© South-Western Educational Publishing GOALS LESSON 1.3 THE BUSINESS ENVIRONMENT  Relate current economic conditions to consumer expenditures  Compare the legal structures for a business

© South-Western Educational Publishing Economic Systems An economic system refers to the way a country uses resources to produce goods and services  Command economy  The government owns most of the resources and commands individuals and businesses to product specific items or perform specific jobs  North Korea, Cuba

© South-Western Educational Publishing Economic System  Market economy  Individuals and businesses determine the products they will produce and sell  Purpose of business is to earn a profit  Business owner decides what products to sell

© South-Western Educational Publishing Market Economies and Scarcity  Driven by scarcity  Resources are consumed when a product is made  As resources are used, they become harder to find, making them more valuable  Scarcity describes the situation where consumers always want more resources than are available

© South-Western Educational Publishing Market Economy and Supply  Supply  The law of supply states that producers are willing to sell more of a product at a higher price than a lower price  Ex: Page 17

© South-Western Educational Publishing Market Economy and Demand  The law of demand states that consumers will demand more of a product at a lower price compared to a higher price  Ex. Page 17

© South-Western Educational Publishing Market Economy and Equilibrium  The equilibrium price for a product is the price at which the quantity supplied exactly equals the quantity demanded

© South-Western Educational Publishing Economic Conditions  Customers’ confidence in the economy determines the  Amount of money they spend, and  Types of products they buy  To survive an economic downturn, retailers should  Offer products customers need, and  Cut back on items that are more expensive and not necessary

© South-Western Educational Publishing Legal Structure  4 Main Types of Legal Structures 1.Sole proprietorship 2.Partnership 3.Corporation 4.Franchise

© South-Western Educational Publishing Legal Structures  Sole Proprietorship  Simplest form of business  Most popular form of business

© South-Western Educational Publishing 1. Sole Proprietorship Advantages  Easiest and least expensive structure to set up and dissolve  Profits and losses reported on personal income tax form  Owner makes all business decisions  Flexible—able to respond quickly to market changesDisadvantages  Automatically dissolves when owner dies  Owner has unlimited personal responsibility for business debts  Growth is limited by personal commitment of owner  Funding is limited to owner’s ability to raise funds

© South-Western Educational Publishing Legal Structures  General Partnership  Formed when two or more individuals are co-owners of a business operated to earn a profit  Before you begin operating should form a partnership agreement  Sets rules for partners and describes actions partners will take  (page 20)

© South-Western Educational Publishing 2. Partnership Advantages  Easy and inexpensive to set up and dissolve  Profits and losses reported on personal income tax returns of each of the general partners  General partners make all business decisions  Flexible—able to respond quickly to market changesDisadvantages  Dissolves when a partner dies or withdraws unless specified differently  Partners have unlimited personal responsibility for business debts  Potential for disagreement between partners  Any partner can commit the business to unrealistic obligations

© South-Western Educational Publishing Legal Structures  Corporation  Most complicated legal structure  Legal entity separate of individual  Owned by share holders  S-Corporation  Has fewer than 35 share holders

© South-Western Educational Publishing 3. Corporation Advantages  Business is a separate legal entity  Existence of business is not affected by the death of individual shareholders  Shareholders are not personally liable for business debt  Hired managers make business decisionsDisadvantages  Most difficult and expensive structure to set up and dissolve  Business is affected by government regulation  Extensive record keeping required  Not flexible—unable to respond quickly to market changes

© South-Western Educational Publishing Legal Structures  Franchise  Grants an individual the right to market a company’s goods or services in a specific territory  Franchise license costs on average between $12,000 and $25,000

© South-Western Educational Publishing 4. Franchise Advantages  The business idea has been proven to work  Franchisee receives assistance from the corporation  Corporation continues to research and develop new products and methodsDisadvantages  The business idea is not original for the business owner  You must follow the procedures determined by the corporation  You are not free to develop your business by changing your products or methods