ECONOMICS – CHAPTER 7 & 8 NAME________________________________________ BLOCK_____

Market Structures / Business Organizations

Market Structure #1 – Perfect Competition * Many sellers

* Many buyers

* Standardized product or service * No control over price

* No ability to dominate the market in the short term or long term

* Freedom to enter the market

Perfect competition is rare.

Fruits & vegetables are examples of products in this market

Market Structure #2 – Monopoly * One seller

* Many buyers

* One product with no substitutes * Complete control over price

* Dominate the market in the short and long term

* No opportunities to enter the market

Monopolies are as rare as perfect competition

Monopolies are seen as a form of market failure

There are three ways that monopolies develop…

1) Control a basic resources

2) Become the sole supplier of a product

3) Government allows it
It isn’t illegal to be a monopoly, but it is illegal to act like one

The government has the power to control and decentralize

businesses that are found guilty of violating Anti-Trust Laws

2 Major Anti-Trust Laws that are still in effect today…

1) Sherman Anti-Trust Act (1890)

2) Clayton Anti-Trust Act (1914)

Market Structure #3 – Monopolistic Competition

* Many buyers * Many sellers

* Similar but differentiated products

* Limited control over price

* Dominated the market in the short but not the long term

* Easy to enter the market

Businesses try to make their products stand out

The rivalry between firms is constant and intense

Market Structure #4 – Oligopolies

* Many buyers * Few sellers

* Differentiated or standardized products

* Some control over price

* Can dominated the market in the short and long term

* Little freedom to enter the market

Brand loyalty is a big factor in these markets

Start-up expenses are the biggest barrier to entering oligopolistic markets

Problems with Oligopolies

With only a few producers, collusion is a constant threat to the market Collusion is where

firms informally agree to set production levels or prices

This kind of cooperation can lead to cartels which have formal

agreements

This is illegal!!!!

CHAPTER 8 – BUSINESS ORGANIZATIONS

3 Forms of Business…

1) Corporation 3) Sole Proprietorship

2) Partnership

Sole Proprietorship
A business that is owned and managed by a single person

About 73% of the business in the U.S. are proprietorships

They account for about 15% of total business income

Advantages of Sole Proprietorships
* Easy to start up

* Few regulations

* Full control

* Owner is the sole receiver of the profits

* Easy to discontinue

Disadvantages of Sole Proprietorships

* Unlimited personal liability

* Limited access to resources

* Lack of permanence

Partnerships
Business owned and controlled by two or more people who share

responsibilities

About 8% of the businesses in the U.S. are partnerships

They account for 13% of the total business income in the U.S.

Types of Partnerships
1) General Partnership – partners equally share responsibilities and liabilities

2) Limited Partnership – only one partner is a general partner

3) Limited Liability Partnership - all partners are limited partners

Advantages of Partnerships
* Easy and inexpensive to set up

* Little government regulation or special taxation

* Shared decision making

* Larger pool of capital to draw from

Disadvantages of Partnerships
Unless the business is an L.L.P, at least one partner has unlimited liability

Potential of conflict between partners on both personal and

business issues

Corporations
A publically traded company that is owned by stockholders

About 20% of businesses in the U.S. are corporations

They account for 72% of the nation’s business income

Advantages of Incorporation
* Limited liability of owners

* Ownership can be transferred

* Ability to attract new capital

* Long life
Disadvantages of Incorporation
* Expensive and difficult to incorporate

* Subject to double taxation

* Easy for owners to lose control of the company

* Heavily regulated

Organization of a Typical
Corporation

Corporate Combinations
* Horizontal Mergers
Combination of two or more firms that sell the same good or service in the same market

The mergers between Chase and Bank One & HP and Compaq are examples of this

* Vertical Mergers
Two or more firms that are involved in different stages of production of the same

good/services

The mergers between ABC and Disney & Pepsico and Taco Bell, Pizza Hut and KFC are

examples

* Conglomerates
Business combination merging three or more businesses that make unrelated products

Samsung and PepsiCo are examples of conglomerates

* Multinational Corporations
A large corporation that produces and sells its goods around the world

MNC’s provide jobs and products around the world

MNC’s can unduly influence the culture and politics in the countries they operate
Franchises
A business franchise is a semi-independent business that pays fees

to a parent company

In return, the business has exclusive rights to sell a certain product or service in a given area

Advantages of a Franchise
* Standardized quality

* National advertising

* Financial assistance

* Centralized buying power

* Management training and support

Disadvantages of a Franchise
* Limited product line

* Strict operating standards and purchasing restrictions

* High franchise fees and royalities

Extra Notes / Important Info: