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SWS © 2011 1 MIDTERM (UNITS 1-8) SWS © 2011 2 Economics defined Economics is defined as the social science primarily concerned with the problems of using.

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Presentation on theme: "SWS © 2011 1 MIDTERM (UNITS 1-8) SWS © 2011 2 Economics defined Economics is defined as the social science primarily concerned with the problems of using."— Presentation transcript:

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2 SWS © MIDTERM (UNITS 1-8)

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

4 SWS © Macro- vs Micro- Economics Macroeconomics (large scale): highly aggregated units) Macroeconomics (large scale): the study of national and global economies ( highly aggregated units) AGGREGATED = TOTALAGGREGATED = TOTAL (EXAMPLES: USA, Britain, European Union) Microeconomics (small scale): (narrowly defined units) 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)

5 SWS © Division of labor: -- breaks down the production of a commodity into a series of specific tasks performed by different workers. What helps promote efficiency? 2. 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.

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

7 SWS © 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 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: The 3 fundamental economic questions individuals, businesses, and nations must ask: 1. What will be produced 2. How will it be produced 3. For whom will it be produced REMEMBER: WHAT, HOW, FOR WHOM

8 SWS © 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. 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. 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

9 SWS © Market economies 2. Command economies 3. Mixed economies (also called free enterprise) Types of Economies - 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

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

11 SWS © The Foundation of Economics The four types of economic resources or factors of production or inputs have one fundamental characteristic in common. 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 LAND LABOR CAPITAL ENTREPRENEURSHIP Remember the word C.E.L.L.

12 SWS © Inefficiency - Production Possibilities Curve for a Nations Economy (Given Limited Resources) Output of Clothing Output of Food Consider the economy of a nation which has limited resources to divide between the production of clothing and food. If the nation allocates all of its resources toward the production of clothing, then it can produce at point S. Mapping out all the possibilities of how the nation can divide its resources between these activities shows us the nations Production Possibilities Curve. Production Possibilities Curve A D B C Only food is produced T Only clothing is produced S All output possibilities on the frontier curve are efficient If the nation allocates all of its resources toward the production of food, then it can produce at point T. Output combinations A, B, and C are all on the PPC are therefore efficient allocations of resources. 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.

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

14 SWS © 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. TRADEOFF AND FREE LUNCH TRADEOFF AND FREE LUNCH

15 SWS © Why and How do we stabilize this business cycle? 1.Monetary Policy: The method of controlling the economy through changes in the SUPPLY OF MONEY, INTEREST RATES, and BANK REGULATIONS 2.Fiscal Policy: Another method is the use of TAXATION and GOVERNMENT SPENDING to control the economy. How? Through the use of MONETARY and FISCAL policy

16 SWS © Business Cycle A TROUGH means that the economy is doing poorly and the Unemployment Rate is at its HIGHEST level 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

17 SWS © The Foundation of Economics In stating the first fact, what do we mean by material wants? 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. 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. Utility is defined as any good or service that gives pleasure or satisfaction utility = happiness. Some are necessities others are luxuries Some are necessities others are luxuries Economists believe that household attempt to maximize their total utility first, then their income. Economists believe that household attempt to maximize their total utility first, then their income.

18 17 As production increases, additional costs increase. What does the Graph show? Law of Diminishing Marginal Returns Price (monthly bill) Quantity (of Cell Phone Subscribers) Supply Benefits > costs Benefits < costs (no more production) Basically for each additional unit produced the company had to hire more people and use more capital, which costs money. Therefore, even though the company is taking in more money the returns on each item decrease as a result of increased costs.

19 SWS © 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. 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. As price of a good rises, consumers buy less. The availability of substitutes --goods that do similar functions -- explains this negative relationship. 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. 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.

20 SWS © THE DETERMINANTS OF DEMAND THE ONLY FACTORS THAT CAN CAUSE A DEMAND CURVE TO SHIFT TO THE LEFT (decrease) OR RIGHT (increase). 15 $ Price Quantity

21 What specific things determine the position of the demand curve? P.O.I.N.T. 1. Price of Related Products (Subs & Comps) 2. Outlook (Consumer Expectations) 3. Income 4. Number of consumers 5. Tastes Position of the Demand Curve?

22 SWS © Elastic and Inelastic Demand Curves Elastic demand: quantity demanded is sensitive to small price changes. Easy to substitute a good with elastic demand. Easy to substitute a good with elastic demand. Example: a good with many substitutes, such as bottle water or cereal 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. Difficult to find substitutes to the good. Example: needed medication for and illness, such as chemo-therapy or gasoline Example: needed medication for and illness, such as chemo-therapy or gasoline

23 SWS © Elastic and Inelastic Demand Curves Gasoline Tacos (from 8 to 7 units). 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). (from 8 to 1 unit). 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). 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.

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

25 SWS © THE DETERMINANTS OF SUPPLY THE ONLY FACTORS THAT CAN CAUSE A SUPPLY CURVE TO SHIFT TO THE LEFT (decrease) OR RIGHT (increase). 15 $ Price Quantity

26 What specific things determine the position of the supply curve? G.O. S.P.I.T.G.O. S.P.I.T. Position of the Supply Curve? 1. Government Actions 2. Outlook of Future (by the producer) 3. Size of Industry (# of businesses) 4. Price of Related Product Lines 5. Input Costs 6. Technology

27 SWS © Government Actions a.decrease in business taxes = increase supplied (shift right) (cost to produce goes down) b.mandating healthcare be provided to all employees= decrease supplied (shift left) (cost to produce goes up) 2.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. Suppliers Expectations EX: Producer expectations about future profits or inflation 6. Number of Sellers DETERMINANTS OF SUPPLY 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)

28 SWS © Elastic and Inelastic Supply Curves ELASTIC SUPPLY: quantity supplied is SENSITIVE to small price changes 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. 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. 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. 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. INELASTIC SUPPLY: quantity supplied is NOT SENSITIVE to small price changes INELASTIC SUPPLY: quantity supplied is NOT SENSITIVE to small price changes..

29 SWS © 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). If the market price for burgers rises from $1.25 to $2.00, the quantity supplied in the market increases substantially (from 1 to 8 units). 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. INELASTIC ELASTIC Motor Oil Burgers Q $ $ Q

30 SWS © Elasticity in Short Run and Long Run Short-Run - Firms dont have enough time to adjust production in a short period of time (ie: stuck with current factory size). Short-Run - Firms dont 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 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). 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 Supply tends to be much more elastic in the long-run..

31 30 Time and Supply Elasticity $20 $ A producer of birdhouses notices that the price per unit is rising from $10 to $20. Currently he only has enough resources to make 8 birdhouses. (ie. employees) Let us see what happens over time. Supply $ Quantity Supplied $5 TIMELINE Present 3 Months6 Months... at 3 Months (hired another employee)... at 6 Months (purchased a larger workshop) Therefore, supply becomes more elastic over time as a company has more time to adjust to changes in price. InelasticElastic

32 Profit occurs when revenues are greater than all costs (variable and fixed). To understand the law of supply, we must recognize that companies need profits. Variable Cost (VC) are cost that CAN change month to month depending on productionVariable 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.Fixed Cost (FC) are cost that CANNOT change month to month. They are steady regardless of the amount of production. VC+FC= TOTAL COSTS Role of Costs in Shaping the Supply Curve 31 SWS © 2011

33 32 Equilibrium Price Supply Demand Price Quantity Equilibrium Price Equilibrium Quantity Equilibrium Price (x marks the spot) This is the perfect price to charge for a good.

34 SWS © 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: 1. The price floor is not effective. 2. The price floor is effective on the market and creates Surpluses

35 SWS © Market Impacts of a Price Ceiling A Price Ceiling creates shortages. Examples: Rent control for low income families 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.

36 SWS © Price Ceilings and Floors o P S D } } SURPLUS SHORTAGE $6 PRICE FLOOR PRICE CEILING DEMAND & SUPPLY

37 SWS © A Price Ceiling Creates Shortages Supply Demand Price Quantity PEPE QEQE PCPC QSQS QDQD Shortage Illegal $ Legal $ Price Ceiling

38 SWS © A Price Floor Creates a Surplus Supply Demand Price Quantity PEPE QEQE PFPF QSQS QDQD Surplus Illegal $ Legal $

39 SWS © PRICE FLOOR: Minimum Wage You cant go below the floor! You cant go below the floor! A Price Floor creates... A Price Floor creates... – Surpluses (i.e. Quantity Supplied > Quantity Demanded) Examples: Minimum Wage (can be used to protect workers) Minimum Wage (can be used to protect workers) Protects farmers (protects suppliers) Protects farmers (protects suppliers) Market Impacts of a Price Floor

40 SWS © Market Impacts of a Price Floor A government imposed market price floor hinders the forces of supply and demand in moving toward the equilibrium. 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). 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. The price floor keeps the larger companies from charging a lower price than a smaller company that is struggling to get on its feet.

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

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

43 SWS © The 5 conditions of perfect competition 1)LARGE number of SMALL firms. No single buyer or seller can influence the price. 2)Buyers and sellers deal in identical products. No product differences. (EXAMPLES: Salt, Flour, Commodity, Corn) 3)Unlimited Competition: so many firms, that suppliers lose the ability to set their own price. 4)No Barriers to Entry. Sellers are free to enter the market, conduct business and free to leave the market. (Low cost to enter) 5)Each firm is a PRICE-TAKER 5)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.

44 43 The 5 conditions of perfect competition 4)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. The agricultural market is the best example of a perfectly competitive market. 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.

45 44 Perfect Competition Each individual firm is to influence prices. Each individual firm is to influence prices. Price becomes fixed to everyone in the industry. 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. too small Generally speaking, wheat is the same per bushel in North Georgia as it is in Florida.

46 SWS © Perfect Competition Firms in a perfectly competitive market are. (they take the price they are given, they cant change the price) Firms in a perfectly competitive market are price takers. (they take the price they are given, they cant change the price) Since they have no control over their own prices, they have _______________________. In other words, no one will buy an overpriced dandelion. Why should they? 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. A 4-cent dandelion is the same as the 3-cent one, so there is no reason to spend that extra penny. NO MARKET POWER MARKET POWER = MARKET POWER = the ability to set ones OWN prices

47 number of large companies (but fewer than perfect competition). 1)LARGE number of large companies (but fewer than perfect competition). Sellers can influence the price through creating a product identity (more on this later) 2)Products are NOT exactly identical, BUT VERY SIMILAR, so companies use PRODUCT DIFFERENTIATION 3)Heavy Competition: Firms must remain aware of their competitors actions, but they each have some ability to control their own prices. 4)Low Barriers to Entry: harder to get started because of the amount of competition. 5)Monopolistic competition takes its name and its structure from elements of monopoly and perfect competition. 46 Monopolistic Competition The 5 conditions of Monopolistic Competition

48 SWS © Conditions of Monopolistic Competition Product DifferentiationNon-price 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. The real or imagined differences between competing products in the same industry. Differences may be real or imagined. 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! Differentiation may be color, packaging, store location, store design, store decorations, delivery, service….. anything to make it stand out!

49 48 Product DifferentiationNon-price Competition The point is that firms in Monopolistic Competition must use Product Differentiation & Non-price Competition to sell their products. Conditions of Monopolistic Competition Non-Price Competition: Non-Price Competition involves the advertising of a product's appearance, quality, or design, rather than its price. 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. Advertising to help the consumer believe that this product is different and worth more money. VS Notice these commercials never mention price.

50 SWS © 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 1)Very few Sellers that control the entire market. 2)Products may be differentiated or identical (but they are usually standardized) 3)Medium barriers to entry: Difficult to Enter the market because the competitors work together to control all the resources & prices. 4)The actions of one affects all the producers. 5)Collusion = an agreement to act together or behave in a cooperative manner.

51 SWS © 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. What is an Oligopoly? Conditions of Oligopoly 5)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. 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.

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

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

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

55 SWS © ) 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. 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. 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) 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. 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. Example: It is cheaper for the Tennessee Valley Authority (TVA) to provide power in Georgia than two or three companies. 4 Distinct Types of Monopolies: Types of Monopolies

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

57 56 3) 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

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

59 SWS © The Role of Government 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. Basically outlawing monopolies. 1887: Interstate Commerce Act 1887PRESENT 1890: Sherman Antitrust Act Antitrust Legislation

60 SWS © 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. 1887: Interstate Commerce Act 1887PRESENT 1890: Sherman Antitrust Act Cease and Desist Order: FTC ruling requiring a company to stop an unfair business practice that reduces or limits competition. 1914: Federal Trade Commission Act

61 SWS © MERGERS OF LARGE COMPANIES Sometimes companies fall victim to market failure. However, not all businesses close their doors and empty their factories and stores. 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. 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. EXAMPLE: steel company buys an automaker Reason: Diversification 2.) VERTICAL: involve one firm buying a resource provider. 3.) CONGLOMERATE: a company buys a business in a UNRELATED industry.

62 SWS © Sole Proprietorships The Role of Sole Proprietorships: THE TYPES OF BUSINESSES ORGANIZATIONS –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?

63 SWS © THE TYPES OF BUSINESSES ORGANIZATIONS 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. 1.Name: If not using this or her own name as the name of the business, a sole proprietor must register a business name. 2.Authorization: Sole proprietors must obtain a business license.

64 SWS © THE TYPES OF BUSINESSES ORGANIZATIONS 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 For example, health codes

65 SWS © THE TYPES OF BUSINESSES ORGANIZATIONS 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.

66 SWS © Sole Proprietorships Disadvantages of Sole Proprietorships: THE TYPES OF BUSINESSES 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

67 SWS © Partnerships Two or more owners who split responsibility of the management of the company THE TYPES OF BUSINESSES

68 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 firms 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 partners 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 67 Partnerships (two or more owners who split responsibility of the management of the company) Types of Partnerships: (each has a contract) THE TYPES OF BUSINESSES

69 SWS © ) 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) Advantages of Partnerships: Partnerships THE TYPES OF BUSINESSES

70 SWS © ) 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 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 Disadvantages of Partnerships: Partnerships THE TYPES OF BUSINESSES

71 SWS © Corporations Larger and more complex THE TYPES OF BUSINESSES

72 SWS © Corporations defined: Corporations THE TYPES OF BUSINESSES 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 firms debts. Stockholders own stock, also called shares, which represent their portion of ownership in the corporation.

73 SWS © Corporations defined: Corporations THE TYPES OF BUSINESSES 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. 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.

74 SWS © Corporations defined: Corporations THE TYPES OF BUSINESSES 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.

75 SWS © 2011 Corporations Structure: Corporations: THE TYPES OF BUSINESSES A corporation has the following general structure: A corporation has the following general structure: Board of Directors (some of the board members ARE stockholder and some ARE NOT) Stockholders (owners of stock) Chief Executive Officer (CEO) Regional Managers COOCFOCIOCMO

76 SWS © Two Types of Corporations: Corporations THE TYPES OF BUSINESSES 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: dont worry about S corporations

77 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. 76 Advantages of Corporations: Corporations: THE TYPES OF BUSINESSES

78 SWS © ) 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) Disadvantages of Corporations: Corporations: THE TYPES OF BUSINESSES

79 DONT FORGET TO ME ANY FURTHER QUESTIONS YOU MAY HAVE. 78 SWS © 2011

80 PRACTICE FOR MIDTERM ANSWER THE FOLLOWING ON YOUR OWN PAPER 79 SWS © 2011

81 PRACTICE FOR MIDTERM ANSWER THE FOLLOWING ON YOUR OWN PAPER 1.What are the three basic questions that every economy must ask itself? 3.By moving from one point on the PPF to another point on the PPF you will experience what type of loss? 4.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 WHAT, FOR WHOM, HOW 2.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 Opportunity Cost 5.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 80 SWS © 2011

82 PRACTICE FOR MIDTERM ANSWER THE FOLLOWING ON YOUR OWN PAPER 7.What economist believed that the factors of production should be PRIVATE with little or no government involvement in the markets? 9.In what market do Households sell the factors of production to firms? 10.Using the PPF, tell what is the opportunity cost of moving from Point C to Point E. 7 Units of CDs Adam Smith 8.What are the four factors of production? Land, Labor, Capital, & Entrepreneurship Factor Market 11.What is the definition of capital? The MAN-MADE goods used to produced a consumer good 81 SWS © 2011

83 a)a shift of the supply curve to the right. b)a shift of the demand curve to the left. c)a long-term loss of market revenues for suppliers d)a price set below the current market price. 12. A price ceiling is characterized by: PRACTICE FOR MIDTERM ANSWER THE FOLLOWING ON YOUR OWN PAPER 13. Which of the following is not allowed in a command economy? a)government regulation of the economy b)environmental controls c)minimum wage d)ownership of corporate stock 82 SWS © 2011

84 a)the law of demand b) laissez-faire c) the law of competition d) the invisible hand 14. The statement the quantity demanded of a product varies inversely with its price is a definition of: PRACTICE FOR MIDTERM ANSWER THE FOLLOWING ON YOUR OWN PAPER 15. Which of the following is a primary characteristic of a capitalist system? a)private ownership of property b)governmental regulation of business c)equal distribution of resources d)income tax 83 SWS © 2011

85 16. In the graph, what information is determined by looking at the intersection of the supply and demand curves? PRACTICE FOR MIDTERM ANSWER THE FOLLOWING ON YOUR OWN PAPER a)efficiency of production b)amount supplied at a specific price c)increase in demand d)equilibrium price 84 SWS © 2011

86 17. In the graph, what information is determined by looking at the shift of the supply curve from S1 to S2? PRACTICE FOR MIDTERM ANSWER THE FOLLOWING ON YOUR OWN PAPER a)Increase in resource costs b)Increase in supply c)Increases in demand d)Price has decreased 85 SWS © 2011


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