Ch 3

Business Organizations

Sec 1

Businesses may be organized as individual proprietorships, partnerships, or corporations.

Sole Proprietorships

• A sole proprietorship is run by one person. -smallest type of business in size,

• -most numerous and profitable. • advantages

-ease of start-up;

-ease of management;

-owner gets all the profits; business itself pays no income taxes; taxes only on the owner’s personal income; psychological satisfaction of owning one’s business; ease of closing the business.

• disadvantages

-owner has unlimited liability

-hard to raise financial capital;

-owner may not be able to hire enough personnel or stock enough inventory to operate efficiently;

-owner may have limited experience;

- hard to attract qualified employees;

- business has limited life and legally stops existing when the owner dies or sell the business.

Mergers

• When firms merge, one gives up its separate legal identity.

• horizontal merger = the joining of firms that make the same product.

• vertical merger = the joining of firms involved in different stages of manufacturing or marketing.

Conglomerate

• A conglomerate is composed of four or more businesses, each making unrelated products, none of which is responsible for a majority of its sales.

Multinationals

• A multinational is a corporation with manufacturing and service operations in several countries, which are subjected to each nation’s business regulations.

Why have some multinational companies been criticized?

paying low wages to workers, exporting scarce natural resources, driving out local businesses. Discuss with students that economists believe the advantages of multinationals outweigh the disadvantages.

How can mergers improve efficiency?

Mergers can diminish cost and increase buying power.

Identify five reasons why firms merge.

grow faster, increase efficiency, acquire new product lines, eliminate rivals, or change corporate image

Describe the different ways a business can merge.

horizontal: two or more firms that produce the same product merge; vertical: firms in different steps of manufacturing or marketing merge

Ch7.1 Competition & Market Structure

M.I. =Market structures include perfect competition, monopolistic competition, oligopoly, and monopoly.

• Laissez-faire, -philosophy that government should not interfere with commerce or trade. (Adam Smith)

• “Laissez-faire” is a French term that means “allow them to do.”

laissez-faire

• the role of government is confined to protecting private property, enforcing contracts, settling disputes,

protecting against foreign comp.

Market structure Q’s DO NOT WRITE

• How many buyers and suppliers are there? • How large are they? • Does either have any influence over price? • How much competition exists between firms? • What kind of product is involved–is everyone

trading the exact same product, or are they simply similar?

• Is it easy or difficult for new firms to enter the market?

4 market structures

• perfect competition,

• monopolistic competition,

• oligopoly,

• monopoly.

Perfect Competition• - when a large number of buyers and

sellers exchange identical products under 5 conditions.

– There should be a large number of buyers and sellers

– The products should be identical

– Buyers and sellers should act independently

– Buyers and sellers should be will-informed

– Buyers and sellers should be free to enter, conduct, or get out of business.

Perfect comp cont’d

• Under perfect competition, supply and demand set the equilibrium price, and each firm sets a level of output that will maximize its profits at that price.

• Imperfect competition refers to market structures that lack one or more of the five condition of perfect competition.

Monopolistic Competition

• Monopolistic competition meets all conditions of perfect competition except for identical products.

• Monopolistic competitors use product differentiation -the real or imagined differences between competing products in the same industry.

Monopolistic Competition cont’d

• Monopolistic competitors use nonprice competition, the use of advertising, giveaways, or other promotional campaigns to differentiate their products from similar products in the market.

Oligopoly

• Oligopoly is a market structure in which a few very large sellers dominate the industry.

• Oligopolists act interdependently by lowering prices soon after the first seller announces the cut, but typically they prefer nonprice competition because their rival cannot respond as quickly.

Oligopoly

• Oligopolists may all agree formally to set prices, called collusion, which is illegal (because it restricts trade).

one way is price fixing

– price-fixing, which is agreeing to charge a set price that is often above market price

Oligopoly-cont’d

• price wars, -price cuts that can push prices lower than the cost of production for a short period of time.

• final prices are likely to be higher than under monopolistic competition and much higher than under perfect competition.

Monopoly

---a market structure with only one seller of a particular product.

• Natural monopoly --when a single firm produces a product or provides a service because it minimizes the overall costs (public utilities).

• Geographic monopoly -- when the location cannot support two or more such businesses (small town drugstore).

Monopoly

• Technological monopoly -when a producer has the exclusive right through patents or copyrights to produce or sell a particular product.

• Government monopoly - when the government provides products or services that private industry cannot adequately provide.

More Competition

Less Competition

Perfect CompetitionMonopolistic CompetitionOligopolyMonopoly

Price=$15

• Makes since to add workers until your MC exceeds the sale price