Industrialization Big Business

Learning Targets:  Know how fixed costs and operating costs effect economies of scale and how big businesses manipulated these to maximize profits.  Know the influence that Andrew Carnegie held over America.  Be able to compare and contrast vertical and horizontal integration.  Know how a “trust” and “holding company” work.  Know how department stores changed shopping in America.  Discuss what a corporation is, who owns it, and how it raises money.

The Rise of Big Business -To achieve Economies of Scale  Economies of Scale, in which corporations make goods more cheaply because they produce so much so quickly using large manufacturing facilities. Corporations could:  invest in new technologies  purchase many machines,  lower costs and lower prices,  Fixed costs,  for example, a company would have to pay its loans, mortgages, and taxes, regardless of whether it was operating.  Operating costs  as paying wages and shipping charges and buying raw materials and other supplies.  Compared to their fixed costs, big business had low operating costs. Wages and transportation costs were such a small part of a corporation’s costs that it made sense to keep operating, even in a recession.

The Consolidation of Industry -Andrew Carnegie and Steel  Andrew Carnegie illustrated many of the different factors that led to industrialism and the rise of big business in the United States.  He opened a steel company in Pittsburg in 1875.

The Consolidation of Industry -Trusts  A trust is a legal concept that allows one person to manage another person’s property.  Instead of buying a company outright, which was illegal, Standard Oil had stockholders give their stocks to a group of standard Oil trustees.

The Consolidation of Industry -Holding Companies  A holding company owns the stock of companies that produce goods.  The holding company controls all the companies it owns, effectively merging them into one large enterprise.

Selling the Product  The vast array of products that American industries churned out led retailers to look for new ways to market and sell goods.  Department stores changed the idea of shopping by bringing a huge array of different products together in a large, elegant building.

Review Questions:  How do fixed costs and operating costs effect economies of scale? How did big businesses manipulate these to maximize profits?  What influence did Andrew Carnegie hold over America?  Compare and contrast vertical and horizontal integration.  How does a “trust” and “holding company” work?  How did department stores change shopping in America?

Essay Question and Answer:  What is a corporation, who owns it, and how does it raise money?  A corporation is an organization owned by many people but treated by law as though it were a single person. It can own property, pay taxes, make contracts, and sue and be sued. The people who own the corporation are called stockholders because they own shares of ownership called stock. Issuing stock allows a corporation to raise large amounts of money for big projects, while spreading out the risk.