Economics Unit 2 – Business Organization

Sole Proprietorships

• Sole proprietorship – business owned and run by a single person who has the rights to all profits and unlimited liability for all debts of the firm
• Easiest form of business to start
• Management is relatively simple
• Owner can keep the profits without having to share them with other owners
• Proprietorship does not have to pay separate business income taxes because the business is not recognized as a separate legal entity
• Psychological satisfaction of being their own boss
• Easy to get out of business
• Main disadvantage is that the business has unlimited liability – requirement that an owner is personally and fully responsible for all losses and debts of the business
• Difficulty of raising financial capital to start the business
• Inventory – stock of finished goods and parts held in reserve
• May not hire enough personnel or stock enough inventory to operate the business efficiently
• Has limited managerial experience – need to hire advisors
• Difficulty of attracting qualified employees, no benefits
• Sole proprietorship is limited life – situation in which a firm ceases to exist when an owner dies, quits, or sells the business

Partnerships

• Partnership – unincorporated business owned and operated by two or more people who share the profits and responsibility for debts
• General partnership – form of partnership where all partners are equally responsible for management and debts
• Limited partnership – form of partnership where one or more partners are not active in the daily running of the business and have limited responsibility of debts
• Relatively easy to start
• Ease of management; each owner brings a distinctive talent that help overall condition of the business
• Lack of special taxes on a partnership
• Attract financial capital more easily than proprietorships
• Partnerships is the more efficient operations that come with their slightly larger size
• Partnerships often find it easier to attract top talent than proprietorships
• Main disadvantage of the general partnership is that each partner is fully responsible for the acts of all other partners; limited partner’s responsibility for the debts of the business is limited by the size of his or her investment in the firm
• Partnership has limited life
• Potential for conflict between partners

Corporations

• Corporation – form of business organization recognized by law as a separate legal entity
• Very formal and legal arrangement
• Charter – written government approval to establish a corporation
• Stock – certificate of ownership in a corporation
• Stockholders – people who own a share or shares of stock in a corporation
• Dividend – check that transfers a portion of the company profits to stock holders, usually quarterly
• Common stock – most frequently used form of corporate ownership with one vote per share for stockholders – vote select board members
• Preferred stock – form of corporate ownership without vote, in which stockholders get their investments back before common stockholders
• Main advantage is the ease of raising financial capital
• Bond – formal contract to repay borrowed money with interest
• Principal – amount borrowed when getting a loan or issuing a bond
• Interest – payment made for the use of borrowed money
• Provides limited liability for its owners
• The directors of the corporation can hire professional managers to run the firm
• Unlimited life, corporation continues to exist even when ownership changes
• The ease of transferring ownership of the corporation
• Disadvantage: double taxation of corporate profits – taxation of dividends both as corporate profit and as personal income
• Corporate structure is the difficulty and expense of getting a charter
• Corporation is that the owners, or shareholders, have little voice in how the business is run
• Corporations are subject to more government regulation than other forms of business

Chapter 3.3 – Nonprofit organizations

• Nonprofit organizations – economic organization that operates like a business but does not seek financial gain

Community organizations and cooperatives

• Cooperative or co-op – nonprofit association performing economic activity for the benefit of its members
• Consumer cooperative – housing cooperatives, discount price clubs, bulk foods store
• Service cooperatives – credit unions, insurance companies, babysitting services
• Producer cooperatives – farmers marketing cooperatives
• Credit union – nonprofit service cooperative that accepts deposits, make loans, and provides other financial services

Labor, professional, and business organizations

• Labor union – organization that works for its members’ interests concerning pay, working conditions, and benefits
• Collective bargaining – negotiation between union and company representatives over pay, working conditions, and benefits
• Professional association – nonprofit organization of professional or specialized workers seeking to improve working conditions, skill levels, and public perception of its profession
• Chamber of commerce – nonprofit organization of local businesses formed to promote their interests
• Better business bureau – business sponsored nonprofit organization providing information on local companies to consumers

Government

• Government supplies a good or service that competes with private businesses
• US postal service, FDIC are good examples
• State and local governments also play a direct role in the economy
• Public utility – company providing an essential service such as water or electricity to consumers

Chapter 8.2 – wages and labor disputes

Wage Determination

• Wage rate – prevailing pay scale for work performed in an occupation
• Unskilled labor – workers not trained to operate specialized machines and equipment
• Semiskilled labor – workers who operate machines that require a minimum amount of training
• Skilled labor – workers who are trained to operate complex equipment and require little supervision
• Professional labor – workers with high level of training, education, and managerial skills
• Market theory of wage determination – explanation of wage rates relying on theory of supply and demand
• Equilibrium wage rate – wage rate leaving neither a surplus nor a shortage in the market
• Theory of negotiated wages – explanation of wage rates based on the bargaining strength of organized labor
• Seniority – length of time a person has been on a job
• Signaling theory – theory that employers are willing to pay more for people with certificates, diplomas, and other indicators of superior ability

Chapter 12.3 – poverty and the distribution of income

Poverty

• Poverty threshold – annual dollar income used to determine the number of people in poverty
• Social security administration help minimize the cost of getting the right amount of nutrient
• Poverty guidelines – administrative guidelines used to determine eligibility for certain federal programs
• Lorenz curve – graph showing how the actual distribution of income differs from an equal distribution

Reasons for income inequality

• Difference in individuals’ educational levels
• Distribution of wealth is unequal; wealth has a dramatic impact on people’s ability to earn income
• Law and tax changes, decrease taxes for generally all Americans
• Union membership has fallen, adding to the growing income gap
• Economy currently are converting from goods production to service production, wages are generally lower wages
• Degree of monopoly power
• Discrimination also affects the distribution of income
• Growing income gap are also due to the changing structure of American family

Antipoverty programs

• Welfare – government or private agency programs that provide general economic and social assistance to needy individuals
• Programs such as TANF (temporary assistance for needy families) and SSI (supplemental security income) assist individuals in need. But federal government took over to assure more uniform coverage
• Food stamps – government issued coupons that can be exchanged for food
• Medicaid – joint federal-state medical insurance program for low income people
• State developed a variety of social service programs such as family planning, job training, child welfare, and day care
• Earned income tax credit (EITC) – federal tax credits and cash payments for low income workers
• Enterprise zones – area free of tax laws and other operating restrictions
• Workfare – program requiring welfare recipients to work in exchange for benefits
• Negative income tax – tax system that would make cash payments to individuals with incomes below certain levels
• Negative income tax – tax system that would make cash payments to individuals with incomes below a certain level
• Has been and continue to be one of the most difficult problem to solve

Chapter 6.3 – social goals and market efficiency

Distorting market outcomes

• Price ceiling – highest legal price that can be charged for a product
• Minimum wage – lowest legal wage that can be paid to most workers
• Price floor – lowest legal price that can be paid for a product
• Minimum wage pro: raises poor people’s incomes and provides a small measure of equity
• Minimum wage con: increase unemployment due to decrease of hiring, minimum wage is lower than the lowest wages paid in many areas

Agricultural price supports

• Target price – price floor for agricultural products set by the government to stabilize farm income
• Nonrecourse loan – agricultural loan that carries no penalty or further obligation if it is not repaid
• The surplus of food made them reconsider if they should continue to support the program
• Deficiency payment – cash payment making up the difference between the market price and the target price
• Federal agricultural improvement and reform act – lasted until 2007
• American agriculture is dependent on subsidies and price supports, opinions varies on perspective

Automation and employment in the 21^st century article

• Only a small percentage of occupations can be fully automated by adapting current technologies, but some work activities of almost all occupations could be automated
• Automation will not happen overnight, but will likely take decades
• Automation can boost productivity and help close a GDP growth gap resulting from declining growth rates of working age populations

Work in the future will fall into these 4 categories

• Social and organizational reconfiguration
• All-inclusive global talent market
• A truly connected world
• Exponential technology change
• Human-automation collaboration

Main forces that currently change the labor force

• Technology
• Globalization

Profit = revenue – costs

Breakeven point = total revenue > or = total cost

Profit maximum point: marginal cost = marginal revenue

Prices in free enterprise

• Send signals to producers and consumers
• Allocate resources between markets