Econ Chapter 7 Section 1A

Section 1: About Business Firms (Powerpoint)

Corporations
1. What two things define a corporation? (p.181)
The corporation can conduct business in its own name in the same way a sole proprietorship
does
The firm is owned by stockholders

2. Who are stockholders? (p. 181)

A person who own shares of stock in a corporation

3. What are assets? (p. 181)

Anything of value to which the firm has a legal claim.

Advantages of Corporations
4. What are some advantages of corporations? (pp. 181–182)
The owners are noir personally liable for their debts
Corporations find it much easier to raise capital to do business
Even if a prominent member of a corporation dies or resigns, the business continues.

5. What is limited liability? (p. 182)

It means that stockholders cannot be sued for the corporation’s failure to pay debts and as n
owner in the firm can only love the amount he/she has invested in the firm.

Disadvantages of Corporations
6. What are some disadvantages of corporations? (p. 182)
Double taxation on its profit
Corporations are complicated to set up

The Corporate Structure

7. What does the board of directors do in a corporate structure? (pp. 183–184)
The BOD decides upon goals and policies of the corporation such as what products to sell and
when, what percentage of the corporation’s profit will go to stockholders, what percentage will
go to modernization ad expansion of the business. It also appoints the corporation’s op officers
that will; actually do the day-to-day running of the business.

Financing Corporate Activity

8. What are the two other avenues corporations can use to borrow money? (pp. 184–185)
Borrowing from banks

Selling bonds: a bond is a statement of debt issued by a corporation that is purchased by a

buyer. The buyer of the debt is promised a profit on the debt he/she bought usually over a
period of time. The corporation is obligated to pay bondholders. The bondholder is essence has
loaned money to the corporation in exchange for a profit on the money loaned.

Issuing stock: when a corporation sells the stock, the buyers become actual part-owners of the
corporation. Purchasing stock is not like granting a loan or purchasing a bond stockholders are
not guaranteed a profit. If the company prospers, they will receive some of the profit, if not the
stock becomes devalued and they may lose part of all of their initial investment.
The Franchise
9. What is a franchise? (p. 186)
A contract by which a firm allows a person or group to use its name and sell its good in
exchange for making certain payments and meeting certain requirements.

10. What is the difference between the franchiser and the franchisee? (p. 186)
A franchise offers a franchise-the franchisee is a person or group that buys the franchise.

How It Works
11. How does a franchise work? (p. 186)
A franchisee pays an initial fee to the franchiser and agrees to pay a percentage of the
franchise’s profits to the franchiser. The franchisee must operate the franchise within the
guidelines set by the franchisor. The franchisee must agree to sell certain goods, train
employees, and account for financial matters in accordance with the guidelines agreed to.

Advantages and Disadvantages

12. What is one advantage and one disadvantage of owning a franchise? (p. 186)
Advantages are: selling a known successful product from a known successful company with
nationwide advertising provided for that product. The risk for these aspects by the franchisee is
minimal.
Disadvantages are: when the franchisor fails to provide the support and guidance necessary for
the franchisee to succeed and when the franchisee fails to provide the quality of service and
product that the franchiser expects.

What Is the Ethical and Social Responsibility of Business?

A)The Nader View

13. What does Ralph Nader think about businesses having ethical and social
responsibilities? (pp. 186–187)
Companies must provide customers with full information about the products being sold
Employees must be treated well- provide a safe place to work and take employee concerns
seriously.
Companies should consider the quality of life issues like benefits, flexible working hours, and
parental leave
Companies should contribute to the betterment of the communities they serve

B)The Friedman View

14. What is Friedman's view regarding a business's social responsibility? (p. 187)
Companies must not use the government to crush their competition
Companies must not lie about their products, making untrue claims about their effectiveness
Companies should seek to profit as much as they can by selling the public something it wants to
buy
Companies should refrain from giving money to charities and focus on selling goods and
services that bring value to the lives of their customers.

Asymmetric Information
15. When does asymmetric information occur? (pp. 187–188)
When one party to a transaction has information that another party to the same transaction does
not have. The withheld info could affect the transaction if known by both parties. It can also
occur in various ways in employer-employer relationships as well. Generally, it’s agreed today
that businesses have the social and ethical responsibilities to offer information that is relevant to
buying a product or taking a job.

Where Will Firms Locate?

At First, Far Apart
16. Where will the consumers shop if two firms are far apart from each other? (p. 188)
At the one that is geographically closet to them.

One Firm Moves, Then the Other

17. If firm 1 moves closer to firm 2, how will this affect each of them? (p. 189)
Firm 1 will initially gain more business at Firm 2’s expense. Firm 2 will need to move in order to
gain back the lost business.

A Pattern Develops
18. What location pattern develops? -In the Real World? (p. 189)
As competition for customers grows between them the closer they will move together initially at
the end, they will be right next to each other. They will do this in order to compete better for
customers.