Download ECONOMICS CHAPTER 3

ECONOMICS CHAPTER 3
BUSINESS ORGANIZATIONS
FORMS OF BUSINESS ORGANIZATION
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SOLE PROPRIETORSHIP
DEFINITION:
HOW TO FORM ONE:
– LICENSES
• GENERAL BUSINESS LICENSE
• (SKILL) LICENSE
– FEES
ADVANTAGES
– EASY TO START
– EASE OF MANAGEMENT (QUICK DECISION MAKING)
– OWNER RECEIVES ALL THE PROFITS
– DOES NOT PAY BUSINESS TAXES
– BEING YOUR OWN BOSS
– EASY TO CLOSE DOWN
DISADVANTAGES
– UNLIMITED LIABILITY
– DIFFICULT TO RAISE OPERATING CAPITAL
– LIMITED SIZE AND EFFICIENCY
– LIMITED ENTREPRENEURIAL SKILLS—INVENTORY AND TRUSTED
WORKERS
– HARD TO ATTRACT QUALIFIED EMPLOYEES
– LIMITED LIFE
BUSINESS ORGANIZATIONS CONTINUED
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PARTNERSHIP
Definition:
Types of partnerships:
– General partnership– Limited partnership
Forming a partnership:
– Articles of Partnership
• Attorney fees
• Licenses and fees
Advantages:
– Easy to start
– Ease of management
– Lack of special taxes
– Easier to attract start up capital than a sole proprietor
– Slightly larger in size
– Easier to attract talented employees
Disadvantages:
– Each partner is fully responsible for the actions of each other.
– (Limited partners = limited liability)
– Limited life
– Conflict between partners
– Split the profits
BUSINESS ORGANIZATIONS CONTINUED
Worldwide Web
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CORPORATIONS
Definition:
Forming a Corporation:
– File incorporation papers
– Charter
– # shares (stock)
– Stockholders
– dividends
Corporate structure:
– Common stock-voting privileges for the Board of Directors.
– Preferred stock-nonvoting owners, first recipients of
dividends.
– Voting by proxy
Advantages:
– Ease of raising capital
• Sell more stock
• Issue bonds
– Hire professional managers to run the company
– Owners have limited liability
– Unlimited life of the company
– Due to their size they can attract and hire the best because
they can offer the highest salaries and best benefits packages..
Disadvantages:
– Expensive to get a charter
– Owners have little say in the running of the company.
– Owners are double taxed
– Corporations are subject to much government regulation
GOVERNMENT REGULATION OF
BUSINESS
• 1880s -- government regulation of business. “Populists”—
regulated railroads.
– ICC.
• Since the end of the Civil War there has been a conflict between
large corporations and government regulation.—antimonopoly, or anti- “trusts” laws.
– Sherman Anti-Trust Act
• Great Depression caused the biggest wave of government
involvement.
– Banking laws, working hours, minimum wages, worker’s compensation,
pollution standards, clean and safe workplaces, union protections, utilities.
• BUSINESS DEVELOPMENT
• State governments today work very hard at getting new
industry to locate in their state.
BOEING
• Incentives: building infrastructure, bond offers, deferred taxes,
low taxes, state financing. Why?
• JOBS!!
BUSINESS GROWTH AND EXPANSION
• BUSINESS GROWTH
• There are two BASIC ways businesses grow:
• 1. Growth through investment:
– Income statement p. 69
– Net Income + depreciation = cash flow
– Those $ may be reinvested back into the company.
• 2. Growth through mergers:
– Reasons for merging
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Quicker growth
Efficiency (cut costs)
Need to acquire new product lines
Keep up with rival companies
To lose its corporate identity (if the old name had a bad name)--Valujet
– Types of mergers
• Horizontal merger
• Vertical merger
– Conglomerates
• Diversification
– Multinationals
• International in scope
Other Business Organizations
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LLC—Limited Liability Company, sole proprietorship with limited liability.
Non-Profit Organizations
– Definition:
– Examples: YMCA, United Way,
Cooperatives
– Consumer Co-ops
• Co-op grocery stores in big cities/apartments
– Service Co-ops
• Credit Union
– Producer Co-ops
• Farm co-ops
Labor, Professional and Business Organizations
– Labor Unions
• Collective Bargaining
• UAW
– Professional Associations
• NEA, AMA, American Bar Association
– Business Associations
• Chamber of Commerce, Better Business Bureau
Government
– Direct Role of Government
• TVA, FDIC, US Postal Service
– Indirect Role of Government
• Oversee Public Utilities, Social Security, VA
INVESTING ON THE STOCK MARKET
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1. Financial investments on the stock market are called equities.
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2. Prices of equities are determined by:
Number of shares on the market for sale.
Profitability of the company.
Expectations for the future
3. ACCURACY OF THE MARKET
The Efficient Market Hypothesis
• Due to the # of market analysts, prices of stock are right…there are no bargains.
• Stock market therefore is not luck.
• Portfolio diversification, buy lots of different types of stock.
– Buy from internet account
– Use a stockbroker
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4. Places where equities are sold:
– New York Stock Exchange (NYSE)—Wall Street—lists 2,800 companieseach of these companies must meet profitability and size requirements
– American Stock Exchange (AMEX)—Wall Street—750 companies
– Global Stock Exchanges (Tokyo, London)
– Over-the-Counter Markets (electronic stock marketplace)—National
Association of Securities Dealers Automated Quotation NASDAQ
MEASURES OF STOCK PERFORMANCE AND HOW TO
MAKE MONEY OFF THE STOCK MARKET
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• MEASURES OF STOCK PERFORMANCE
Dow –Jones Industrial Average—publishes the average closing price
of 30 stocks.
Standard & Poor’s 500—uses price changes of 500 representative
stocks as an indicator of the overall market performance.
Bull Market—is a strong market where stock prices have been going
up over a certain period of time. 1995-2000 Dow-Jones average went
from 4,000-12,000.
Bear Market—is a period where the market is weak for a certain period
of time. 1930s and 2001-2003 (market dropped by 33%), 2008-2009
• HOW TO MAKE MONEY OFF THE STOCK MARKET
1. Stock speculation—buy low and sell high.
2. Dividend value—based on the profit yield of the company.
3. Short selling– borrow stock when price is high and sell it, then buy
it back when the price drops. The difference is your profit.