Review Unit 3: Market Structures/Business Organizations
· Competitive Price Theory: Model to measure market performance - competitive market allocates resources efficiently - Sellers and buyers both compete.
· Perfect Competition: Large # of buyers and sellers, products are identical, buyers/sellers act independently, buyers/sellers are well-informed, buyers/sellers are free to enter, conduct, and leave business. Supply and demand set equilibrium price and each firm sets a level of output that will maximize its profits at that price.
· Imperfect Competition: Market structures that lack one or more of the ingredients above.
· Monopolistic Competition: Meets all condition for perfect competition except identical products. Product differentiation (real/imagined differences between products - Jean companies), nonprice competition (advertising, giveaways), sell within narrow price range but try to raise prices to maximize profits.
· Oligopoly: Few very large sellers dominate the industry. Oligopolists may collude which is illegal by price-fixing or dividing up the market for guaranteed sales. Can engage in price wars, pushing price well below cost of production for a period of time. Final prices usually higher than perfect and monopolistic competition.
· Monopoly: Only one seller of a particular product - price makers rather than price takers. Natural monopoly provides good/service because it minimizes the overall costs - public utilities. Geographic monopoly when location cannot support 2 or more such businesses - small town drugstore. Government monopoly - uranium processing.
· Market Failures: Inadequate competition caused by mergers and acquisitions; Inadequate information; resource immobility; Externalities - especially negative ones; Public goods
· Antitrust Legislation: Sherman Antitrust Act (1890) first US law against monopolies; Clayton Antitrust Act (1914) outlawed price discrimination; Federal Trade Commission (1914) cease and desist orders to stop unfair business practices; Robinson-Patman Act (1936) outlawed special discounts to some customers.
· Government Regulation: Public disclosure; indirect disclosure on websites; Modified free enterprise
· Sole Proprietorship: Business run by one person. They are the smallest, but most numerous and profitable types of businesses. Advantages: Easy management, owner gets all profits, business itself pays no income taxes (only business owner's personal income is taxed), psychological satisfaction of owning a business, and easy to close. Disadvantages: Owner has unlimited liability, hard to raise financial capital, might be difficult to hire personnel or stock enough inventory, owner might have limited managerial experience, hard to attract qualified employees, limited life, and business dies when owner dies or sells the business.
· Partnerships: Business jointly owned by two or more persons. They are the least numerous and has the second smallest proportion of sales and net income. Advantages: easy start-up, easy management, no special taxes on partnership, easier to raise financial capital, larger size, and easier to attract skilled employees. Disadvantages: Partners responsible for acts of all the partners, limited life if a partner leaves, and potential for partner conflicts.
· General Partnership: All partners are involved in the management and sales.
· Limited Partnership: At least one partner is not involved in management - That partner may have helped to finance the business.
· Corporations: A business organization recognized by law as a separate legal entity with all the rights of an individual. They receive a charter (permission from government) to create a corporation that includes details of stock ownership. Investors who buy common/preferred stock are the owners of the firm. Advantages: Ease of raising capital, professionals may run the firm, owners have limited liability, business life is unlimited, and easy to transfer ownership. Disadvantages: A charter is expensive, ownership and management are separated so shareholders have little say in running the business, corporate income is taxed twice, and subject to government regulation.
· Government and Business Regulation: Federal and state governments play indirect role in economy when they regulate interest rates and utility rates, provide Social Security and student financial aid. Play direct role when they produce goods/services for consumers - Tennessee Valley Authority and US Postal Service.
· Growth Through Reinvestment: A portion of a businesse's cash flow should be used to invest in factories, machinery, or new technologies.
· Growth Through Mergers: When firms merge, one gives up its separate legal identity. The purpose is to grow faster, become more efficient, acquire/deliver a better product, eliminate a rival, or change its image.
· Horizontal Merger: Joining of firms that make the same product.
· Vertical Merger: Joining of firms involved in different stages of manufacturing or marketing.
· Conglomerate: Composed of 4 or more businesses that each make unrelated products - General Electric.
· Multinational: A corporation with manufacturing and service operations in several countries. They are subject to each nation's business regulations - Walmart.
· Community and Civic Organizations: A nonprofit organization is in business to promote its members' collective interests, not to seek financial gain. Nonprofit organizations incorporate to gain unlimited life and limited liability. If the nonprofit organization has $ after expenses are paid, its board of directors may use the surplus for other projects to further the organization's mission - American Legion and Lion's Club.
· Cooperatives: A voluntary association of people who carry on economic activity that benefits its members.
· Consumer Cooperatives: Buy food and other necessities in bulk. Members donate their time and pay lower prices for goods - Recreational Equipment Inc. (REI).
· Service Cooperatives: Offer services to its members at lower rates - Teacher Federal Credit Union.
· Producer Cooperatives: Help members promote/sell their products - Farmers.
· Labor Unions: Represent workers' interests and negotiate with management through collective bargaining.
· Professional Associations: Set stadards for those in the profession and influence government policies on issues concerning members' interests - National Council for the Social Studies and National Council on Economic Education.
· Business Associations: Trade associations that represent specific kinds of businesses - The Better Business Bureau helps to protect the consumer.
· Stock Exchanges: Organized stock exchanges include the NYSE and AMEX - however most stocks are traded over-the-counter (OTC) through the NASDAQ.
· Dow-Jones Industrial Average: Dow-Jones Industrial Average is an index of 30 stocks used to measure the stock market's performance.
· Standard and Poor's 500: Index of 500 representative stocks to measure market performance.
· Bulls/Bear Market: Bull market is when prices are rising; Bear market is a market when prices are falling.