Businesses

Types and Market Structures

 Circular Flow

■ Think back to the circular flow diagram:

■ What do businesses buy?
■ What do they sell?
■ What is their goal?
 Types of Businesses (3)

1. Sole Proprietorship
■ Owned by one person
■ 72% of all businesses in U.S.
■ 4% of all U.S. sales
■ Advantages
■ Easy to start
■ Total control
■ All profits

■ Disadvantages
■ Unlimited personal liability
■ (Personally) Responsible for all debts
■ Lack of permanence
■ Tough to borrow
■ Low level employees
2. Partnership
■ Owned by 2 or more persons
■ 8% of all businesses in U.S.
■ 12% of all sales
■ Advantages
■ Easy to start
■ Shared decision making and funding
■ More human capital

■ Disadvantages
■ Unlimited/limited(sometimes) personal liability
■ Conflict
3. Corporations
■ Owned by stockholders
■ 20% of all businesses in the U.S.
■ 80% of sales in the U.S.
 ■ Advantages
■ Able to sell stocks and bonds (raise capital)
■ Limited liability
■ Owners and business are separate entities
■ Better employees
■ Long life

■ Disadvantages
■ Difficult to start
■ Many regulations
■ Double taxation
 Other Types of Businesses

■ Franchises
■ Corporate Owned (Chain Stores)
■ Franchisor & Franchisee
■ Corporation provides store, training and materials
■ Franchisee pays start up fee
■ Also pays annual royalties to corporation
■ Common in fast food industry
 Other Types of Businesses
■ Cooperative
■ Owned by members
for their shared
benefit

■ Examples:
■ Book Clubs
■ Credit Unions
■ Food Co-Ops
Non-Profit Organizations
■ Non-Profit
Organizations
■ Usually benefit society

■ Examples:
■ Museums
■ Public schools
■ YMCA
■ American Red Cross
 Types of Markets (4)
■ Competitive Markets
■ Perfect Competition &
Monopolistic
Competition
■ Characteristics
■ Many firms/sellers
■ Few barriers to entry
■ Same or similar
products
 Competitive Markets
Examples
■ Agriculture (PC)
■ Stock Sales (PC)
■ Retail Stores (MC)
■ Fast Food (MC)
 Non Price Competition &
Differentiation
■ Occurs in Mon. Comp.
Mkts.
■ Location
■ Advertising
■ Trends/Features
■ Service Level
■ Result
■ Limited Lasting Control
over price
 Competitive Markets

■ Results
■ Most efficient
■ Lowest prices
■ Smallest profits
 Noncompetitive Markets

■ Oligopoly & Monopoly

■ Characteristics
■ High barriers to entry
■ Government regulation
■ Research and development
■ Start up costs
■ Few sellers as a result
 Oligopoly

■ 2-5 firms dominate

 Monopoly

■ 1 firm controls industry

■ Discovery
■ Patent
■ Govt. created
 Noncompetitive Markets

■ Results
■ High prices
■ Large profits
■ Least efficient