Economic Notes Chapter 3

Topic 7. — Business Organizations

Economic institution — an organization or group of persons that use the factors of production.
Business Organization (3 types) — Sole Proprietorship, Partnership, and Corporation.

  1. Sole proprietorships are small, easy-to-manage enterprises one person owns.
    6 strengths
    1. easy to establish
    2. easy to manage
    3. owner keeps the profits
    4. no double taxation
    5. psychological
    6. easy to end business
    5 Weakness
    1. unlimited liability
    2. Funding - Raising financial capital, inventory
    3. size and efficiency
    4. limited managerial experience
    5. attracting & retaining qualified employees - fringe benefit
    6. limited life

  2. Partnerships are owned by two or more persons. Generally larger in size than sole proprietorships. Articles of partnership.
    6 strengths:
    1. easy to establish
    2. easy to manage - shared
    3. owners keep the profits no double taxation
    4. easier to obtain financial capital
    5. larger size make for greater efficiency
    6. larger size makes it easier to attract top talent
    3 weaknesses
    1. unlimited liability, personally & for the other partner(s)
      Limited partnerships: general partner/limited partner Legal Requirements of limited partnerships
    2. limited life
    3. conflict between partners

  3. Corporations, owned by individual investors called stockholders.
    Corporations very formal & legal.: — incorporation — charter —Varies by state
    charter (purpose & nature) — Corporation becomes a separate legal entity
    • Shares of Stock — number of shares, type, rights, capital
    • Common stock — preferred stock
    • Stockholder/shareholder shares the revenue.
    • Dividends — Proxies
    Owners of common stocks elect the board of directors
    The Board of Directors hires professional management & determines corporate policies.
    Management follows the policies set by the Board and runs the daily operations.
    — organizational chart — unlimited life
    5 strengths
    1. Ease of raising Capital — Stock — bonds - principal & interest
    2. hire the best management
    3. limited liability — bankruptcy
    4. unlimited life
    5. ease of ownership
    4 weaknesses
    1. difficult to establish — obtaining charter
    2. Shareholders have little say — limited to voting on the BOD
    3. TAXES — separate legal entity - Legal recordkeeping requirment
    4. More government regulation — SEC

Review — What are three forms of business organizations?

Topic 8. — Business Growth & Expansion


Businesses may expand through combinations called mergers (Acquisitions) Friendly / Hostile Takover..
Mergers take place because firms want to become bigger or more efficient. (Bigger -> Efficiency -> Profits -> Dividends)
Eliminates management. Management at all levels is reduced. Redistribution of Labor

    Horizontal merger — when two similar firms come together.
    Vertical merger — merger of two or more firms at different stages of manufacturing.
A Conglomerate is very large, has at least four different businesses, none responsible for a majority of sales. Diversification

Multinational — business (regular or conglomerate) with operations (manufacturing or service) in a number of different countries.
    Strengths
      Spread new technology worldwide
      Create new job where labor is available
      Create tax revenue for the host country.
    Weaknesses
      Influence politics in host country
      Exploiting economy of host country
        Low wages to workers — exploitation of children / Kathy Lee Gifford / Nike / NORINCO
        Exporting scarce natural resources — Who owns scarce resources
        Interferes with local businesses — Toyota - Honda - BMW
      Export Jobs — Ford plant in Mexico means Americans lose Jobs.
        Briggs & Stratton plant in Mexico means Brookfield resident lose jobs.

Review — Why and how might a business expand?

Topic 9. — Other Organizations and Institutions


Nonprofit organizations operate like a business, but on a Not-For-Profit Basis.
Non Profits exist to further the benefit of a cause or the welfare of their members.
Non Profits use the factors of production.
Nonprofit are difficult to analyze economically because the value of their product is not easy to measure
Nonprofit organizations:

    Government.
    Schools (not all)
    Churches
    Hospitals (not all)
    Labor unions
    Professional associations
    Civic associations (clubs)
    Business associations
    Cooperatives
Cooperatives (Co-op) 3 Types:
    Consumer Cooperative - Deal in Goods - Benefits it's members - through lower prices.
    Example: Food Bank
    Service Cooperatives - Deal in Services - Example credit union — members only.
    Producer Cooperative - Helps producers market products - Wisconsin Cheese / Idaho Potatoes /Sunkist / Ocean Spray
      Why are there not more cooperative?
        Profit — the Invisible Hand — Not enough financial reward for the effort. Employees for their jobs.
          Food Bank vs. Kohl's, Sentry, PickNSave, etc.
          Educators Credit Union vs. FirStar, First Financial, etc.
          Ocean Spray vs. Northland Cranberry.
Labor Unions - Works for members interest. Labor Contracts. Working conditions. Ethics.
Collectively more powerful than a single worker. American Ethic of Fair Play.
Professional Associations - May require membership to practice your occupation.
State Licensing. Voluntary.
Business Associations - Lobbying for favorable legislation.
Chamber of Commerce - Self interest of its members.
Better Business Bureau - Non profit organization. Informs consumers about local businesses.
Government
    Direct Role: Governments produce and distribute certain goods and service to consumers.
      Federal - National Defense, postal service. Ben Franklin / Roland Hill.
      State - Roads, licensing.
      Local - roads, libraries, parks., schools, licensing.
      Multi-level services: Federal/State/Local: parks, education, roads, transportation, etc. etc.

    Indirect Role: Government provides regulation in the public interest.
      Regulating Public Utilities. Government regulated monopolies. Cable, electric, phone, etc.
        Private and publicly owned service.
        Garbage, electricity, water, fire protection, ambulances, etc.
      Regulating Business Activity
      Money Grants — Social Security, veterans benefits, financial aid, unemployment.
        This money influences production of goods and service affecting allocation of scarce resources.


Review — What are the features of nonprofit organizations?

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January 24 1998