econ unit 2 test

what are the 4 factors of production

land, labor, capitial, and Entrepreneurship

land

resources that come from the earth 

• Ex, animals, food, land that business is on 

labor

• people doing the work paid ( owner not part) 

  • Truck driver bringing food, cashier, chef, cleaner

capital

• machines made by humans 

  • Stoves, cashier machine, building of business 

Entrepreneurship

•  the ideas that make your place stand out 

  • What do you offer that make customers come to you 

Fixed cost 

• Cost of running the business stays the same for at least a year and no matter how much you produce 

  • Cost of labor (salary has to pay for year) 

  • Rent of space (still have to pay for year with lease)

  • Taxes (property, social security, worker salary) 

variable costs

• costs that change depending on what you produce 

  • Hourly wage, utilities, raw materials, advertising

what is the us economic market

• US Free Enterprise System (MOSTLY MARKET W SOME COMMAND)

what is the us economy driven by

profit and eliminating competition

profit

(generic term) = Revenue - Costs

Gross Profit

Revenue - Costs to make the product

Net Profit

Revenue - All costs to run the company

four pillars of us economy

• Private ownership of land

• Importance of competition

• Freedom of choice

• Limited government interference/involvement/intervention

what are the terms of limited government interference

• Consumer protection (can’t limit consumers)

• Provide essential services (fire department puts out fires, police help when you are robbed

• Could correct a market failure if something is really going wrong

• Assist in a crisis

what are pros of us free enterprise system

• Encourages independence

• more innovation because —> independence & intense competition

• lot of options where consumers get to pick what to buy

• quick to pivot because innovators are all thinking at once

what are cons of us free enterprise system

• Wealth gap

• bad for the environment (burn through a lot of natural resources because of the monetary incentive)

• confusion about extent of government involvement

why is eliminating competition important

• fewer competitors, you can raise your price

• Consumers will pay increase in price because no choice

• Goods produced —> more inelastic

how can you eliminate competition

become bigger than competitors

how can you become bigger than the competition

companies can merge, make competition obsolete, let competition fail, quick to pivot

Economics of Scale

The bigger you are, the cheaper your raw materials

how can companies merge

horizontal, vertical and clogmerate

horizontal merge

Companies that do the same service in the same market merge

vertical merge

Companies are involved in the same market but provide different services

Conglomerate merge

Companies merge that are not in the same market

Make competition obsolete

part of how to eliminate competition

• People wait/ want your product 

• Become distinct 

Let competition fail

part of how to eliminate competition

• Wait for competition to screw up 

• Stick to what you do and let competitors fail

Quick to pivot

part of how to eliminate competition

• When something bad happens → quicker to adjust than your competition

market structures

how industries are classified based on nature of competition for products and resources 

Perfect competition

• Highly competitive market with many firms selling identical products 

  • Ex. eggs, fruits, veggies (don’t know brand) 

Monoplastics Competition

• Many companies selling similar but different products

  • Ex. restaurants (want to get a burger from this place), jeans

Oligopoly

• Dominated by a few large firms and makes different for other firms to enter 

  • Ex.  airlines, soft drinks, wireless service, music recording places 

Monopoly

• Dominated by one company with no substitutes

• barriers that prevent other companies from being a part of that market 

Monopoly pros

• Encourages innovation (especially in arts bc protected) 

• Easy to regulate/ more efficient (easier to have one) 

monopoly cons

• Prices are controlled 

• Less innovation (bc only option in town)

Natural (legal monopoly)

• more efficient for one company to provide the resource for a community 

  • Ex. department of water and power, garbage 

geography (legal monopoly)

•  monopoly because of physical location 

  • Ex. only gas station for 60 miles (can have higher prices) 

Technology (legal monopoly)

firm controls manufacturing method needed to produce product or exclusive rights to manufacture it 

Patent

(technology monopoly) protects original invention or idea 

Trademark

(technology monopoly) protects the words and design elements that identifies the source of the product

Copyright

(technology monopoly) protect words of authorship (books, song lyrics)

Seed Money

Money needed by business to start or grow (takes idea to actuality)

ways to use seed money

• Use your own money

  • Reason why businesses merge (if u have idea for app, big company (google) can buy)  

• Loan from bank or lender

  •  But.. must pay back loan with interest 

  • If can’t pay back the loan, the bank/ lender takes business 

• Offer percentage of ownership in exchange for money

  • Once company makes profit, VC will get percentage of that profit 

venture capitalist

offers money to companies for a percentage of ownership 

two types of venture capitalist deals

• Say in decisionmaking (active role in helping)

• Don't care about decisions just want profit (not active, just for profit, ex. silent partner)

what are factors to consider when selecting an ownership structure for a business 

• Ease to start up 

• Longevity 

• Ability to get resources 

• Ease of making decisions   

Corporations

Legal entity owned by individual stock holders

How does corporation owenership work

• purchase stock in company —> own part of the company 

• purchase 10% stock

  • You control 10% of decision making and say in company  

  • Get 10% of profit 

• Once sell shares of stock, no longer have ownership in the company  

• Liability is limited to amount of investment 

How is corporation like a person 

• Pay taxes on any income you make 

• Can buy/ sell property 

• Must honor contacts

• Can be sued

Closely held corporation

issuing stock only to a few people (selective) 

Publicly held corporation

Issue stock 

Structure of leadership corporations (lowest to highest)

Employees → Management → Vice President → CFO and COO → CEO → Board of Directors → Stock Holders 

who holds the most power in a company

highest shareholder 

pros of Corporation

• If company is doing well → possibility to get big profit (if shareholder)

• Easier to get more resources (selling stock in company, you get more money)

• Longevity (if owner dies corporation does not die with them, their stock gets inherited by someone else) 

• Limited liability (as shareholder can only loose the amount u invested)

cons of corporation

• Limited/ difficult on decision making (have to consult with anyone who owns stock) 

• Hard to understand who is at fault (multiple shareholders)

• Double Taxes → corporations taxed on income of corporation and stock holders taxed on the profit you make if you sell stock 

liability

financial debt/ obligation a person or business owes to another party, typically settled through future payments of money, goods, or services

depreciation

the decline in the value of a fixed asset over time due to wear and tear, age, or obsolescence

Free-Enterprise

an economic system in which private business operates in competition and largely free of state control

stock

fractional ownership in a corporation

Sole proprietorship

• Business owned and managed by a single individual 

• Earns all of the profits and is responsible for all of the debts

Sole proprietorship pro

• Complete control over business

• No shared profits with partners

• Easy to start and end

Sole proprietorship cons

• Full liability 

• Limited access to resources

• Tax burden

• Lack of permanence 

• Cannot provide fringe benefits

Partnership

Business organization is when two or more parties/ groups share ownership, profits and business loses

Partnership pros

• Easy to establish; no written partnership agreement is necessary by law

• Shared decision making: responsibility for business is shared 

• Can get more resources

Partnership cons

• All partners have full liability 

• Lack of Permanence: a partnership may not outlast the life of one of the general partners

• Must split profit

• Different opinions in decision-making

Franchise

way of doing business where one company buys the rights to operate the brand, and products through the other company's name.

Franchise pros

• Customers already know and trust the brand, no need to build a reputation from scratch

• The franchisor provides training, guidance etc… so even people with less business experience can run the business more confidently  

• usually have established relationships with suppliers, meaning lower costs 

• Don't need to spend money on marketing or advertising because the large scale marketing is already done

Franchise cons

• When you sell, you sacrifice a percentage of what you make to the bigger brand

• It can take a long time to break even if you are not making the money you owe back

• Purchasing restrictions: you need to buy supplies only from the parent company

• Limited product line: can’t sell your own products since you don’t own the company

Cooperative

A cooperative is a business organization owned and operated by a group of individuals for their shared benefit. 

• Individuals working with one another 

• Voluntary and open membership, democratic control of the organization, sharing of contributions and benefits 

• Don’t pay income tax on earnings

Cooperative pros

• Every member has an equal vote in making decisions

• Access more to resources because they are working together

Cooperative cons

• Slow decision making because of decisions made by vote

• Government intervention can lead to a loss of autonomy and members lose control of the operation 

• Cooperative managers need to remember that they are in charge, which can halt flexibility within the group to make decisions. 

• Can’t make a profit 

• Longevity is difficult due to the amount of people making decisions

decision-making structure of a corporation 

shareholders own the company and elect directors; the Board of Directors sets high-level strategy and appoints officers; and officers (CEO/executives) handle day-to-day operations

Factors of supply other than price 

• Technology 

• Number of producers 

• Cost of raw materials 

• Taxes (decrease taxes, more items will be made) 

Factors of demand others than price

• Change in income (more money → buy more things) 

• Change in number of buyers (busier area) 

• Change in style and taste 

• Change in expectations (maybe storm coming to LA → expected to get gloves) 

• Complimentary goods (if demand peanut butter increase, jelly increase) 

• Substitute goods (if people buy ur rival item, ur product decrease)