MIDTERM (UNITS 1-8) SWS © 2011.

Economics defined Economics is defined as the social science primarily concerned with the problems of using scarce (limited) resources to attain maximum fulfillment of society’s unlimited wants. Without scarcity (limited resources) there would be no reason to study economics. SWS © 2011

Macro- vs Micro- Economics
Macroeconomics (large scale): the study of national and global economies (highly “aggregated” units) “AGGREGATED” = “TOTAL” (EXAMPLES: USA, Britain, European Union) Microeconomics (small scale): the study of individual decisions and markets (narrowly defined units) (EXAMPLES: you buy a movie ticket verses a pizza, single product markets like IPODS, and how prices for goods are set) SWS © 2011

What helps promote efficiency?
Division of labor: -- breaks down the production of a commodity into a series of specific tasks performed by different workers. Specialization: increase output for three reasons: Specialization permits individuals to take advantage of their existing skills. Specialized workers become more skilled with time. Division of labor allows for the adoption of mass-production technology. SWS © 2011

Adam Smith (Famous Economist)
The Father of Modern Economics Free markets and private ownership will provide jobs, profits, and an increasing standard of living. “Pure Capitalism” (Market economy = no government regulation) All economic activity is governed by an “invisible hand”. (If you leave a economy alone, people’s need for goods will be enough to keep the economy going) PROBLEMS WITH CAPITALISM: Flow of information and goods is not balanced Unequal distribution of power and wealth SWS © 2011

The Foundation of Economics
The overall objective of all economic activity is to satisfy these diverse material wants (keeping in mind that resources used to make them are scarce) The 3 fundamental economic questions individuals, businesses, and nations must ask: What will be produced How will it be produced For whom will it be produced REMEMBER: WHAT, HOW, FOR WHOM SWS © 2011

These externalities cause either POSITIVE or NEGATIVE results
EXTERNALITIES OF PRODUCTION What are externalities? An externality occurs in economics when a decision causes costs or benefits to any person OTHER than the person making the decision or buying the good. In other words, the decision-maker (buyer or producer) does not bear all of the costs or reap all of the gains from his/her actions. These externalities cause either POSITIVE or NEGATIVE results SWS © 2011

Types of Economies Market economies Command economies
Mixed economies (also called free enterprise) - A method or organization that allows unregulated prices and the decentralized decisions of private property owners to resolve the basic economic problems. (NO GOVERNMENT REGULATION) - An economy where the government control the factors of production (TOTAL GOVERNMENT REGULATION) Examples: CUBA, Communism, etc. - An economy where the government regulation AND private business control the factors of production Example: USA, Europe, most superpowers SWS © 2011 7 7

The Circular-Flow Diagram
FLOW OF GOODS AND SERVICES Spending Revenue Product Market Firms Sell here Households Buy here Goods & Services sold Goods & Services bought IMPORTANT!! Example of question: What do households and firms do in the factor (resource) market? Firms Households Wages, rent, and profit Income Labor, land, and capital Inputs for production Factor Market (Resource Market) Firms Buy here Households Sell here SWS © 2011 7

The four types of economic resources or factors of production or inputs have one fundamental characteristic in common. They are all scarce or limited in supply. Review: THE FOUR FACTORS OF PRODUCTION CAPITAL Remember the word “C.E.L.L.” ENTREPRENEURSHIP LAND LABOR SWS © 2011

Production Possibilities Curve for a Nation’s Economy (Given Limited Resources)
Consider the economy of a nation which has limited resources to divide between the production of clothing and food. Production Possibilities Curve Output of Clothing If the nation allocates all of its resources toward the production of clothing, then it can produce at point S. Only clothing is produced S - Inefficiency - If the nation allocates all of its resources toward the production of food, then it can produce at point T. All output possibilities on the frontier curve are efficient A Mapping out all the possibilities of how the nation can divide its resources between these activities shows us the nation’s Production Possibilities Curve. D B Output combinations A, B, and C are all on the PPC are therefore efficient allocations of resources. C Only food is produced Output combination D is within the PPC and therefore represents an inefficient allocation of resources Note that the nation could produce the same level of clothing while producing a greater quantity of food at point B. T Output of Food SWS © 2011

PRODUCTION POSSIBILITIES CURVE
The PPF illustrates: Opportunity Cost: The value of the best possible alternative that is given in the decision to use a resource. All attainable and unattainable combinations Full employment and unemployment Tradeoffs and free lunches SWS © 2011

TRADEOFF AND FREE LUNCH
1. When production is on the PPF, we face a tradeoff. To get more of one good we must give up some of the other good. 2. When production is inside the PPF, there is a free lunch. We can move to the PPF and get more goods without giving up either good. SWS © 2011

Why and How do we stabilize this business cycle?
Through the use of MONETARY and FISCAL policy How? Monetary Policy: The method of controlling the economy through changes in the SUPPLY OF MONEY, INTEREST RATES, and BANK REGULATIONS Fiscal Policy: Another method is the use of TAXATION and GOVERNMENT SPENDING to control the economy. SWS © 2011

Business Cycle How does this cycle relate to unemployment rates?
A PEAK (or BOOM) means that the economy is doing very well and the Unemployment Rate is at its LOWEST level A TROUGH means that the economy is doing poorly and the Unemployment Rate is at its HIGHEST level SWS © 2011

In stating the first fact, what do we mean by “material wants?” Answer. the desire of consumers to obtain and use various goods and services that provide utility. Utility is defined as any good or service that gives pleasure or satisfaction “utility = happiness”. Some are necessities others are luxuries Economists believe that household attempt to maximize their total utility first, then their income. SWS © 2011

What does the Graph show? Law of Diminishing Marginal Returns
As production increases, additional costs increase. Price (monthly bill) Basically for each additional unit produced the company had to hire more people and use more capital, which costs money. 140 Supply Benefits > costs 120 100 Benefits < costs (no more production) Therefore, even though the company is taking in more money the returns on each item decrease as a result of increased costs. 80 60 Quantity (of Cell Phone Subscribers) 5 10 15 20 25 30

Law of Demand Law of Demand: There is an inverse relationship between the price of a good and the quantity consumers are willing to purchase. As price of a good rises, consumers buy less. The availability of substitutes --goods that do similar functions -- explains this negative relationship. The LAW OF DIMINISHING MARGINAL UTILITY also explains the fact that people will demand less as the price increases because their utility is decreasing with each item bought. SWS © 2011

THE DETERMINANTS OF DEMAND
THE ONLY FACTORS THAT CAN CAUSE A DEMAND CURVE TO SHIFT TO THE LEFT (decrease) OR RIGHT (increase). $ Price 8.00 5.00 1.00 1 5 10 Quantity SWS © 2011

Position of the Demand Curve?
What specific things determine the position of the demand curve? “P.O.I.N.T.” Price of Related Products (Subs & Comps) Outlook (Consumer Expectations) Income Number of consumers Tastes SWS

Elastic and Inelastic Demand Curves
Elastic demand: quantity demanded is sensitive to small price changes. Easy to substitute a good with elastic demand. Example: a good with many substitutes, such as bottle water or cereal Inelastic demand: quantity demanded is not sensitive to price changes. Difficult to find substitutes to the good. Example: needed medication for and illness, such as chemo-therapy or gasoline SWS © 2011

Elastic and Inelastic Demand Curves
If the market price for gasoline was to rise from $1.25 to $2.00, the quantity demanded in the market decreases insignificantly (from 8 to 7 units). 2.00 Gasoline 1.25 If the market price for tacos rises from $1.25 to $2.00, the quantity demanded in the market decreases significantly (from 8 to 1 unit). 1 2 3 4 5 6 7 8 10 9 2.00 Tacos Taco demand is highly sensitive to price changes and can be described as elastic; gasoline demand is relatively insensitive to price changes and can be described as inelastic. 1.25 1 2 3 4 5 6 7 8 9 10 SWS © 2011

Law of Supply Law of supply is the claim that, other things staying constant, (ceteris paribus) the quantity supplied of a good or service rises when the price of the good or service rises. $ = SUPPLY SWS © 2011

THE DETERMINANTS OF SUPPLY
THE ONLY FACTORS THAT CAN CAUSE A SUPPLY CURVE TO SHIFT TO THE LEFT (decrease) OR RIGHT (increase). $ Price 8.00 5.00 1.00 1 5 10 Quantity SWS © 2011

Position of the Supply Curve?
What specific things determine the position of the supply curve? “G.O. S.P.I.T.” Government Actions Outlook of Future (by the producer) Size of Industry (# of businesses) Price of Related Product Lines Input Costs Technology SWS

DETERMINANTS OF SUPPLY
Government Actions decrease in business taxes = increase supplied (shift right) (cost to produce goes down) mandating healthcare be provided to all employees= decrease supplied (shift left) (cost to produce goes up) Input Costs a. decrease in cost of a resource = increase supplied (shift right) (cost to produce goes down) b. increase in cost of a resource = decrease supplied (shift left) (cost to produce goes up) 3. Technology a. Increase in technology = increase in amount supplied (shifts right) b. Decrease in technology = decrease in amount supplied (shift left) 4. Changes in the Price of other Goods that share the same resources 5. Supplier’s Expectations EX: Producer expectations about future profits or inflation 6. Number of Sellers EXAMPLE Pizza: price of rolls decreases (opportunity cost of making pizza declines) less likely to produce rolls and more likely to produce more pizza (supply curve shifts right) a. Increase in # = increase in amount supplied (shifts right) b. Decrease in # = decrease in amount supplied (shift left) SWS © 2011

Elastic and Inelastic Supply Curves
ELASTIC SUPPLY: quantity supplied is SENSITIVE to small price changes . If the marginal costs to make an additional good are low, then the producer will be more likely to produce the good if the price changes. INELASTIC SUPPLY: quantity supplied is NOT SENSITIVE to small price changes . If the marginal costs to make an additional good are high, then the producer will be less likely to produce the good if the price changes. SWS © 2011

Elastic and Inelastic Supply Curves
If the market price for motor oil was to rise from $1.25 to $2.00, the quantity supplied in the market increases insignificantly (from 7 to 8 units). $ Motor Oil 2.00 INELASTIC 1.25 If the market price for burgers rises from $ to $2.00, the quantity supplied in the market increases substantially (from 1 to 8 units). 1 2 3 4 5 6 7 8 9 10 Q $ 2.00 Burgers Burger supply is highly sensitive to price changes and can be described as elastic; motor oil supply is insensitive to price changes and can be described as inelastic. 1.25 ELASTIC 1 2 3 4 5 6 7 8 9 10 Q SWS © 2011

Elasticity in Short Run and Long Run
Short-Run - Firms don’t have enough time to adjust production in a short period of time (ie: stuck with current factory size). Supply tends to be inelastic in the short-run for all goods . Long Run - Firms have enough time to adjust in a longer period of time (ie: build a larger factory, thus benefiting from mass producing a good). Supply tends to be much more elastic in the long-run SWS © 2011 .

Time and Supply Elasticity
A producer of birdhouses notices that the price per unit is rising from $10 to $20. Supply $ $20 Currently he only has enough resources to make 8 birdhouses. (ie. employees) $10 $5 Let us see what happens over time. Quantity Supplied 1 2 5 8 10 12 ... at 3 Months (hired another employee) ... at 6 Months (purchased a larger workshop) TIMELINE Therefore, supply becomes more elastic over time as a company has more time to adjust to changes in price. Present 3 Months 6 Months Inelastic Elastic

Role of Costs in Shaping the Supply Curve
To understand the law of supply, we must recognize that companies need profits. Profit occurs when revenues are greater than all costs (variable and fixed). Variable Cost (VC) are cost that CAN change month to month depending on production Fixed Cost (FC) are cost that CANNOT change month to month. They are steady regardless of the amount of production. VC + FC = TOTAL COSTS SWS © 2011

(x marks the spot) This is the perfect price to charge for a good.
Equilibrium Price Price Supply Equilibrium Price Equilibrium Price (x marks the spot) This is the perfect price to charge for a good. Demand Quantity Equilibrium Quantity 6

Price Floors When the government imposes a price floor (a legal minimum on the price at which a good can be sold) two possible outcomes are possible: The price floor is not effective. The price floor is effective on the market and creates Surpluses SWS © 2011 12

Market Impacts of a Price Ceiling
A Price Ceiling creates shortages. Examples: Rent control for low income families Rent controls are price ceilings placed on the rents that landlords may charge their tenants. The goal of rent control policy is to help the poor by making housing more affordable. SWS © 2011 11

Price Ceilings and Floors
DEMAND & SUPPLY Price Ceilings and Floors PRICE FLOOR P $6 } S SURPLUS 5 4 3 } PRICE CEILING 2 SHORTAGE 1 D o 10 20 35 55 80 SWS © 2011

A Price Ceiling Creates Shortages
Supply Price Ceiling PE Illegal $ PC Legal $ Shortage Demand Quantity QS QD QE SWS © 2011 10

A Price Floor Creates a Surplus
Supply Legal $ PF Illegal $ PE Demand Surplus Quantity QS QD QE SWS © 2011 17

Market Impacts of a Price Floor
PRICE FLOOR: Minimum Wage You can’t go below the floor! A Price Floor creates. . . Surpluses (i.e. Quantity Supplied > Quantity Demanded) Examples: Minimum Wage (can be used to protect workers) Protects farmers (protects suppliers) SWS © 2011

Market Impacts of a Price Floor
A government imposed market price floor hinders the forces of supply and demand in moving toward the equilibrium. One reason to establish a price floor is to protect the producer (such as a new farmer who is competing against larger farming corporations). The price floor keeps the larger companies from charging a lower price than a smaller company that is struggling to get on its feet. SWS © 2011 15

What Are Markets? 1. Pure (perfect) Competition
Markets are classified by 4 structures 1. Pure (perfect) Competition 2. Monopolistic Competition 3. Oligopoly 4. Monopoly SWS © 2011

IT IS ONLY A THEORY! 1. Perfect Competition
BEFORE WE BEGIN!! This is a theoretical situation. NO TRUE Perfectly Competitive Market exists. IT IS ONLY A THEORY! SWS © 2011

The 5 conditions of perfect competition
LARGE number of SMALL firms. No single buyer or seller can influence the price. Buyers and sellers deal in identical products. No product differences. (EXAMPLES: Salt, Flour, Commodity, Corn) Unlimited Competition: so many firms, that suppliers lose the ability to set their own price. No Barriers to Entry. Sellers are free to enter the market, conduct business and free to leave the market. (Low cost to enter) Each firm is a PRICE-TAKER (more on this later) CONSUMERS HAVE THE LARGEST SELECTION OF BUYERS TO BUY GOODS FROM BECAUSE NO SINGLE GOOD IS MORE APPEALING THAN ANOTHER. SWS © 2011

The 5 conditions of perfect competition
No Barriers to entry. Sellers are free to enter the market, conduct business and free to leave the market. Perfect competition is the opposite of monopoly. Here, any firm can get into the market at very little cost. Suppose there was a market for dandelions. Growing dandelions requires little start-up cost. All you need are dandelion seeds, soil, water, and some sunlight. There is no difference between one dandelion and another, so the market has a similar product. The agricultural market is the best example of a perfectly competitive market.

Perfect Competition too small
Each individual firm is to influence prices. Price becomes fixed to everyone in the industry. EXAMPLE: the price of a bushel of wheat is set only by the interaction of supply and demand. Generally speaking, wheat is the same per bushel in North Georgia as it is in Florida.

MARKET POWER = “the ability to set one’s OWN prices”
Perfect Competition Firms in a perfectly competitive market are price takers. (they take the price they are given, they can’t change the price) Since they have no control over their own prices, they have _______________________. NO MARKET POWER MARKET POWER = “the ability to set one’s OWN prices” In other words, no one will buy an overpriced dandelion. Why should they? A 4-cent dandelion is the same as the 3-cent one, so there is no reason to spend that extra penny. SWS © 2011

Monopolistic Competition
The 5 conditions of Monopolistic Competition LARGE number of large companies (but fewer than perfect competition). Sellers can influence the price through creating a product identity (more on this later) Products are NOT exactly identical, BUT VERY SIMILAR, so companies use PRODUCT DIFFERENTIATION Heavy Competition: Firms must remain aware of their competitor’s actions, but they each have some ability to control their own prices. Low Barriers to Entry: harder to get started because of the amount of competition. Monopolistic competition takes its name and its structure from elements of monopoly and perfect competition.

Conditions of Monopolistic Competition
The point is that firms in Monopolistic Competition must use Product Differentiation & Non-price Competition to sell their products. Product Differentiation: The real or imagined differences between competing products in the same industry. Differences may be real or imagined. Differentiation may be color, packaging, store location, store design, store decorations, delivery, service….. anything to make it stand out! SWS © 2011

Conditions of Monopolistic Competition
The point is that firms in Monopolistic Competition must use Product Differentiation & Non-price Competition to sell their products. Non-Price Competition: Non-Price Competition involves the advertising of a product's appearance, quality, or design, rather than its price. Advertising to help the consumer believe that this product is different and worth more money. Notice these commercials never mention price. VS

Conditions of an Oligopoly
What is an Oligopoly? A market in which a two-three large sellers control most of the production of a good or service and they work together on setting prices. Conditions of an Oligopoly Very few Sellers that control the entire market. Products may be differentiated or identical (but they are usually standardized) Medium barriers to entry: Difficult to Enter the market because the competitors work together to control all the resources & prices. The actions of one affects all the producers. Collusion = an agreement to act together or behave in a cooperative manner. SWS © 2011

Conditions of Oligopoly
What is an Oligopoly? A market in which a two-three large sellers control most of the production of a good or service and they work together on setting prices. Conditions of Oligopoly Collusion = an agreement to act together or behave in a cooperative manner. It is also called Price Fixing: setting the same prices across the industry. THIS IS IN VIOLATION OF ANTI-TRUST LAWS. WHY? WHY DOES THE GOVERNMENT HAVE THE POWER TO STOP THIS? Basically, the companies are acting a one large monopoly. SWS © 2011

2 Types of Price Behavior in an Oligopoly
Price Leader: independent pricing decisions made by a dominate firm on a regular basis that results in generally uniform industry-wide prices. ADVANTAGE: you are the company leading the price. Independent Pricing: policy by a competitor that ignores other producer’s prices. DISADVANTAGE: other firms shut you down by agreeing to set lower prices than yours. SWS © 2011

Price Behavior in Oligopoly
Now, sometimes businesses do not agree with each other about the price, and if that happens, a WAR will result. Price Wars: Series of price cuts that competitors must follow or lose business. it is a fierce price competition between sellers, sometimes the price is lower than the cost of production. Why is that bad??? (Business Failure) Oligopolists would like to be Independent Price setters: a firm sets prices based on demand, cost of input and other factors (not based on other companies prices). SWS © 2011

Conditions of Monopoly
Exact Opposite of Pure Competition. A price maker. (set their own price, without regard to supply and demand) There is a single seller No close substitute goods are available High Barriers to Entry: Other sellers cannot enter the Market. SWS © 2011

WHY WOULD GOVERNMENT DO THIS???
Types of Monopolies 4 Distinct Types of Monopolies: Natural Monopoly: Where costs are minimized by having a single producer of the product. Gas, water, electricity. Government creates Natural Monopolies by Franchising some utilities. Franchise: the right to produce or do business in a certain area without competition. Government franchises come with government regulation. Georgia PSC (Public Service Commission) WHY WOULD GOVERNMENT DO THIS??? Economies of Scale: As natural monopolies grow larger it reduces its production costs. Because normally the more efficient its use of personnel, plant and equipment as a firm becomes larger. Example: It is cheaper for the Tennessee Valley Authority (TVA) to provide power in Georgia than two or three companies. SWS © 2011

EXAMPLE: Only person selling water in the desert.
Types of Monopolies Geographic Monopoly: The only business in a location due to size of market. Decreasing in the U.S. because of mobility. EXAMPLE: Only person selling water in the desert. SWS © 2011

Types of Monopolies Technological Monopoly: Firm has discovered a new process or product. Constitution gave government the right to grant technological monopolies. Patent: 17 years exclusive rights to a developed technology. Copyright: (Artists and writers) Life plus 50 years.

Types of Monopolies Government Monopoly: Retained by the government.
Liquor sales in some counties, uranium production, water, etc. SWS © 2011

Antitrust Legislation
The Role of Government Antitrust Legislation Sherman Antitrust Act: law against those companies that hindered competition or made competition impossible because of the “restraint of trade” that was created. Basically outlawing monopolies. 1887 PRESENT 1887: Interstate Commerce Act 1890: Sherman Antitrust Act SWS © 2011

The Role of Government Federal Trade Commission Act: passed to enforce the Clayton Antitrust Act. It gave the authority to issue Cease and Desist Order. Cease and Desist Order: FTC ruling requiring a company to stop an unfair business practice that reduces or limits competition. 1887 PRESENT 1914: Federal Trade Commission Act 1887: Interstate Commerce Act 1890: Sherman Antitrust Act SWS © 2011

MERGERS OF LARGE COMPANIES
Sometimes companies fall victim to market failure. However, not all businesses close their doors and empty their factories and stores. Many get “swallowed up” by another company. This “take-over” or acquisition of a company is known as a merger. There are THREE types of mergers: HORIZONTAL, VERTICAL, and CONGLOMERATE. 1.) HORIZONTAL: involve firms in the SAME market, such as between two oil companies. Reason: Diversification 2.) VERTICAL: involve one firm buying a resource provider. EXAMPLE: steel company buys an automaker 3.) CONGLOMERATE: a company buys a business in a UNRELATED industry. SWS © 2011

THE TYPES OF BUSINESSES ORGANIZATIONS
Sole Proprietorships The Role of Sole Proprietorships: A sole proprietorship is a business owned and managed by a single individual. That person earns all of the firm's profits and is responsible for all of the firm's debts. This type of firm is by far the most popular in the United States. According to the Internal Revenue Service, about 75 PERCENT of all businesses are sole proprietorships. Most sole proprietorships are small. Why? SWS © 2011

Sole Proprietorships Advantages of Sole Proprietorships: 1.) Easy to Start: While you need to do more than just hang out a sign to start your own business, a sole proprietorship is simple to establish. With just a small amount of paperwork and legal expense, just about anyone can start a sole proprietorship. Name: If not using this or her own name as the name of the business, a sole proprietor must register a business name. Authorization: Sole proprietors must obtain a business license. SWS © 2011

Sole Proprietorships Advantages of Sole Proprietorships: 2.) Few Regulations: A proprietorship is the least-regulated form of business organization. Most importantly, because they require little legal paperwork, sole proprietorships are usually the least expensive form of ownership to establish. Does this mean they have NO regulations? Even the smallest business, however, is subject to some regulation, especially industry-specific regulations. For example, health codes SWS © 2011

Sole Proprietorships Advantages of Sole Proprietorships: 3.) Owner makes all profit: If the business succeeds, the owner does not have to share the success with anyone else. 4.) Total control of decisions: sole proprietors can run their businesses as they wish. This means that they can respond quickly to changes in the marketplace. 5.) Easy to Discontinue: Finally, if sole proprietors decide to stop operations and do something else for a living, they can do so easily. SWS © 2011

THE TYPES OF BUSINESSES
Sole Proprietorships Disadvantages of Sole Proprietorships: 1.) Unlimited Personal Liability: Sole proprietors are fully and personally responsible for all their business debts. 2.) Limited Access To Resources: Many small business owners use all of their available savings and other personal resources to start up their businesses. This makes it difficult or impossible for them to expand quickly. Also, they may lack HUMAN CAPITAL, which would make their business suffer. 3.) When owner dies, the business dies: when owner dies or retires the company ceases to exist, unless given to someone else. 4.) No Fringe Benefits: No healthcare plan, dental coverage, 401k retirement plan, or paid vacations SWS © 2011

Partnerships (two or more owners who split responsibility of the management of the company) Types of Partnerships: (each has a contract) 1.) General Partnerships: Partners in a general partnership share equally in both responsibility and liability. 2.) Limited Partnerships: In a limited partnership, only one partner is required to be a general partner. That is, only ONE partner has UNLIMITED personal liability for the firm’s actions. The remaining partner or partners contribute only money. 3.) Limited Liability Partnerships/Companies (LLP & LLC): In this type of partnership, all partners/companies are limited partners. An LLP functions like a general partnership, except that all partners are limited from personal liability from another partner’s mistakes. Also the owners are taxed at a personal level, versus the entire company being taxed. FOR THE MIDTERM: DO NOT WORRY ABOUT P.C.s

Partnerships Advantages of Partnerships: 1.) Easy to Start: Like proprietorships, partnerships are easy and inexpensive to establish. The law does not require a written partnership agreement. (FEW REGULATIONS) 2.) Little government regulation: Like sole proprietorships, partnerships are subject to little government regulation. 3.) Shared Decision Making and Specialization: divide up the work and the costs of the company. 4.) Pooling of capital: combine the money and human resources (intelligence) of two in order to get started. 5.) Not liable for other partners actions: if one partner screws up, then the other is not liable for the wrong-doing. (ONLY for an LP, LLP & LLC) SWS © 2011

Partnerships Disadvantages of Partnerships: 1.) Unlimited Liability: all partners are liable for actions of each other (only for General Partnership) each partner could lose what they put into the partnership 2.) Loss of individual control: share decision-making 3.) Disagreements: if a conflict starts, then the business could suffer because of the disagreement SWS © 2011

Corporations Corporations defined: The most complex form of a business organization is the corporation. A corporation is a legal entity or being, owned by individual stockholders, each of whom faces limited liability for the firm’s debts. Stockholders own stock, also called shares, which represent their portion of ownership in the corporation. SWS © 2011

Corporations Corporations defined: The stock is registered with the Securities and Exchange Commission (SEC: the protector of investors) The largest corporations are usually listed on the New York Stock Exchange (NYSE). Some stocks for smaller companies many be listed National Association of Securities Dealers Automated Quotation (NASDAQ). Selling stock is not the only way a corporation can raise capital to develop or expand. It can also sell debt by issuing bonds. A bond promises to pay a stated rate of interest over a stated period of time; it also promises to repay the full amount borrowed at the end of that time. SWS © 2011

Corporations Corporations defined: Bonds: Less risk because a bond promises to pay interest and to repay the full amount borrowed. You become the “bank” for the corporation Stock: More risk because your money is lost if the company goes bankrupt. It is more of a gamble. SWS © 2011

Corporations: Corporation’s Structure: A corporation has the following general structure: Stockholders (owners of stock) Board of Directors (some of the board members ARE stockholder and some ARE NOT) CIO CFO Chief Executive Officer (CEO) COO CMO Regional Managers Regional Managers Regional Managers Regional Managers SWS © 2011

Corporations Two Types of Corporations: 1.) Private Corporations: Some corporations issue stock to only a few people, often family members. These stockholders rarely trade their stock, but pass it on within families. 2.) Publicly Traded Corporations: It has many shareholders who can buy or sell stock on the open market. Stocks are bought and sold at financial markets called stock exchanges, such as the New York Stock Exchange (NYSE). For the midterm: don’t worry about “S” corporations SWS © 2011

Corporations: Advantages of Corporations: 1.) Very Little Liability: A corporation is defined as an "entity" because it has a legal identity separate from those of its owners. A corporation pays taxes, may engage in business, make contracts, sue other parties, and gets sued by others. 2.) Many Resources are Available: not only do corporations have more access to physical capital, they have access to human capital (well educated business leaders) 3.) Continues after death of Owner: a corporation will not cease to exist if the owner passes, or retires. 4.) Easy to Raise Money for it: through the sells of stock a company can raise money to fund operations.

Corporations: Disadvantages of Corporations: 1.) Owner has little control: he/she has little control over the company. They have to listen to the Board of Directors and the stockholders. 2.) Does NOT React quickly to changes in the market: corporations are huge bureaucracies and they are not quick to response to the marketplaces. Everything has to be approved by the Board of Directors (which takes valuable time) SWS © 2011

PRACTICE FOR MIDTERM ANSWER THE FOLLOWING ON YOUR OWN PAPER What are the three basic questions that every economy must ask itself? WHAT, FOR WHOM, HOW What are two key indicators that can help a nation determine what stage of the business cycle it is in? GDP (Gross Domestic Product) & Unemployment Rate By moving from one point on the PPF to another point on the PPF you will experience what type of loss? Opportunity Cost Draw the Demand and Supply curves together. What will happen to the equilibrium price & quantity if the demand curve shifts to the left? Decrease in price and decrease in quantity An effective price ceiling will create a shortage or surplus? Shortage 6. What economist stated that the markets should be free, but government should be allowed to step in and help promote stability? John Keynes SWS © 2011

PRACTICE FOR MIDTERM ANSWER THE FOLLOWING ON YOUR OWN PAPER What economist believed that the factors of production should be PRIVATE with little or no government involvement in the markets? Adam Smith What are the four factors of production? Land, Labor, Capital, & Entrepreneurship In what market do Households sell the factors of production to firms? Factor Market Using the PPF, tell what is the opportunity cost of moving from Point C to Point E. 7 Units of CDs What is the definition of capital? The MAN-MADE goods used to produced a consumer good SWS © 2011

PRACTICE FOR MIDTERM ANSWER THE FOLLOWING ON YOUR OWN PAPER 12. A price ceiling is characterized by: a shift of the supply curve to the right. a shift of the demand curve to the left. a long-term loss of market revenues for suppliers a price set below the current market price. 13. Which of the following is not allowed in a command economy? government regulation of the economy environmental controls minimum wage ownership of corporate stock SWS © 2011

PRACTICE FOR MIDTERM ANSWER THE FOLLOWING ON YOUR OWN PAPER 14. The statement ‘the quantity demanded of a product varies inversely with its price’ is a definition of: the law of demand laissez-faire the law of competition the invisible hand 15. Which of the following is a primary characteristic of a capitalist system? private ownership of property governmental regulation of business equal distribution of resources income tax SWS © 2011

PRACTICE FOR MIDTERM ANSWER THE FOLLOWING ON YOUR OWN PAPER 16. In the graph, what information is determined by looking at the intersection of the supply and demand curves? efficiency of production amount supplied at a specific price increase in demand equilibrium price SWS © 2011

PRACTICE FOR MIDTERM ANSWER THE FOLLOWING ON YOUR OWN PAPER 17. In the graph, what information is determined by looking at the shift of the supply curve from S1 to S2? Increase in resource costs Increase in supply Increases in demand Price has decreased SWS © 2011

MIDTERM (UNITS 1-8) SWS © 2011.

Similar presentations

Presentation on theme: "MIDTERM (UNITS 1-8) SWS © 2011."— Presentation transcript:

Similar presentations

About project

Feedback

Log in

Auth with social network:

MIDTERM (UNITS 1-8) SWS © 2011.

Similar presentations

Presentation on theme: "MIDTERM (UNITS 1-8) SWS © 2011."— Presentation transcript:

Similar presentations

About project

Feedback