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Explorations in Economics Alan B. Krueger & David A. Anderson - Chapter 7: Business Organizations Module 19: Businesses and the Economy Module 20: Types of Businesses Module 21: How Businesses Grow Module 22: Business Ethics MODULE 19: BUSINESSES AND THE ECONOMY KEY IDEA: The lure of profits motivates entrepreneurs to take risks and start businesses. OBJECTIVES • To describe how the workings of a business firm differ from the workings of a market. • To explain why and how entrepreneurs start businesses. • To discuss the risks and rewards of running a business. WHY ARE THERE BUSINESS FIRMS? The incentive to earn an income, coupled with a demand for goods and services, creates a willingness to start a firm. A firm can provide income, self-worth, and community needs. THE ROLE OF ENTREPRENEURS Entrepreneurs can be inventors and/or innovators. WHAT MAKES A SUCCESSFUL ENTREPRENEUR • Visionary— sees a business opportunity when others may not • Innovative— transforms ideas into new products, processes, or businesses • Willing to take risks— puts savings and reputation on the line by starting a new venture • Optimistic— is realistic but confident of business success; • Self-motivated— is disciplined and persistent willing, and able to solve problems • Attentive— learns from experts, colleagues, and customers and recognizes and adapts to market conditions • Organized— coordinates and manages resources efficiently IMAGINE YOU’RE AN ENTREPRENEUR “The Tutor Shop” 1. How would you earn revenue? 2. Would you collect a fee from the tutor after each session with a student? 3. Would you charge the tutors a one- time fee when you first connect them to each student? 4. How would you find and recruit good tutors? 5. How would you inform those who need tutors about the service? MODULE 19 REVIEW What does it mean to be… A. Visionary? B. Innovative? C. Willing to take risks? D. Optimistic? E. Self- motivated? F. Attentive? G. Organized? H. An entrepreneur? MODULE 20: TYPES OF BUSINESSES KEY IDEA: Entrepreneurs consider the advantages and disadvantages of different organizational types before they form a new business. OBJECTIVES: • To identify the important features of sole proprietorships, partnerships, and corporations. • To evaluate the advantages and disadvantages to the owners of each form of business organization. • To assess the importance of each form of business organization to the economy. • To explain other ways to organize a business. SOLE PROPRIETORSHIPS A sole proprietorship is a business firm owned by one person, the proprietor. How to Start a Sole Proprietorship 1. Register the name of your business 2. Check and conform to regulations 3. Obtain any necessary licenses and permits. 4. Keep records and prepare tax forms. SOLE PROPRIETORSHIPS Advantages of Sole Proprietorships 1. Easy start- up 2. Ease of decision making 3. Ownership of profits 4. Tax benefits 5. Intrinsic rewards Disadvantages of Sole Proprietorships 1. Burden of responsibility 2. Difficulty raising funds 3. Unlimited liability PARTNERSHIPS A partnership is a for- profit business firm owned by two or more people, called partners, each of whom has a financial interest in the business. Small businesses like retail stores, restaurants and contractors may operate as partnership. Large law firms, medical practices and business consulting firms will most often be organized as partnerships. PARTNERSHIPS Advantages of Partnerships Disadvantages of Partnerships 1. Larger pool of financing 2. Shared decision making. 1. Unlimited liability for general partners 2. Disagreements among partners Corporations A corporation is a business firm that is itself a legal entity. • Owned by stockholders who purchase stock. The shares of stock represent ownership. • A private corporation is owned by one person or a small group of individuals. • Public corporations are held by many people and can be freely bought and sold. Corporations Advantages of Corporations Disadvantages of Corporations 1. Limited liability for stockholders 1. Expensive start- up costs 2. Ability to raise funds by issuing shares 3. Low nonmonetary rewards 3. Ability to raise funds by issuing bonds 5. Tax treatment 4. Rapid growth 2. Delays in decision making 4. Divided ownership of profits 6. More reporting requirements THE THREE MAJOR BUSINESS TYPES: AN OVERVIEW COMPARING THE COMMON TYPES OF BUSINESS ORGANIZATIONS OTHER TYPES OF BUSINESS ORGANIZATIONS A limited liability company (LLC) is a hybrid business organization that combines features of corporations, partnerships, and sole proprietorships. A business franchise consists of a parent company and numerous associated businesses that sell a standardized good or service. A cooperative, or coop, is a business owned by its members and operated to supply members and others with goods and services. A nonprofit organization is a legal entity formed to carry out a “not- for- profit” mission. MODULE 20 REVIEW What is a… A. Sole proprietorship? B. Partnership? C. Corporation? D. Corporate bond? E. Business franchise? F. Nonprofit organization? G. Limited liability company? H. Cooperative? MODULE 21: HOW BUSINESSES GROW KEY IDEA: Business organizations have many avenues for growth. OBJECTIVES • To explain how firms can grow by reinvesting profits. • To identify sources of outside funding used for business growth. • To recognize the role of mergers and acquisitions in business growth. GROWTH FROM REINVESTING PROFITS GROWTH FROM OUTSIDE FUNDING A firm can borrow funds by: …issuing and selling bond …issuing and selling new shares of stock. MERGERS AND ACQUISITIONS • A merger occurs when two firms legally join together to form a single, larger firm. • An acquisition is the purchase by one firm of a controlling interest in another firm. A horizontal merger combines two firms that produce the same type of product. A vertical merger combines firms that operate at different stages in the production of a good. MERGERS AND ACQUISITIONS A conglomerate is a single business enterprise formed by combining firms from unrelated industries. GOING GLOBAL A multinational corporation is a company that operates in more than one country. GOING GLOBAL MODULE 21 REVIEW What is… A. After- tax profit? B. Acquisition? C. Income statement? D. Horizontal merger? E. Vertical merger? F. Depreciation? G. Conglomerate? H. Multinational corporation? MODULE 22 BUSINESS ETHICS KEY IDEA: Increasingly, businesses are expected to pursue not only profits but the ethical treatment of workers, consumers, communities, and the environment. OBJECTIVES: • To explain two viewpoints in the controversy over corporate responsibility. • To describe how public scrutiny of business behavior has increased in modern times. • To identify ways in which firms can make decisions about questionable behavior. THE VALUE OF “DOING RIGHT” Business ethics is the examination of standards for “right” and “wrong” behavior by firms. Business Ethics in the 2000s: -Corporate Scandals -Financial Crisis of 2008 BUSINESS ETHICS AT THE FIRM Ethical businesses do the following… • Develop a clear vision of company values and mission • Publish a “code” of business conduct • Conduct ethics training programs • Reward employees who exhibit ethical behaviors • Obey national and international laws. CORPORATE SOCIAL RESPONSIBILITY IN THE GLOBAL ECONOMY Globalization is the broadening access to products, people, businesses, technology, ideas, and money across national borders to create a more integrated and interdependent global economy. Corporate social responsibility (CSR) refers to the duties and obligations corporations have to different stakeholders. MODULE 22 REVIEW What is… A. Business ethics? B. Globalization? C. Corporate social responsibility?