li></ul></ul><ul><ul><li>The sole proprietor faces unlimited liability. Liability is the legal term that has to do with the responsibility to pay off debts. Personal assets may be used to pay off the debts </li></ul></ul><ul><ul><li>Sole proprietors have trouble borrowing money and taking out loans </li></ul></ul>
  5. 5. Partnership <ul><li>A business owned by two or more co-owners, called partners, who share profits and are legally responsible for debts </li></ul><ul><ul><ul><li>Advantages: </li></ul></ul></ul><ul><ul><ul><li>Partners may possess specialized talents in certain areas. For example if there are three members of the partnership, one may specialize in marketing, another in public relations, and the third in finances and accounting </li></ul></ul></ul><ul><ul><ul><li>Only personal income taxes apply to partnerships </li></ul></ul></ul><ul><ul><ul><li>Disadvantages: </li></ul></ul></ul><ul><ul><ul><li>Partnerships face liability </li></ul></ul></ul><ul><ul><ul><li>Decision making can be complicated and frustrating because of different points of view </li></ul></ul></ul>
  6. 6. Corporations <ul><li>A business that can conduct business in its own name and in the same way that an individual does but is owned by its stockholders. A stockholder is a person who owns shares of a stock in a corporation. A board of directors is an important decision making body in a corporation, deciding on corporate policy and goals </li></ul><ul><ul><li>Advantages: </li></ul></ul><ul><ul><li>Limited liability, the stockholders are not personally liable for the debts of the corporation and cannot be sued for the corporation’s failure to pay off its debt. They will simply lose their investment in the company, they amount of shares they own. </li></ul></ul><ul><ul><li>Corporations continue to exist even if one or more owners sell their stock </li></ul></ul><ul><ul><li>Corporations can easily raise large sums of money by selling stock </li></ul></ul><ul><ul><li>Disadvantages: </li></ul></ul><ul><ul><li>Double taxation, corporate income tax and personal income tax </li></ul></ul><ul><ul><li>More complicated to set up and difficult to organize </li></ul></ul>
  7. 7. The Franchise
  8. 8. The Franchise <ul><li>A franchise is a contract by which a firm (usually a corporation) lets a person or group use its name and sell its good or service. In return the person or group must make certain payments and meet certain requirements. </li></ul><ul><li>The corporation, or parent company, is the franchiser </li></ul><ul><li>The person or group that buys the franchise is the franchisee </li></ul><ul><li>Some well known franchises include: McDonalds, Wendy’s, Pizza Hut, and Taco Bell </li></ul>
  9. 9. How a Franchise Works <ul><li>The franchisee pays an initial fee ( In 2005, the initial fee for a McDonalds franchise was $45,000) </li></ul><ul><li>The franchisee pays a royalty, a percentage of the profits to the franchiser for a number of years. At McDonalds in 2005 the royalty rate was 12.5 % </li></ul><ul><li>The franchisee has to meet certain quality standards </li></ul>
  10. 10. Costs and Revenue <ul><li>Costs: </li></ul><ul><li>Fixed Cost – a cost, or expense, that is the same no matter how many units of a good are produced. Example, a business owner pays $1,500 for insurance each year, not matter how much they sell. </li></ul><ul><li>Variable Cost – a cost, or expense, that changes with the number of units of a good produced. Example, if production increase in a factory, the factory will need more workers and the companies cost for labor will increase. </li></ul><ul><li>Total Cost = Fixed cost + Variable Cost </li></ul><ul><li>Marginal Cost – the cost of producing an additional unit of a good </li></ul><ul><li>Revenue: </li></ul><ul><li>Total Revenue = price of a good x quantity sold </li></ul><ul><li>Marginal Revenue – the revenue from selling an additional unit of a good </li></ul>
  11. 11. Questions firms have to answer: <ul><li>How much should we produce? </li></ul><ul><li>What price should we charge? </li></ul><ul><li>How can we maximize profits? </li></ul>
  12. 12. The Law of Diminishing Marginal Returns <ul><li>A law that states if additional units of one resource are added to another resource in fixed supply, eventually the additional output will decrease </li></ul>
  13. 13. Chapter 8 – Competition and Markets <ul><li>Characteristics of Perfect Competition: </li></ul><ul><ul><li>The market has many buyers and sellers </li></ul></ul><ul><ul><li>All firms sell identical goods </li></ul></ul><ul><ul><li>Buyers and sellers have information about prices, quality, supply </li></ul></ul><ul><ul><li>Firms have easy entry into and exit out of the market </li></ul></ul><ul><ul><li>Example: Wheat Farmers </li></ul></ul>
  14. 14. Monopolies <ul><li>Characteristics of a Monopoly: </li></ul><ul><ul><li>The market consists of one seller </li></ul></ul><ul><ul><li>The single seller sells a product that has no close substitutes </li></ul></ul><ul><ul><li>The barriers to entry are high, which means that entry into the market is extremely difficult </li></ul></ul><ul><ul><li>Example: Cable TV </li></ul></ul>
  15. 15. Anti-Trust Laws <ul><li>Laws meant to control monopoly power and to preserve and promote competition </li></ul>
  16. 16. Monopolistic Competitive Market <ul><li>Characteristics of a Monopolistic Competitive Market: </li></ul><ul><ul><li>The market includes many buyers and sellers </li></ul></ul><ul><ul><li>Firms produce and sell slightly different products </li></ul></ul><ul><ul><li>Firms have easy entry into and exit out of the market </li></ul></ul><ul><ul><li>Example: Restaurants </li></ul></ul>
  17. 17. Oligopolistic Market <ul><li>Characteristics of an Oligopolistic Market: </li></ul><ul><ul><li>Has few sellers </li></ul></ul><ul><ul><li>Firms produce and sell either identical or slightly differentiated products </li></ul></ul><ul><ul><li>The barriers to entry are significant, and entry into the market is difficult </li></ul></ul><ul><ul><li>Example: Cars, Cereal </li></ul></ul>
  18. 18. Cartel Agreement and Price Discrimination <ul><li>Cartel Agreement – an agreement that specifies how firms will act in a coordinated way to reduce the competition among them and raise their profits </li></ul><ul><li>Price Discrimination - practice by which a seller charges different prices to different buyers and the price difference does no reflect cost differences </li></ul>