american business 3 major types –sole proprietorship –partnership –corporation
Post on 22-Dec-2015
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AMERICAN BUSINESS
• 3 MAJOR TYPES–SOLE PROPRIETORSHIP
–PARTNERSHIP
–CORPORATION
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SOLE PROPRIETORSHIPS
• A business owned and operated by one person
• Advantages–Relatively easy to begin
–Claims all of the profits
–Your own boss
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SOLE PROPRIETORSHIPS
• DISADVANTAGES–Unlimited liability –
responsible for all of the debts of the company
–Responsible for all aspects of the business
–Difficult to raise revenue
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PARTNERSHIPS
• 2 or more individuals agree to own and operate a business together
• ADVANTAGES– They pool their resources and their
business skills
– Relatively easy to create
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PARTNERSHIPS
–Share business responsibilities–Can have some sort of
specialization–Share risks
• DISADVANTAGES–Relatively difficult to raise
revenue–Must share profits
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PARTNERSHIPS
–Partnership has unlimited liability
–Decision making can lead to conflict among partners
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CORPORATIONS
• A legal creation that can
– Acquire resources
– Own assets
– Produce and sell products
– Incur debts (sell bonds)
– Sue and be sued
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CORPORATIONS
• ***A CORPORATION IS SEPARATE FROM THE STOCKHOLDERS THAT OWN IT
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CORPORATIONS
• ADVANTAGES–Effective at raising revenue
• Selling stocks
• Issuing bonds
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STOCKS
• Part ownership in a corporation
• Stock owners vote for the corporate officers (those who run the corporation)
• Vote is in proportion to percentage of stocks owned
• Stock owners get a share of the corporate profits (dividends)
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BONDS
• If you purchase a corporate bond, you are lending money to the corporation
• The corporation promises to pay the value of that bond plus interest
• Stocks and bonds are also known as
SECURITIES
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The Dow Jones Industrial Average
• The Dow
• A single measurement of 30 top U.S. companies
• Indication of how the stocks of these companies are doing
• ****Serves as a barometer of the health of U.S. stocks in general
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The Dow Jones Industrial Average
• AT&T
• Coca-Cola
• Boeing
• Caterpillar Inc.
• Chevron
• Exxon
• GE
• Hewlett Packard
• Home Depot
• McDonald’s
• Microsoft
• Walmart
• Walt Disney
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History of the Dow
• http://stockcharts.com/charts/historical/djia1900.html
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CORPORATIONS
• LIMITED LIABILITY – Stockholders only risk what they have invested– The corporation can be sued but the
stockholders cannot
• Can mass produce product and specialize human resources
• Tend to have a longer life than partnerships and proprietorships
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CORPORATIONS
• DISADVANTAGES–Some red tape and expense to
get a corporate charter
–Double taxation• Corporate profits are taxed
• Dividend income is taxed
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CORPORATIONS
• Separation of ownership and management–Can lead to conflicting views
on the running of the corporation
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Legal Forms of Business•Sole Proprietorship•Partnership•Corporation
Domestic Output by Business Type
Percentage of Firms Percentage of Sales
Sole Proprietorships
Partnerships
Corporations
Sole Proprietorships
Partnerships
Corporations
72%
8%
20%
5%
11%
84%
Source: U. S. Census Bureau
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FORTUNE 500
• Annual listing of the top corporations in America in terms of sales
• What companies do you think were on the 2010 list?http://money.cnn.com/magazines/fortune/fortune500/2009/full_list/
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America’s Top Corporations2010
• Walmart - $408 billion in sales; $14 billion in profits
• Exxon Mobil - $285 billion in sales; $19 billion in profits
• Chevron - $164 billion in sales; $10 billion in profits
• General Electric (GE) - $157 billion in sales; $11 billion in profits
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America’s Top Corporations2010
• Rest of the top 10• 5 – Bank of America• 6 – Conoco Phillips• 7 – AT&T• 8 – Ford Motor• 9 – JP Morgan Chase & Co.• 10 – Hewlett-Packard
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America’s Top Corporations2010
• Other notables• 13 - Verizon
Communications• 15 – General Motors• 18 – CVS Caremark• 23 – Kroger• 25 – Costco• 30 – Target• 36 – Microsoft• 45 – Best Buy• 50 – Pepsi Co
• 56 – Apple• 57 – Walt Disney• 72 – Coca-Cola• 87 – Tyson Foods• 100 – Amazon.com• 102 – Google• 108 – McDonald’s• 124 – Nike• 241 - Starbucks
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America’s Top Corporations2009 (last year’s list)
• 1. Exxon Mobil - $443 Billion in sales; $45.2 billion in profits
• 2. Walmart - $406 Billion in sales; $13.4 Billion in profits
• 3. Chevron - $263 Billion in sales; $23.9 Billion in profits
• 4. Conoco Phillips - $231 Billion in sales; LOST $17 Billion
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America’s Top Corporations2009
• Rest of the top 10• 5. General Electric
• 6. General Motors (GM) Lost $30.8 B
• 7. Ford Motor Lost $14.6 B
• 8. AT&T
• 9. Hewlett Packard
• 10. Valero Energy
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America’s Top Corporations2009
• Other notables• 17. Verizon
• 19. CVS
• 22. Kroger
• 24. Costco
• 25. Home Depot
• 28. Target
•33. Dell
•35. Microsoft
•36. Walgreens
•52. Pepsi
•56. Best Buy
•60. Disney
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REALLY BIG BUSINESS
• Sometimes corporations merge together with other corporations
• These mergers can create more efficient firms that produce goods at lower prices
• The mergers can also create monopolies!
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TYPES OF CORPORATE MERGERS
• Horizontal Merger–2 or more firms competing in
the same market–Example – McDonald’s
purchases Wendy’s
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TYPES OF CORPORATE MERGERS
• Vertical Merger–2 or more firms involved in the
production of the same product
–Example – McDonald’s buys the trucking company that delivers its meat and buns
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TYPES OF CORPORATE MERGERS
• Conglomerates–When firms buy other firms that
make unrelated products
–More than 3 businesses merged
–No one business in the conglomeration makes a majority of the firm’s profits
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TYPES OF CORPORATE MERGERS
• Which of these types of mergers (horizontal, vertical, conglomerate) do you think government regulators have their closest eye on? Why?
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THE MULTINATIONAL
• Corporations that produce and sell their goods throughout the world
• Headquartered in one country with branches in many other countries
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THE MULTINATIONAL
• They must follow the laws and pay taxes in whatever country they are operating in
• 30 years ago, only the U.S. and England had the largest multinationals
• Now, the largest multinationals are multinational!
• Toyota, Shell, BP
Clever, eh?
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OTHER TYPES OF BUSINESS ORGANIZATIONS
• Franchise–An entrepreneur pays a fee to a
“parent company” for the right to sell that company’s product
–Usually associated with fast food restaurants but is more broad than that (H&R Block, 7-Eleven, Ace Hardware, Jiffy Lube)
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FRANCHISE ADVANTAGES
• Name recognition
• Standardized quality
• Parent company trains and supports the franchise employees
• National advertising
• Financial assistance
• Buying from large parent company can mean lower prices
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FRANCHISE DISADVANTAGES
• Must pay a franchise fee and share profits with the parent company
• Must strictly follow the parent company guidelines for running the business
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OTHER TYPES OF BUSINESS ORGANIZATIONS
• Non-Profit Organizations – an organization that exists for the purpose of benefiting society, NOT for making a profit
• Examples – YMCA, American Red Cross, Bill and Melinda Gates Foundation, The Better Business Bureau
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OTHER TYPES OF BUSINESS ORGANIZATIONS
• Almost all of them provide services instead of goods
• They are exempt from income taxes by government
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LEVELS OF COMPETITION
• Some businesses compete in a market with large numbers of sellers
• Some businesses compete in a market with relatively few sellers
• Some businesses “compete” in a market with no competition
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LEVELS OF COMPETITION
• Thus, the MARKET STRUCTURE for an American business depends on their unique competitive situation
• There are 4 basic levels of market competition – Pure Competition– Monopolistic Competition– Oligopoly– Pure Monopoly
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PURE COMPETITION
• Sometimes called PERFECT COMPETITION
• CHARACTERISTICS– Relatively large number of independently
acting sellers in the market– All the sellers produce the same,
homogeneous product; Consumers make no difference between Product A, B, C, D, etc… (No differentiation)
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PURE COMPETITION
• Sellers make no attempt to differentiate their product from their competitors
• Because there are so many sellers, no one business can increase or decrease their output to affect the market price
• In other words, businesses do not control the price of their product
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PURE COMPETITION
• It is very easy to enter and to leave this type of market
• In other words, no significant legal, financial or technological obstacles exist
• Relatively rare market structure – agricultural goods (farmer’s market)
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MONOPOLISTIC COMPETITION
• Characteristics– Relatively large numbers of sellers
– Sellers try to differentiate their product from others; usually through advertising
– Easy entry to and exit from this market
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MONOPOLISTIC COMPETITION
• The 1st and 3rd characteristics (many sellers, easy entry) represent the “competition” part of monopolistic competition
• The 2nd characteristic (differentiation) represents the “monopolistic” part of monopolistic competition
• Monopolistically competitive industries are more competitive than monopolistic
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MONOPOLISTIC COMPETITION
• How do businesses try to differentiate (other than price) their product from competitors?
• In other words, what is the NONPRICE COMPETITION that takes place among businesses?
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MONOPOLISTIC COMPETITION
• Product Quality – businesses try to convince consumers that there is a real difference in the quality of their product
• Services Offered – Pizza delivery? Same day furniture delivery? Polite workers?
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MONOPOLISTIC COMPETITION
• Location, Location, Location and accessibility –Open 24 hours, close to the interstate, MiniMarts
• Advertising and Packaging – companies try to create brand name loyalty; attractive packaging
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OLIGOPOLY
• A market dominated by a few large producers (they control 75% or more of a market)
• Breakfast Cereals–Big Three
–Kelloggs, Post, General Mills
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OLIGOPOLY
• Automobile Industry– Big Six– Ford, GM, Chrysler, Toyota, Honda, Nissan
• Tobacco• Motion Pictures• Passenger aircraft• Sellers try to differentiate their
products
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OLIGOPOLY
• Oligopolies can form when there are significant barriers to entering a market
• Why is the automobile industry an oligopoly?
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OLIGOPOLY
• Oligopolistic companies have greater control over the price of their product than monopolistic competition or pure competition companies
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OLIGOPOLY
• However, these companies must take into account the reaction of their rivals
• 3 oligopolistic practices that are of concern to government regulators– Price Leadership– Collusion– Cartels
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OLIGOPOLY
• Price Leadership – an influential company takes the lead in announcing price increases that lead the other companies to do the same.
– Sometimes the effect is a price war that hurts producers (but helps consumers)
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OLIGOPOLY
• Collusion – an agreement among the companies to fix prices at a high level in order to maximize profits
• Collusion is illegal in the United States
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OLIGOPOLY
• Cartels – a formal organization of producers that fix output and prices
• Illegal in the U.S.
• OPEC
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Pure Monopoly
• Characteristics–Single Seller – the firm IS the
industry
–Total control over price and output (restrained by the law of demand)
–Entry to this market is not possible
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Pure Monopoly
• Pure monopoly is relatively rare
• “Near” Monopolies exist when a single firm controls 75% or more of a market
• Intel
• Wham-O (frisbees)
• Cable TV companies like Comcast
• Microsoft operating systems
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Types of Monopoly
• Government issued patents – gives a single firm exclusive rights (20 years) to sell a product
• Why?
• Incentive to invent and create
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Types of Monopoly
• Geographic Monopoly – gas station in the middle-of-nowhere Texas