Forms of business ownership
Objectives:
• Identify and explain forms of business
ownership.
• Compare and contrast the similarities,
differences, advantages and
disadvantages of each form
Three Types of Business
Organizations
Sole Proprietorship
Partnership
Corporation
Sole Proprietorships
• Facts
• The Good
– Sole Receiver of Profit
– Easy to Start Up
– Full Control
– Least Regulated
– Easy to Stop Operations
Sole Proprietorships
• The Bad
– Unlimited Personal Liability
– Lack of Resources
– Lack of Permanence
Partnerships
• The Types
– General: 2 or more (infinite)
– Limited
– Limited Liability
– Examples: Law offices, medical practices
• Ben-Jarvis Green-Ellis a.k.a “the law firm”
Partnerships: The Good
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•
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•
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Ease of Start Up
Little Regulation
Specialization of Owners
Larger Pool of Capital
Taxation Advantages
Partnerships: The Bad
• Unlimited Personal Liability
• Potential for Conflict
• Division of Assets & Profit
Corporations
• Types
– Closely Held
– Publicly Held
• The Good
– Stockholders Equity
– Flexibility, Portability of Stock
– Potential for Growth (Stocks/Bonds)
– Shareholders Knowledge
– Longer Lasting
Corporations: The Bad
• Difficulty of Start Up
– Certificate of Incorporation
• Double Taxation
• Loss of Control for Stockholders
• More Regulation - SEC
Other Terms
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•
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•
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Conglomerate
Multi-National
Franchise
Consumer / Producer / Service Coop
Non-Profits
Economies of Scale
• economies of scale are the cost
advantages that enterprises obtain due to
size, with cost per unit of output generally
decreasing with increasing scale
Fixed ______
Costs are spread out over
as______
more units of output.
Objectives:
• Identify and explain the different
economic market structures
• Compare and contrast the similarities
and differences of the economic market
structures
Market Structures
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•
•
Monopoly
Oligopoly
Cartel
Monopolistic Competition
Monopsony
STRUCTURE
Monopoly
Meaning
A situation in which a single company or group owns all or
nearly all of the market for a given type of product or service
Prices
High if true monopoly (illegal), government regulates prices if
legal.
Absence of competition =high prices & low quality.
Characteristics
1 firm, no competition. Although monopolies may be big
businesses, size is not a characteristic of a monopoly. A small
business may still have the power to raise prices in a small
industry
Barriers to Entry
Governments attempt to prevent monopolies from arising
through the use of antitrust laws.
Sources of Power
Control market. When company increases prices, others may
(control over the terms and enter market if they’re able to provide same good or substitute,
at lower price
conditions of exchange)
Examples
Public monopolies: ComEd, Nicor. Patents on inventions are
monopolies for a period of time (allows recoup of R&D costs).
STRUCTURE
Oligopoly
Meaning
An economic market condition where numerous sellers have
their presence in one single market.
Prices
Moderate/fair pricing due to competition in market. But much
higher than perfect competition (where there is a large
number of buyers and sellers)
Characteristics
A small number of firms dominate the industry. These firms
compete with each other based on product differentiation,
price, customer service etc.
Barriers to Entry
Barriers to entry are very high as it is difficult to enter the
industry because of economies of scale.
Sources of Power
(control over the terms and
conditions of exchange)
Market making ability because very few firms in industry.
Each firm can significantly influence the market by setting
price or production quantity.
Examples
Media co. (radio/tv), wireless providers, grocery store
chains, big box stores, cable companies
STRUCTURE
Cartel
Meaning
An explicit, formal agreement between firms in an
industry to fix price and production quantity.
Prices
Unusually high prices, fixed by cartel members
Characteristics
A small number of firms dominate the industry. Prices
and production quantities are fixed. Product is
undifferentiated.
Barriers to Entry
Barriers to entry are very high as it is difficult to enter the
industry because of economies of scale.
Sources of Power
(control over the terms
and conditions of
exchange)
Market making ability by an explicit agreement between
the dominant players in the industry.
Examples
OPEC, Federal Reserve
STRUCTURE
Monopolistic
Meaning
All firms produce similar yet not perfectly
substitutable products
Prices
Price setter and highly elastic.
Characteristics
Many producers and many consumers in the
market, no business has total control over
market price. Consumers perceive that there are
non-price differences among the competitors'
products.
Few barriers exist to entry or exit
Barriers to Entry
Sources of Power
(control over the terms and
conditions of exchange)
Some degree of market power.
Examples
Restaurants, cereal, clothing, shoes
Government Intervention
• Sherman Anti-Trust Act of 1890
– Outlawed mergers and monopolies that limit
trade between states.
• Breaking up monopolies
– Standard Oil in 1911
– AT&T in 1982
• Regulating Unfair Business Practices
– Microsoft in 2001
• Blocking Mergers
– Supermarket merger research.
Current Trend towards “Deregulation”
• Starting in 1980’s, Congress began to deregulate certain industries.
– Airlines, trucking, banking, railroads, natural
gas, TV broadcasting.
Game Theory
Objective:
• Identify and explain the price setting
motives of producers in an oligopoly
market.
What is Game Theory
• Determines the actions that “players” should take to secure the
best outcomes for themselves in a wide array of “games.”
• Games range from chess to child rearing and from tennis to
takeovers. But the games all share the common feature of
interdependence.
• Outcome for each participant depends on the choices
(strategies) of all.
• In so-called zero-sum games the interests of the players conflict
totally, so that one person’s gain always is another’s loss.
•
More typical are games with the potential for either mutual gain
(positive sum) or mutual harm (negative sum).
Game Theory Debrief
• Prisoner situation
– Gamble is not confess
– Safe option is to confess, must protect ourselves
• Applied to businesses
– Coke/Pepsi: make small profit, avoid losing money
– Car companies: limit Q on lot = prices high
• “Sorry, we only have a few”
– Limit production, lower supply, higher price
• Best solution collectively is an inferior solution
individually
• See more:
http://www.econlib.org/library/Enc/PrisonersDilemma.ht
ml
Oligopoly Game
Objective:
• Apply the strategies of oligopolies
while competing in the oligopoly game
simulation.
Oligopoly Game
Directions:
1. Each person is in a group of 4-5, an
oligopoly. Each firm is producing widgets
with the goal of profit maximization.
2. You will begin with $100 capital and
receive a new production cost card each
round
Oligopoly Game
Directions:
3. The forecast of demand will be displayed
on the board. This is just a projection but is
pretty accurate. An actual demand chart will
be posted after you turn in your production.
4. Each team determines production and
turns in cards with the number of widgets
they’re producing this cycle (round).
Oligopoly Game
Directions:
5. Actual demand will be posted.
6. Record actual profit on your balance sheet
(all team members do this).
7. Get new cost cards and repeat process for
each round.
GOAL: Produce the most profitable amount of
widgets
Oligopoly Game
Objective:
• Apply the strategies of oligopolies
while competing in the oligopoly game
simulation.