Chapters 9-10: Business and Competition

Starting a Business In group of four, List 10 businesses that have been in Mandan (or Bismarck) for a long time. Why have these businesses stood the test of time? List 10 Businesses in Mandan (Bismarck) that have closed in the last few years. Why did they close List 10 new Businesses that have started up in the last few years What characteristics do they need to remain open? Are there any business trends in Bismarck Mandan?

Entrepreneur Person who see’s opportunity for profit, starts an business, and with it takes on all risks involved What are some risks in entrepreneurship? Takes time and resources

Elements of Business Operation 1. Expenses: How are the start up costs and costs of inputs for your business (factors of production) Can be cheap or expensive Inventory: Supply of Items used in your business 2. Advertising: Can be expensive to start Word of mouth will eventually take effect 3. Receipts and Record Keeping 4. Risk: All business involves risk

Calculating Profit Receipts – Expenses= Profit If your profit isn’t more than you could make elsewhere doing similar work, its not worth it

Time A major opportunity cost in business What is the opportunity cost of doing books, creating advertising etc. Many business owners (just starting out) work longer hours than in a regular job

An Entrepreneur: Bill Gates Read page 212 This interview was from 1993, has any of his predictions come true? If so, explain.

Types of Business Organizations Sole Proprietorship: Business owned by one person Oldest and most common 11million, mostly small, businesses in the United States Advantages: You receive all the profits You make all decisions; no consulting with others Fewer gov’t regulations You are your own boss, satisfaction is great Disadvantages: You take all risk; losses are not shared You have unlimited liability: you are responsible to pay for all things that go wrong Taking on things you are unfamiliar with Can be very demanding and time consuming Uncertainty of future

Types of Business Organizations Partnership: Business owned by two or more people Partnership agreement: outlines the partnership Limited Partnership: partnership in which one member has no decision-making rights that person only contributes money and sees profit Limited partner has no responsibility outside of original investment Advantages: Losses are shared Greater capital for expansion Creditors are willing to lend more Disadvantages: Profits are shared Decision-making and disagreement problems

Help starting a Sole Proprietorship Creating small businesses=Economic growth! The government wants this and will offer: Low interest rate small business loans Tax breaks for small business owners Small Business Incubators: State or Federal-run entities that help businesses with start up Advice and resources provided

The Corporate World and Franchises Corporation: Organization owned by many people, but treated by law as if it were one person. Stockholders “own” the company Dollar-wise most important type of business in America 90% of business revenue comes from corporations Advantages: Owners (Stockholders) need invest no time Limited liability: Corporation is responsible for debts, not stockholders; you only lose what you invest There are many workers with specialties Financial growth is always possible through issuing stock Corporation can live forever Disadvantages Decision-making can be a slow process Taxes on corporations are usually greater Those that run the company have no vested interest

Corporation Formation Three Things: 1. Register corporation with the state Articles of Incorporation: Name, address, and purpose Addresses of original board of directors Number of shares of stock to be issues Amount of money to be raised through stock Corporate Charter: License to operate granted by the state 2. Sell Stock Common Stock: Ownership and voting rights without a paid dividend Preferred Stock: Stock with a paid dividend Also get money back first if corporation fails No voting rights 3. Elect a Board of Directors

Corporate Structure

Franchises Franchisor sells to another business the right to sell its products Franchisee (person buying) pays a franchise fee Might include a percentage of money taken in Benefits: Corporate managers will help with business setup Chain will help with location and credit Training usually provided Free advertising run by company Negatives: Very little freedom of decision-making Expensive McDonalds franchise fee: 250,000 Cash non-borrowed

The Levels of Competition What is Competition? In the Market Economic System, What are the Benefits of Competition? What is an example of a very competitive market? What is an example of a not so competitive market: The Stream of competitiveness in a Market Economy (From most competitive, to least competitive) Perfect Competition Monopolistic Competition Oligopoly Monopoly

Perfect Competition There are numerous buyers and sellers, no one buyer or seller can affect price Five Conditions of a Perfect Market: Large Market Identical Products Easy Entry and Exit Easily Obtainable Information Well Informed Buyers The Market Controls the Price

The Perfectly Competitive Model

The Perfectly Competitive Market Commodity Goods: Goods exactly the same, found in perfect competition Deregulated Farming best example It really doesn’t exist anymore

Monopoly Pure Monopoly: Single seller controls the supply of a good and thus, dictates price. Characteristics: A Single Seller No Substitutes Complete Barrier to Entry Almost Complete control of Market Price Monopolies result in Increased Price coupled with decreased Supply

Types of Monopolies Natural: One Supplier has an overwhelming cost advantage He can produce product cheaper Usually first producer in the Market Geographic: Small Town Gas station There is no need for 2 Have become almost obsolete due to catalogs and internet Technological: Seller has a patent to exclusively manufacture a product Ex: Drug Companies Government Monopolies: Government Created barriers to entry

Natural Monopoly

Technology Monopoly

Geographic Monopoly

Government Monopoly

Monopolistic Competition Large number of sellers offer the similar but slightly different products Ex. Toothpaste, Cosmetics, Clothing Characteristics: Numerous Sellers: No one dominates the market Relatively Easy Entry Drawback: High advertising Costs Differentiated Products Non price Competition: Advertising and product differentiation Ex. Packaging There Is some Price Control

Start up and Catch Up Costs are High; Some, but not all of price is controlled by Supplier

Oligopoly A Few large Corporations control a Market Characteristics: Domination by a few sellers Barriers to entry are high Ex: Start-up costs Identical or Slightly Differentiated Products: Same or similar product or service provided Cereal industry, Airline Industry Nonprice Competition Limited control over price

An Oligopical Example

Government Policies Toward Competition I. Government Regulates Business A. Historically gov’t has passed antitrust laws to force monopolies to compete fairly. 1. Interlocking Directorate: boards of directors of competing companies are the same. 2. Merger: one corporation joins another a. Horizontal merger: when a business that buys or sells to another buys that business b. Vertical merger: business buys an unrelated businesses (conglomerate)

Government Policies Toward Competition 3. Clayton Antitrust Act: Forbids the merger of companies that substantially lessons competition. II. Deregulation A. 1980’s saw government deregulate many industries (airline) What were the results? Pos/Neg