Download Chapter 2 Economic Systems and Decision Making Section 1 p. 33

Brief Response
• Discuss inflation as it affects one of the following:
(2)
• Labor:
– may affect labor by causing a business to reduce its
workforce
– reduces the effective spending power of workers'
salaries.
• Consumers
– may affect consumers by limiting their consumption
habits.
• Government spending
– may result in cuts in government spending that helps
people and businesses.
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Section 3 p. 46
Terms:
• Capitalism (free enterprise)
• 46 Private citizens own factors of production.
– Many are entrepreneurs
2
Voluntary exchange
• 47 The interactions, transactions, and
decisions of buyers and sellers are
– Willful
– Free
3
Private property rights
• 47 the privilege of an individual to own and
control their possessions as they wish.
– Tangible
• goods
– Intangible
• Ideas
• Skills/abilities
• Treatment (use or abuse)
4
Profit
• 48 an organization is better off at the end of a
business period than they were when they started.
– Company A had $10 million more at the end of the second
quarter (April to June) than they had at the beginning.
– Company A had $10 million less at the end of the second
quarter (April to June) than they had at the beginning =
• loss
5
Profit motive
• 48 the force or compulsion that makes a
person or organization get involved in
business:
– Improve their material well-being/wealth
6
Competition
• 48 sellers struggle to attract consumers
– LOWER COSTS
– Vary products
– Advertising
7
Consumer sovereignty
• 50 the consumer has the role of deciding
– What she/he wants to buy
• Includes design and function
– What she/he will pay
– When she/he will purchase
8
Mixed economy
• AKA: modified private enterprise economy
• 51 economic decisions are made by private
consumers and businesses
• Government intervenes and regulates in some
cases:
– Civil rights
– Labor rights
– Public safety
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Chapter 3 Business Organizations
Section 1, Terms p. 57,
• Sole proprietorship/proprietorship
• 57 a business owned and run by one
person
• 1/6 of American businesses are such
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Sole proprietorship/proprietorship
•
•
•
•
•
EC: Advantages (5)
Easy to start and
operate
Easy to manage
Keep all profits
Only pays one
income tax
Psychological
satisfaction
EC: Disadvantages (6)
• Unlimited liability
• Difficulty to raise
financial capital
• Limits size and
efficiency
• Limited managerial
experience
• Problem attracting
qualified employees
• Limited life
(retirement or passing
of owner)
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Unlimited liability
• 58 owner is personally responsible for all
losses and debts of the business
• Owner may lose all possessions if he/she goes
bankrupt or loses a lawsuit.
12
Inventory
• 59 a counting (stock) of finished good and parts in supply
(reserve).
• Businesses have the goods they are selling on the shelves
where consumers choose.
• Keep a stock of extra goods to replace items chosen by
consumers.
• Inventory needed to keep track of:
– What is available
– What needs to be ordered
• To prevent running out.
– What has been sold
• Also helps decide if a good will continue to be sold by the business.
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Limited life
• 59 a business (firm) ceases if the owner
– dies
– Quits
– Sells the business off
– Your crowd dies out
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Partnership
• 60 a business jointly owned by two or more
persons
– General partnership
– Limited partnership
• Larry Page and Sergey Brin, Company:
Google, Year Founded:1998
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Other Partnerships
• Ben Cohen and Jerry Greenfield
• Company: Ben & Jerry's
• Year Founded: 1978
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Limited partnership
• 62 partners have an agreed-upon amount of
responsibility and liability.
– Often based on amount of investment in the
company.
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Bankruptcy
• 62 a court-granted permission to an individual
or company to cease or delay debt payments
– Will result in reduction or denial of future credit
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Corporation
•
•
•
•
62 a form of business
Recognized by law
A separate legal entity (like a separate person)
Has the rights of an individual to
– Buy and sell property
– Enter into legal contracts
– Be sued
• Run by a board elected by the stock holders
– Headed by a chairman, selected by the board.
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Corporate Food Processors
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How some view corporate power
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EC: Corporation
• EC: Advantages (5)
• Ease of raising financial
capital
• Directors can hire
professional managers
• Limited liability for owners
• Unlimited life
• Ease of transferring
ownership
• EC: Disadvantages (4)
• Difficulty and expense of
getting a charter
• Most owners/shareholders
have little voice in decisions
after picking the board of
directors
• Taxes
• More government
regulation than other forms
of business
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Charter
• 63 government document allowing a
corporation to exist
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Stock
•
•
•
•
•
63 Ownership certificates in the firm
Stockholder, shareholder:
An investor owning stock in a firm.
Dividend:
A check for part of the firm’s earnings in time
of profit:
– Amount depends on number of shares owned.
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bond
• 64 written promise to repay the amount borrowed at a later date. Issued
by……
–
–
–
–
–
Industrials,
Utilities,
Transportation,
Banks,
Finance (non-bank).
• EC: One method a company uses to raise financial capital
– Bought by investors
•
•
•
•
Principal
Amount of money borrowed
Interest
Price paid for the use of another’s money, a fee for borrowing the
principal.
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Double taxation
• The corporation pays a tax on its earnings
– Just like any person
– Reduces the shareholders dividend
• Shareholders must pay a tax on their dividend
earnings from the corporation.
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Hwk Assessments, Class Work,
to Know
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CH 2, sect 3
• 1
• They are made through free interaction of
individuals looking out for their own best
interests
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CH 2, S3
•
•
•
•
•
•
3
Economic freedom
Voluntary exchange
Private property
Profit motive
competition
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CH 2, S3
• 4
• The entrepreneur organizes and manages
– Land
– Capital
– Labor
• Also
– Starts the business
– Creates
• New strategies
• New designs
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CH 2, S3
• 5
• The consequences involve what is, and what is
not, produced when consumers express their
wants
– In the form of purchases in the marketplace
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CH 3, sect 1 Assessments:
Checking for Understanding
• 1
• Partnerships
– Are bigger
– Are better established
– Have a better chance of getting a bank loan
– New partners bring financial capital.
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CH 3, S1
•
•
•
•
•
•
3
Owned by one individual
All decisions made by the owner
Owner receives all profits
Owner responsible for all debts and losses
Life of company limited by health/interest of
owner.
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CH 3, S1, 4
•
•
•
•
•
•
Advantages
Ease in establishing
Ease of management
Lack of special taxes
Attract financial capital
Larger size, more
efficient operation
• Easier to attract top
talent.
• Disadvantages
• Each partner fully
responsible for acts of
others.
• Limited life
• Potential conflict
between partners
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CH 3, S1
•
•
•
•
•
5
It is a separate legal entity
All the rights of an individual
Possesses a charter
Possesses shares of stock
– Sold to investors
• Common stock
• Preferred stock
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Why is the entrepreneur so important
in the free enterprise economy?
• Entrepreneurs introduce new ideas about
– products,
– manufacturing,
– services.
• They provide consumers
– with the products they want,
– at prices they want to pay.
• They create competition with existing businesses that
– helps to reduce costs
– improve the quality of goods.
• They provide jobs for workers.
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Concepts
• Why is the United States said to have a mixed economy rather
than a pure free enterprise or capitalist economy?
• The United States has a mixed economy government
– intervention can
• maintain competition, to
• redistribute income, and sometimes to
• pass laws on what and how items will be produced.
– Human and environmental safety
• Under a pure free enterprise or capitalist system, the
government would not intervene in economic activities but
would leave the market to regulate itself.
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6 Image, p 47
• Question
• tangible items, such as houses, mobile
phones, and cars
• intangible items, such as ideas, skills, and
talents
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6 Image, p. 48
•
•
•
•
•
Question
Voluntary exchange
Private property rights
Profit motive
competition
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6 Image, p 49
•
•
•
•
Question
Workers
Consumers
Government
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6 Image, p 50
• Question
• If the consumers reject the product and refuse to
purchase it, the firm may go out of business.
• + do you know of any examples? (even a company
that got close to such a problem?)
–
–
–
–
New Coke
Celery flavored Jell-O
Bacon you can cook in your toaster
Ford Edsel
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Concepts
• Why should members of a general partnership
be concerned about the financial
responsibility of their partners?
• In a general partnership, all partners are liable
for the business' losses.
– One partner's irresponsibility could cause all the
partners to lose money.
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EC: Bonds are cheap!
• Bonds tend to have much lower returns (interest
rates) than stocks.
• Why would anyone buy bonds at such low interest
rates? (4)
– Most investors sell their bonds to other investors long
before the term is up = quick profit
– Other investors are looking for safer (slower) ways to
make/protect money = long-term assets
• Usually part of many other investments (portfolio), that might
have risky stocks
– If an investor loses on a risky stock, they have money safe in bonds.
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Concepts
• Based on what you have learned about how corporations are formed and
managed and how they may be financed, write four pertinent, analytical
questions that you would like answered about additional aspects of
corporations.
•
•
•
•
•
•
Sample questions:
Who can buy shares of stock in a corporation?
Why do corporations issue both preferred and common stock?
Are corporations totally financed by selling stocks and bonds?
How can one corporation stage a takeover of another corporation?
How are corporations affected by changes in the value of their stocks?
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12 Image, p. 63
• Question:
• Common stock:
– Basic ownership of a corporation
– Can vote for:
• Board of directors
• Preferred stock:
– Cannot vote
– Receive dividends before common shareholders
45
Performance (on a separate paper, use
your old one if there’s space)
• Your company issues $10 million dollars in
five-year bonds.
– How much will your company have to pay back if
the interest rate is 1%?
– What year will you have to pay it back?
– Would a 10-year bond have a higher or lower
interest rate? Why?
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Answers
• Your company issues $10 million dollars in bonds
five-year bonds.
– How much will your company have to pay back if the
interest rate is 1% (current avg. yield)?
• $100,000 (interest) + $10,000,000 = $10,100,000
– What year (consider this current year as the one you issue
the bond) will you have to pay it back?
• Depends on the year this lesson is happening in (this year = 2015;
so pay in 2020)
– Would a 10-year bond have a higher or lower interest rate?
Why?
• Higher: current yield for 10-years is over 3%
• The interest rate is higher to give investors incentive to give you
more time to pay them back.
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Brief Response
• Why does a corporation sell bonds?
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