Economics - Chapters 8 & 9: Businesses, Competition, & Monopolies

entrepreneurs

people who decide to start a business and are willing to take risks; collect info about business, FOP for the products, and taxes relating to business

Government Help for Businesses

• federal and state governments offer to help small businesses

• federal government’s Small Business Administration: often helps finance startups

• small business incubator: a private or government funded agency that assists new businesses by providing advice or low-rent buildings and supplies; adds businesses in areas

• the Internet also has information to help entrepreneurs

Elements of Business Operation

1. expenses

• expenses include insurance, taxes, wages, electricity, telephone service, rent, new equipment, supplies, inventory, etc

• at the beginning, only buy needed parts and over time, expand as inventory becomes available

• inventory: extra supply of items used in a business, such as raw materials or goods for sale

• wages: expenses paid in order to compensate employees; businesses should pay themselves what they would make elsewhere because opportunity cost is important in determining what career one chooses

2. profit

• to track profit, add wages and other expenses like taxes

• subtract from receipts, or the income received from the sale of goods and services

3. advertising

• information about a company and the service or product it is selling

• can be purchased on radio, TV, print media, billboards, etc

4. record-keeping

• track all expenses and income

• Internet programs and software can track expenses and revenues

• business purchases can be deducted from the amount of taxes an owner owes

5. risk

• businesses must balance the risk against the advantages of being self-employed

• entrepreneurs might have to spend their own savings in order to start or keep the business running

• they have to be able to afford expenses and advertising in order to be successful

sole proprietorship

• business owned and operated by 1 person; most basic type of business

• advantages:

  • owner has full control

  • decisions can be made quickly

  • owner receives all profits

  • taxes are usually low because only personal income taxes are paid on profits

• disadvantages:

  • owner has unlimited liability: requirement that an owner is personally and fully responsible for all losses and debts of a business; personal assets (all items to which a business or household holds legal claim) may be seized to pay off business debts

partnership

• business that two or more individuals own and operate; they sign a legally binding agreement describing the duties of each partner, division of profits, and distribution of assets at the end of the partnership

• advantages:

  • owners share control and profit

  • business is more efficient

  • taxes are usually low because only personal income taxes are paid on each partner’s share of the profit

  • creditors are willing to lend more money to Ps rather than SPs

• disadvantages:

  • owners share risk and profit

  • decision-making is slow

  • disagreements lead to problems running the business

  • unlimited liability for debts incurred in business

  • if partner dies or leaves, the partnership must be ended and reorganized

limited partnership

• special form of partnership in which 1 or more partners have limited liability, but no voice in management

• general partner: assumes all management duties and has full responsibility of the debts

• limited partners: contribute money or property, but do not have a voice in management; do not have liability for any losses beyond what they initially invest

• ex. shopping mall

joint venture partnership

• set up for a specific purpose for a short period of time

• partnership is dissolved after goal is accomplished

• sometimes the partnership is sold later for profit

• ex. Curiosity Rover on Mars

corporation

type of business organization owned by many people, but treated by law as if it were a person; can own property, pay taxes, make contracts, and so on; needs financial capital and financial backers who will lend funds without having a hand in the business

Corporations

• have a distinct existence from stockholders

• stockholders: have limited liability, meaning they are not personally responsible, only the business they invest in loses money and assets

• stock: a share of ownership in a corporation that entitles the buyer to a certain part of the future profits and assets of the corporation

• limited liability: requirement in which an owner’s responsibility for a company’s debts is limited to the size of the owner’s investment in the firm

• corporations pay more taxes than other forms of business organizations

Corporate Structure

• registering the corporation

  • registered in the state it will be headquartered

  • articles of incorporation are filed, which includes, name, address and purpose of corporation; names and addresses of initial board of directors (new board elected at 1st stockholder’s meeting); number of shares of stock to be issued; amount of financial capital to be raised through the issuing of stock

• selling stock

  • capital is raised by selling stock of brands

  • common stock: gives stockholders the right to vote and have a percentage of future profits

  • preferred stock: does not give stockholders voting rights, but guarantees a dividend and they have 1st claim on assets left over if the corporation goes out of business

  • dividend: money return on the money invested in a company’s stock

• naming a board of directors

  • stockholders elect a board of directors who will supervise and control the corporation by hiring people to run the day-to-day operations of the business

Franchises

• franchise: a contract in which 1 business (the franchiser) sells to another business (the franchisee) the right to use the franchiser’s name and sell its product

• franchisee pays a fee that could include a percentage of all the money taken in

• often there are training programs to teach the franchisee in order to set the standards of business operation

market structure

the extent to which competition prevails in particular markets; a way to categorize businesses by the amount of competition they face; 4 basic structures in the American economy: perfect competition, monopolistic competition, oligopoly, and monopoly

Perfect Competition

• perfect competition: market situation in which there are numerous buyers and sellers and no single buyer or seller can affect price

• for perfect or pure competition to exist:

  • 1. a large market: numerous buyers and sellers must exist for the product

  • 2. a similar product: goods or services being sold must be nearly identical

  • 3. easy entry and exit: sellers already in the market cannot prevent competition or entrance into the market

  • 4. easily obtainable information: info about prices should be easy to find

  • 5. independence: possibility of buyer and seller working together is nonexistent

• example of perfect competition: agriculture industry

  • no single farmer has control over price

  • supply and demand determine price

  • individual farmers have to accept price

  • demand in unique and inelastic

• benefits of perfect competition for consumer:

  • price will drop to a level that benefits both consumer and entrepreneur

  • economically efficient

  • resources used productively

Imperfect Competition

• most industries are a form of imperfect competition

• 3 types that differ in how much competition and control over price the seller has:

  • monopoly

  • oligopoly

  • monopolistic competition

Monopoly

• monopoly: a market situation in which a single supplier makes up an entire industry for a good or service with no close substitutes

• characteristics: a single seller, no substitutes, no entry into market, almost complete control of prices

• barriers to entry: obstacles to competition to prevent others from entering market

  • laws preventing competing businesses from operating in an area where a company already provides services

  • cost of starting a businesses, or excessive money capital costs, can prevent entry

  • ownership of raw materials

• 4 types of monopolies: natural, geographic, technological, government

Natural Monopolies

• natural monopolies: providers of utilities, bus services, cable

• have economies of scale: produce the largest amount possible for the lowest cost; low production costs resulting from the large size of output

• government has begun making moves to deregulate and allow for more competition

Geographic Monopolies

• geographic monopoly: created due to geographic barriers for competition because potential profits are so small, other businesses choose not the enter

• these types of monopolies are declining, as competition arises from mail-order and Internet catalogs and delivery services

• examples of geographic monopolies: NHL, NFL, NBA

Technological Monopolies

• technological monopoly: result of inventions that are patented and copy-righted

• patent: exclusive right to make, use, or sell an invention for a specified number of years (usually 20)

• copyright: exclusive right to sell, publish, or reproduce creative works for a specified number of years (usually 70 years after author dies)

• examples of technological monopolies: hot tub, Tylenol

Government Monopolies

• government monopoly: similar to natural, but are held by the government

• construction and maintenance of roads and bridges are the responsibility of local, state, and national government

• examples of government monopolies: USPS, construction/maintenance

Oligopoly

• oligopoly: industry dominated by a few suppliers who exercise some control over price

• conditions: domination by a few sellers, barriers to entry, identical or slightly different products, non-price competition, interdependence

• competition not based on price, but product differentiation is based on consumer perception of the value of one over the other

• product differentiation: manufacturers’ use of minor differences in quality and feature to try to differentiate between similar goods and services

• interdependent behavior: with so few firms in an oligopoly, whatever one does, the others follow (ex. SouthWest, when one airline drops airfares, others will follow, and a price war will ensue; price war is good for consumers until an airline goes out of business and less competition forces higher forces)

• cartel: an arrangement among groups of industrial businesses to reduce international competition by controlling the price, production, and distribution of goods; collude to keep prices high for various products

• examples of oligopolies: Johnson-Johnson, Pfizer, airlines, OPEC

Monopolistic Competition

• monopolistic competition: market situation in which a large number of sellers offer similar, but slightly different products and in which each has some control over price; most common form of market structure in the US; characteristics are same as oligopoly, but with a major difference in number of sellers

• conditions: numerous buyers, relatively easy entry, differentiated product, non-price competition, some control over price

• advertising tries to convince consumers of the superiority of a given product; successful advertising enables companies to charge more than the market price for a product

• examples of monopolistic competition: hair salons, toothpaste, cosmetics

Antitrust Legislation

• John D. Rockefeller monopolized oil industry by creating interlocking directories and putting Standard Oil people on boards of the competition

• interlocking directorate: a board of directors, the majority of whose members also serve as the board of directors of a competing corporation

• because the same group controlled both companies, it was less tempting for them to compete with one another

• Sherman Antitrust Act: antitrust legislation preventing new monopolies or trusts from forming and broke up existing one

• antitrust legislation: federal and state laws passed to prevent new monopolies from forming and to break up those that already exist

• Clayton Act: sought to clarify the laws in Sherman by prohibiting or limiting specific number of business practicies