Download Overview

Overview
User:
Adam Gore
Activity:
Business and Labor
Curriculum:
Economics
Date:
10/14/15
23 items printed.
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Adam Gore
Overview
Business and Labor
INTRODUCTION
Let's examine the supply side of market economies -- businesses . A business (firm)
produces the goods and services that are purchased by consumers in a market economy.
There are several legal forms of firm ownership: sole proprietorship, partnership, and
corporations. Each has their advantages and disadvantages . While sole proprietorships are
the dominant form of ownership in terms of the number of firms, corporations are more
dominant in terms of impact. Their resources are greater, which enables them to grow much
larger and have more influence.
Firms consist of people who are organized into two groups: employers (management) and
employees (labor). Employers (management) may or may not be the owners of the firm. If
they are not, they act in the interests of the owners to manage the firm in order to make a profit.
Employees (labor) provide the labor resource of production to the firm in return for which the
firm pays wages and salaries. The wages and salaries are determined by the human capital
provided by the employees and the available labor supply and demand -- that is, how many
workers are available compared to how many are needed.
LEGAL FORMS OF BUSINESS OWNERSHIP
Sole Proprietorships
A sole proprietorship is a firm that is owned and managed by one person. The
advantages and disadvantages all derive from the fact of single ownership. It is an
advantage that the decision-making is in one person's hands. This is very efficient and
uncomplicated. However, because the firm is limited to one person, the decision-making can
also suffer from a lack of expertise and sometimes experience.
All profits belong to the owner, but so do all losses . The owner is personally legally
responsible for any debts incurred by the business. This is called unlimited liability. If an
individual person invests $300,000 in a store or other small business, he or she risks not
only his or her original investment, but everything he or she owns. If the business should fail
and its debts exceed its assets, the courts can force the debts to be paid by using the
owner's savings account and other personal assets.
Sole proprietorships are the most common type of business organization because they
are the easiest form of business ownership to start. However, because of their limitations,
banks are often reluctant to loan much money (financial capital) to a sole proprietorship and,
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Adam Gore
Overview
therefore, it is often very difficult for them to expand.
Partnerships
A partnership is a firm owned and managed by two or more people together. A
partnership also has advantages and disadvantages. In comparison to a sole proprietorship,
it allows the pooling of the resources and abilities of more than one person. Thus, some of
the disadvantages of the sole proprietorship can be lessened. For instance, the owners'
combined wealth gives them more financial capital and banks are more willing to loan them
money. Because they have several people to collaborate on decisions, they have more
experience and expertise to draw upon. Partnerships must divide profits, but they can also
divide losses.
The disadvantages of a partnership also derive from having more than one person
involved. The partners may not agree about how to make decisions, which can cause a
business to stagnate or dissolve in disagreement. If a partner dies or withdraws, it becomes
necessary to form a new partnership. Like a sole proprietorship, partners have unlimited
liability for any debts incurred by the business.
Economies of Scale
Many small businesses are less efficient than large ones. One reason is that small firms
cannot afford the expense of purchasing high-priced technology which can be more efficient.
Example:
Most small farms are unable to buy the modern tractors, harvesters, and refrigeration
equipment that would enable them to compete with very large farms. As a result, smaller
farms lose money both in the United States and elsewhere.
The term "economies of scale" means that it can be cheaper per unit to produce a large
number of a product than it is to produce a small number. This is because of the greater
efficiency that many firms acquire as they increase in size or scale. No small-scale
automobile manufacturer could possibly compete with giant auto firms like General Motors,
Ford, or Daimler-Chrysler. Auto manufacturers must have great financial resources in order
to purchase the expensive machines (economic capital) necessary and also sell a large
number of cars in order to recover that money. Economies of scale are most obvious in
firms requiring large investments in plants, expensive labor, and (especially) expensive
technology .
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Diseconomies of Scale
A few types of business are actually most efficient when the firms are small. Small
service businesses often provide the best service at the lowest price when there are a few
employees working closely with the owners. These firms usually require little initial
investment and expansion would only increase the cost of supervision. Barber shops,
certain types of convenience stores, home repair contractors, and even fresh vegetable
farms are usually most efficient when they have less than a dozen employees.
There is an optimum size for most firms. If a firm is too small to afford the capital goods
and services that it needs, then expanding will produce economies of scale. Expanding
beyond that point of maximum efficiency will produce diseconomies of scale (a higher per
unit cost as the business grows) -- the opposite of economies of scale.
Corporations
A corporation is a form of business ownership that is created by the legal system of a
country. Governments draw up laws that define how corporations can be formed. The
resulting corporation is then treated as an individual person in the eyes of the law, even
though it is owned by many people. Basically, corporations pool the resources of many
people. Almost all large businesses in the United States are corporations. Because
corporations can be owned by thousands or even millions of people, they can have
significantly larger financial resources than a sole proprietorship or partnership.
Limited Liability
Being able to use the financial resources of many people is definitely an advantage.
An even greater advantage of the corporate form of business ownership is what is called
limited liability. Owners in sole proprietorships or partnerships are personally liable for
any debts that their business incurs (unlimited liability). When a business incorporates,
the corporation is responsible for any debts that it incurs, but the shareholders are not
PERSONALLY liable. They only risk losing the amount of their investment.
Stocks
The ownership of a corporation is divided into shares. Each share represents part
ownership in the corporation. The shares are then sold to people who may buy any
number of them. For instance, a person may buy 1,000 shares. The shares of a
corporation owned by an individual are indicated on a paper document called a stock
certificate (or stock). A stockholder is, in reality, a shareowner or a partial owner of that
corporation. It is not uncommon for a large corporation to issue millions of shares.
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Life Independent of Its Owners
Because the corporation is considered a legal person, it remains unaffected by any
changes in ownership. Thus, people can sell or bequeath shares to other people without
any disruption to the business. By contrast, a partnership or sole proprietorship goes out
of business with the death of the owner or a partner.
Stocks and Bonds
Corporations have many sources of financial capital available to them. One is the
money invested by shareholders when they purchase stocks (shares) issued by the
corporation.
However, the money provided by shareholders (stockholders) is only one source of
financial capital available to corporations. Corporations may want to borrow millions or
even billions of dollars to fund expansion. Large corporations usually do not borrow
money directly from banks. Instead, they borrow by selling corporate bonds directly to
investors. A bond is a certificate that represents a loan contract promising to repay
borrowed funds plus interest. It is generally less expensive for a large corporation to sell
bonds than to borrow from a bank.
The Board of Directors and Corporate Management
The stockholders are technically the owners of the corporation, but they generally do
not directly influence the decisions regarding how the firm is managed. The stockholders
meet and elect a board of directors. Stockholders usually have one vote for each share of
stock that they own. The Board of Directors sets policy, makes major decisions, and hires
top corporate management to implement their policies and decisions and direct the
corporation's daily activities.
The top management of a corporation is selected and hired by the board of directors.
In general, however, the board only directly concerns itself with the top management
position. This position is given different titles by different corporations, including president
or chief executive officer (C.E.O.). Regardless of the exact title, the person in the top
management position implements the board's policies and decisions, directly oversees the
daily affairs of the corporation, and selects people to assist in this task. The persons who
report directly to the top management person are usually also confirmed by the board of
directors.
Stock Prices
When a corporation is first formed, it issues shares of stock at a suggested selling
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price. Later, the board of directors may decide to raise more money by issuing additional
shares of stock. However, once the stock is offered for sale, the corporation ceases to
have any direct control over its price. In both instances, after the shares are initially sold
by the corporation, they are in a market where the laws of supply and demand set the
price of a share of stock just as the price for anything else is determined in a market
economy.
The supply of stock is determined first by the number of shares that the corporation
has issued. However, the quantity available in the market at any particular time will
depend on how many people want to sell their shares at the current market price. The
quantity demanded will be determined by how many people want to buy shares at a
particular price.
People evaluate a share's price based on how they believe its price will behave in the
future -- rise or fall. Many factors can influence this perception including how the issuing
company is viewed, how much and what kind of stock the company issues, and the
general state of the economy . For instance, if the corporation is very successful and the
general economy is good, more people will want the stock and bid up the price; however,
if the corporation is not very successful or the economy is in recession, fewer people will
want the stock and the price will fall.
Dividends
Stockholders also expect to share in the profits of the firm because they are the
owners. Periodically -- once, twice, or four times per year -- corporations may "declare a
dividend." In other words, what happens is that the board of directors will keep a portion
of the profits for business expansion and announce that the rest will be paid to the
shareholders in the form of dividends. Dividends are paid based on the number of shares
that each shareholder owns; for instance, the corporation may pay $1.25 per share
owned.
Not all corporations distribute profits or distribute them in the form of money. Some
firms will go years without declaring a dividend either because they are not making a profit
or they are using the profits to expand the company . Although Microsoft Corporation
(founded in 1975) first sold stock to the public in 1986 and has been immensely
successful, it did not pay any dividends until 2003. Some firms also issue dividends in the
form of stock, not money.
Taxes
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There are also disadvantages to a corporation. When governments collect taxes,
corporations are at a disadvantage . Corporate profits are taxed. They also may pay a
portion of their profits to shareholders in the form of dividends. When governments tax
the income of shareholders, the dividends are taxed also. Thus, corporate income is
taxed twice -- once when corporate profits are taxed and a second time when
shareholders' income is taxed.
Management and Ownership
Another disadvantage of large corporations is that most shareholders have very little
influence over management decisions. Sometimes the interest of management and
owners diverge. But most corporate investors like the fact that they are not required to
concern themselves with the day-to-day affairs of the business. They leave that to the
Board of Directors and the corporation's management. On the whole, the advantages of a
corporation far outweigh the disadvantages .
Stock Market
Stock can be purchased directly from the corporation. This is how small (or private)
corporations issue their stocks. Almost all large corporations, however, are public
corporations. You can directly purchase the stock of public corporations, also. However,
their stock is also available to be bought and sold through stock markets where anyone
can buy it. A stock market (or exchange) is simply a place where shares of stock can be
bought and sold. Some of the largest stock markets are the New York Stock Exchange
and the American Stock Exchange (in New York City), the London Stock Exchange, and
the Tokyo Stock Exchange.
The competition in stock markets is close to being perfect competition. The market
price of shares is set entirely by the forces of supply and demand. Today, the world's
larger stock markets are linked together electronically so that the shares of major
corporations can be purchased at any of them and the price does not vary much from one
stock market to another.
Not-for-Profit Organizations
Business firms are established in order to earn profits. All of these must pay local, state,
and federal taxes. Some organizations (such as churches, temples, mosques, public
service organizations, and charities) do not seek profits. In order to have the benefits of a
corporation, many of these organizations go through the legal process of incorporating.
Many governments give such organizations a special status (called not-for-profit
organizations in the United States). They are permitted to pay reasonable salaries to their
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board of directors and other employees. However, they do not have to pay taxes and some
other fees and no money can be paid to anyone who gives them money (as dividends are
given to investors in a firm).
FINANCIAL CAPITAL AND ECONOMIC CAPITAL
Radio, television, newspapers, and magazines often use the word "capital" as if it had only
one meaning: money available for investment. To be precise, that is the meaning of financial
capital, but financial capital is not the same as economic capital. Economic capital is one of the
three resources of production (land, labor, and capital). Land and labor are gifts of nature.
However, the resource of production called capital is anything (a good or service) produced by
humans in order to make the production of other goods and services more efficient. Thus,
economic capital includes the technology and techniques created by humans in order to use
land and labor more efficiently. Whenever writers mean "economic capital," they usually
specifically say so. Whenever writers use the simple term "capital" with no explanation, they
usually mean "financial capital."
Financial capital is monetary resources, including cash, stock, and bonds. It is "financial
capital" that gives capitalism its name. Under capitalism, money (financial capital) is invested
in hope of earning a profit. Despite their very different meanings, economic capital and
financial capital are related. For example, a firm may invest financial capital in new machinery
or technology. Those machines and technology are economic capital. The motivation for such
investment would be to make production more efficient, reduce expenses, and thus to increase
profits.
LABOR: A RESOURCE OF PRODUCTION
Labor, like land and capital, is a resource of production. That means that it is used by firms
to produce goods and services. Economists regard labor as they regard the other resources of
production -- its price is part of the costs of production.
Firms pay wages and salaries in return for labor. They are the price of labor. Although both
wages and salaries involve money, they are different. A wage is paid to a worker based on
how much work that person produces. For instance, a worker might be paid an amount per
hour or for each piece of product that that person produces. Thus, wages can vary from week
to week for each worker based on the amount of work. A salary is a fixed amount regularly
paid to a worker in return for that person's work over a period of time. For instance, a worker
might be paid a certain amount per month or year based on a certain number of hours per
week ($22,000 per year based on a 40-hour work week). Salaries do not vary based on the
amount of work.
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Human Capital Influences Wages and Salaries
Not all labor is equal in value to employers. Labor acquires greater value as it becomes
more efficient at producing goods and services. A worker with skills and experience can be
a much more efficient worker than an unskilled or inexperienced worker. Capital, you
should remember, is the resource of production that makes production more economically
efficient. Thus, as the knowledge and skills that workers have increases, their human
capital increases because they are more efficient. Training and education can often be more
valuable than experience as a source of human capital.
A worker with substantial human capital will be paid more by an employer because that
worker helps to produce more income and profit for the employer. This is why high school
and college graduates who possess greater human capital, are paid more than unskilled
laborers.
Human capital changes with time. It is a "developed" resource,just as technology is a
developed resource. A nation or an individual can change human capital through education,
training, and experience. A country's human capital increases as its workers complete more
education. Thus, the value of their labor increases as a result of the increase in their human
capital.
It is a matter of national interest to increase the human capital of workers because
workers with greater human capital are more efficient and, thus, productive. It is greater
productivity that enables nations to increase their wealth.
Labor Supply and Demand Influence Wages and Salaries
Firms employ workers in order to produce the goods and services that they sell to earn
profits. It is highly unlikely that a firm would employ someone if the money that they paid this
person exceeded the revenue made from the goods and services that that worker produced
for the firm. Workers usually cannot obtain increases in salary unless they can produce
more value than they are paid in wages. However, they may find other employers willing to
hire them at a higher salary.
Thus, the price of labor (salaries and wages) is determined by competition (supply and
demand) -- just as the price of any other resource of production is determined in the market.
Firms want highly productive labor and they will pay what is necessary to get an efficient
workforce -- if it can produce a profit. Just as the price of any resource of production is
partly determined by how it can help a firm to earn profits, the price of labor (salaries and
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wages) is determined by how it can produce profits. That is the demand for labor.
The supply of labor is just as important as demand in determining the price of labor. If
there are more very qualified people looking for jobs than firms need, wages and salaries
will decrease. On the other hand, if there is a shortage of qualified workers, the wages and
salaries offered will increase. The supply of labor and demand for labor determine the price
of labor. Like any other resource, labor's price (wage or salary) is determined by competition
in the marketplace .
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