Chapter 7 Market Structures Chapter 8 Business Organizations

Perfect Competition Commodities Barriers to Entry

A market is any venue where buyers and sellers meet.

In a perfectly competitive market, a large number of firms produce the same product.

Perfect Competition There are many buyers and sellers. A perfectly competitive market has four conditions: There are many buyers and sellers. Sellers offer identical products. Buyers and sellers are well-informed about their products. Sellers are able to enter and exit the market freely.

Markets for fruits and vegetables are usually perfectly competitive markets.

Commodities Commodities are generally sold in perfectly competitive markets. A commodity is a product that is the same no matter who produces it. Milk, petroleum, and apples are examples of commodities. Milk is milk. It is exactly the same regardless of who sells it.

Barriers to Entry A barrier to entry is any condition that makes it difficult to enter a market. High start-up costs are barriers to entry. If opening a new business requires hundreds of thousands of dollars, that high start-up cost is a barrier to entry. A great degree of technical knowledge can also be a barrier to entry. Needing a tremendous amount of technical knowledge is another example of a barrier to entry.

Opening a commercial airline requires a tremendous amount of capital. Growing corn doesn’t require a tremendous amount of money or knowledge. Opening a commercial airline requires a tremendous amount of capital.

Few markets are perfectly competitive. Products must be identical in a perfectly competitive market.

Questions for Reflection: List the four conditions of perfect competition. Define commodity and provide an example of a commodity. What is a barrier to entry? Provide two examples of barriers to entry and explain why they are barriers to entry. Why are few markets perfectly competitive?

Monopoly Natural Monopoly Patent

A monopoly is a market dominated by a single seller.

Monopoly A monopoly is a market dominated by a single seller. In general, monopolies are illegal. Monopolies lead to higher prices, inferior quality of products, and reduced supply.

Antitrust Laws The government generally prevents monopolies from forming or breaks up existing monopolies. Antitrust laws are laws that prevent the formation and continuation of monopolies. The government recognizes that monopolies do not benefit consumers. Theodore Roosevelt is known as the Trust-buster President, even though William Taft broke-up more trust companies during his presidency.

The government watches market activity carefully and prevents the formation of most monopolies.

Natural Monopolies However, the government does allow the formation of some monopolies. A natural monopoly occurs when a market runs most efficiently with one firm supplying all of the output. An example of a natural monopoly is public water and electricity. Rather than building an overlapping network of pipes, one company serves customers best.

Patents A patent also provides a supplier with monopoly power. A patent is a license given to the inventor of a product to be the sole supplier of the product for a number of years. A patent is an incentive for invention.

The Market Spectrum Perfect competition is vastly different than a monopoly. In perfect competition, many sellers sell identical products. In a monopoly, a single seller is the sole supplier.

The phone company was once a natural monopoly. The government has since deregulated it.

Questions for Reflection: Define monopoly. List three problems created by monopolies. Why does the government enforce Antitrust laws? Why is public water a natural monopoly? What happens when a market is deregulated?

Monopolistic Competition and Oligopoly Differentiation Nonprice Competition Oligopoly Economics

Monopolistic Competition Monopolistic competition is a market structure in which many companies sell similar but not identical products. Monopolistically competitive firms sell products that are similar enough to be substituted. Levi jeans can easily be substituted for Lee jeans. The market for jeans is an example of monopolistic competition. Economics

substituted for the other One of these brands could easily be substituted for the other brand. Economics

Differentiation Differentiation occurs when a good is produced slightly differently from another good. In monopolistic competition, differentiation is critical. Products are similar but not identical. The not identical part allows for a slightly higher price but just slightly higher. Economics

Nonprice competition is using something other than price to attract customers. Convenience is an example. Economics

Nonprice Competition Nonprice competition is using something other than price to attract customers. Style, location, and service are examples of nonprice competition. Nonprice competition can help businesses attract customers. Economics

oligopoly is a market dominated by An oligopoly is a market in which a few large firms dominate a market. Usually, the four largest firms produce at least 70 to 80 percent of the market’s output. The government closely monitors oligopolies. An oligopoly is a market dominated by a few sellers. Economics

Barriers to entry can lead to oligopolies. High start-up costs can lead to oligopolies. Economics

The government closely monitors oligopolies because a market dominated by a few sellers could act like a monopoly! Economics

It is important to remember that competition benefits consumers. Economics

Questions for Reflection: List two conditions of monopolistic competition. How do suppliers use differentiation to increase their sales? What is the difference between differentiation and nonprice competition? List two conditions of an oligopoly. Why does the government closely monitor oligopolies? Economics

Chapter 8 Business Organizations Sole Proprietorship Zoning Laws Liability Economics

A business organization is an establishment formed to carry on commercial enterprise. Economics

Sole Proprietorship A sole proprietorship is a business owned and operated by an individual. Most businesses in the United States are sole proprietorships. However, sole proprietorships account for the smallest percentage of total sales in the U.S.A. Economics

A sole proprietorship is a common and popular form of business in the United States. Economics

Advantages of Sole Proprietorships The greatest advantage of owning a sole proprietorship is the ability of the owner to make all decisions. The owner also keeps all profits after taxes. Many people enjoy being the boss. Economics

The sole proprietor is the boss of his business. He makes all decisions and keeps all profits after taxes. Economics

Disadvantages of Sole Proprietorships The greatest disadvantage of a sole proprietorship is that the owner has unlimited personal liability. Unlimited personal liability means that the owner has the obligation to pay all debts. Liability is the legally bound obligation to pay all debts. Economics

If the business is sued, the sole proprietor can lose not only but his personal property. Economics

Zoning Laws While there are few laws regulating sole proprietorships, zoning laws do restrict where businesses can be located. A zoning law is a law that states where businesses can be established in a town. Generally, towns have business districts and residential neighborhoods. Economics

A business district is a section of a town where businesses are located. Economics

Fringe Benefits Sole proprietors have a hard time attracting good workers because they cannot afford fringe benefits. Fringe benefits are payments other than salaries. Paid vacation and health insurance are examples of fringe benefits. Economics

Health insurance is a fringe benefit. Sole proprietors usually cannot afford to offer their workers such benefits. Economics

A sole proprietorship is the least-regulated form of business in the United States. Economics

Questions for Reflection: Define business organization. What is a sole proprietorship and why is it the most common form of business organization in the United States? Why do sole proprietors have unlimited personal liability? What are zoning laws and how do they affect neighborhoods? Economics

Partnerships Unlike a sole proprietorship, a partnership General Partnership Limited Partnership Limited Liability Partnership Unlike a sole proprietorship, a partnership is a business owned and operated by two or more people. Economics

General Partnership The most common type of partnership is a general partnership. In a general partnership, all partners share equally in responsibility and liability. In a general partnership, all partners are responsible for the business. Economics

If you form a general partnership, your partner’s actions directly affect you. Economics

Limited Partnership Another type of partnership is a limited partnership. In a limited partnership, one partner must be a general partner or responsible and liable for the business. The other partners are limited partners. Economics

The limited partner only contributes money and has limited liability. Economics

Limited Liability Partnership Only some individuals are allowed to form such partnerships. Doctors, lawyers, and accountants are allowed to form limited liability partnerships. In these partnerships, liability is limited. Each partner is a limited partner and only responsible for his own actions Economics

Liability It is important to remember that liability is the legal obligation to pay all debts. In the three different forms of partnerships, liability differs. The varying degrees of liability determine the various types of partnerships. Economics

General partners share equally in responsibility and liability. In a limited partnership, one partner must be fully liable and responsible. The limited partner only contributes money and has limited liability. In limited liability partnerships, all partners have limited liability in some situations. Economics

Questions for Reflection: List the three types of partnerships. Who is liable and responsible in a general partnership? How do limited partnerships function? Why would a partner chose to be a limited partner? Who is allowed to form a limited liability partnership? Why? Economics

Corporations, Mergers, and Multinationals Stocks Dividends Mergers Economics

Unlike a sole proprietorship, a corporation is a business owned by stockholders. Economics

Corporation A corporation is a legal entity owned by individual stockholders. A corporation is considered a separate entity apart from its owners. As such, the corporation can be sued but individual stockholders cannot be sued. Economics

Each stockholder is a partial owner of the corporation. Economics

Stocks When a business is incorporated, stocks are generally sold. By selling stocks, the corporation acquires capital. By buying stocks, individuals become partial owners of the corporation. Economics

By becoming a stockholder or partial owner of Burger King, the investor receives some of the corporation’s profits. Economics

Limited Liability However, it is important to remember that a corporation is a separate entity apart from its owners. Therefore, the stockholder has limited liability. They can only lose their investment. Economics

But don’t forget trade-offs. While investors make dividends or their share of the profits, corporations experience double taxation. Economics

Double Taxation Double taxation is one of the disadvantages of incorporation. Double taxation means that after corporations pay taxes on their profits, individual stockholders pay taxes on their dividends. Profits are taxed twice! Economics

A multinational corporation (MNC) is a corporation that operates in different countries. Economics

Raising Money Corporations raise money by selling stocks or bonds. Remember the investment poem: Stocks, you own Bonds, you loan When a person buys stock, he becomes a partial owner. When he buys bonds, he loans money to the corporation and must be repaid. Economics

A merger occurs when one business acquires another business. The government carefully monitors mergers. Economics

Questions for Reflection: How does a person become a stockholder and why would a person want to become a stockholder? What are the advantages and disadvantages of incorporation? How does a corporation become a multinational corporation? Why does the government monitor mergers? Economics

Franchise Cooperative Nonprofit Organization Other Organizations Franchise Cooperative Nonprofit Organization Econ

When you visit your local Ben and Jerry’s, you are visiting a franchise. Econ

Franchise A franchise is a semi-independent business. The owner of a franchise pays a fee to a parent company in exchange for the right to sell the parent company’s products. The owner of the franchise must conform to the parent company’s rules. Econ

Cooperative A cooperative is a business owned and operated by a group of people for their shared benefit. There are consumer cooperatives, service cooperatives, and producer cooperatives. Only members of the cooperative can enjoy the benefits of the cooperative. Econ

Farmers frequently form cooperatives to sell their products. Econ

Nonprofit Organization A nonprofit organization is a business that does not operate for profits. Nonprofit organizations serve society. The American Red Cross is an example of a nonprofit organization. Econ

The American Red Cross is a nonprofit organization. Econ

Questions for Reflection: Why must the owner of a franchise pay a fee to a parent company? Provide three examples of franchises. What is a cooperative? Why must a person be a member of a cooperative to benefit from the cooperative’s services? Why are nonprofit organizations in the business of serving society? Econ