Microeconomics
Business Operations
Warm Up
• What is microeconomics?
• Microeconomics
– Human behavior/choice
– The individual/firm
Why Does it Matter?
• We interact with businesses on a daily basis
• Some of us work for businesses
• List 3 firms/stores you have done business
with in the last month
Types of Businesses
• 3 forms of business ownership (free markets)
– Sole proprietorships
– Partnerships
– Corporations
Sole Proprietorships
• Owned by 1 person
– Makes all decisions
– Receives all the profits/losses
– Legally responsible for the debt
• Ex. Family farms, carpet cleaning service, etc.
• Name a business that is owned by one person
Advantages
• Easy to form and dissolve
• All decision making power resides with owner
– Decisions are made quickly
• The profits of the firm is only taxed once
– Profit you earn is considered income
– Income tax
Disadvantages
• Unlimited liability
– Personal assets may be used to pay of firm debt
– Car/house may have to be sold to pay off debt if
you go out of business
• Can’t borrow funds easily; banks do not want
to loan money to success depends on 1
person
• When owner dies, business does too!
Partnership
• Business that is owned by two or more coowners
• Share profits/debts
• Examples: medical offices, law offices
Advantages
• Specialization
– Each owner does what he/she is good at for the
business
• Only income tax applies to profits
Disadvantages
• General Partner
– Share in debt of firm
– Limited partner does not (doesn’t manage either)
• Decision making can be
complicated/frustrating
Corporations
• Legal entity that can
– Conduct business in its own name and in the same
way an individual does
– Is owned by stockholders
• Share of ownership
• Examples: Disney, Google, Apple
Advantages
• Owners (stockholders) are not personally
liable for the debt of the corporation
– Limited liability
• Can raise large sums of money by selling stock
Disadvantages
• Double Taxes
– Corporate income tax on profits
– Income on stockholders from dividends
• Complicated to set up
The Corporate Structure
• Stockholders are the most important people
• They elect the board of directors
– Cast as many votes as you have shares of stock
– Annual vote
• Board of directors
– Determine corporate policies and goals
– What products to sell
– What % of profits go to shareholders (dividends)
– Appoints President, VP, Treasurer
Financing Corporate Activity
• Can borrow money from banks
• Only corporations can
– Sell bonds
– Issue (sell) additional shares of stock
• Bondholders must be paid back the debt
The Franchise
• Contract by a firm (usually a corporation)
• Lets a person use its name and sell its
products
• Must make payments to them and agree to
certain conditions
• Examples: McDonald’s, Burger King, Wendy’s,
Pizza Hut, Domino’s Pizza, Taco Bell
How a Franchise Works
• A franchisee (person) pays an initial fee
– $45,000 for McDonald’s (excludes building/supplies)
• Annual Payments to Franchiser
– 12.5 % of annual profits
• Meet requirements
– Cook Big Mac for same length
• In return, franchisee gets to use company name,
sell products, financial assistance, assistance in
training new employees, national advertising
Advantages
• National advertising
• Successful business
Disadvantages
• Sometimes does not provide the financial and
training support you expect
• Occasionally does not meet the quality
standards you expect
Ethical/Social Responsibility
• Do businesses have an ethical and social
responsibility to the public?
Yes – Ralph Nader
• Provide customers with full information about
their products
• Treat employees well
• Quality of life (flex time)
• Donates funds to meet social needs in
community
No – Milton Friedman
• Only 1 responsibility for businesses!
• Use resources and activities designed to
increase profits
– Without deception/fraud
• A business should not give away its profits and
does not have any social responsibility to the
community
Where will they locate?
• Similar firms have incentive to locate near
each other (competition for customers)
• Examples:
– Gas stations
– Car dealerships
– restaurants
Questions
• The owners of which types of business
organizations face unlimited liability?
• Which type of business is the largest?
• Do you think the initial fee for franchises is the
same? Why or why not?
• Do you agree or disagree with Milton
Friedman’s position on ethical/social
responsibility? Explain.
Project
• Open your own franchise
• With 1 partner, choose a franchise
• Answer questions
– What do you need to qualify to open one?
– Cost to open
– Pros/Cons
• Present your findings
Stossel
Quiz