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 co-owners

• 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