Explain what a Franchise is and give an example

Types of Businesses

Free EnterpriseFree Enterprise gives businesses the right to choose what, how, and for whom to produce. Often businesses make similar production choices, leading to competition.

Competition is the economic rivalry that exists among businesses selling the same or similar products.

Competition is important because it encourages producers to lower pricesimprove their products or develop new ones.

Adam SmithEconomist Adam Smith lived in the late 1700s. He firmly believed in free enterprise and allowing self interest to direct individuals and businesses.

Smith’s book The Wealth of Nations stresses Laissez Faire economics, or keeping government regulations out of economic decisions.

Instead, Adam Smith says the “invisible hand” of self interest should guide the economy.

The invisible hand

Business startupsBusinesses are created by entrepreneurs. An entrepreneur is someone who seek profits but accept the risks and uncertainty when they combine the factors of production.

Types of businessIn free market (free enterprise) systems we see many different types of businesses:

-Sole Proprietorship-Partnership-Corporations

Most businesses are Sole Proprietorships, followed by corporations and finally partnerships

EntrepreneursEntrepreneurs are people who starts new businesses. They must be aware of laws, be willing to assume risk and have capital to start.

Most Entrepreneurs start sole proprietorships which gives them great control over the business, but also places them at risk for liability if the business fails, is sued or has other issues.

Sole ProprietorshipThis is the oldest, simplest and most common form of business. These businesses are owned and operated by one person. Advantages:

-easy start, full control, exclusive profit

Disadvantages:-liability, sole responsibility, limited growth/

life span

PartnershipsBusiness is owned and controlled by 2 people. Often times, partnerships exist between family members Advantages:

-easy start, job specialization, shared losses and decisions

Disadvantages:-liability, conflict, lack of longevity, share profits

CorporationsCommonly referred to as Big Business, in corporations the owners and business operators are separate from each other. Legally, corporations are treated as individuals and can own property, pay taxes and take loans.

Owners are shareholders, earning dividends, or a portion of the profits. Advantages:

-limited liability, longevity, separate management from owners

Disadvantages:-difficult to obtain corporate status, easy to anger shareholders, profit is taxed twice (once by the business and again by the shareholders).

Corporate Advantages/ Disadvantages Corporations exist to keep owners and operators separate. This has some pros and cons.Advantages:

-limited liability, longevity, separate management from owners

Disadvantages:-difficult to obtain corporate status, easy to anger shareholders,

profit is taxed twice (once by the business and again by the shareholders).

Investing in a CorporationCorporations are considered separate from the shareholders who own and invest in the company. This means that the corporation itself is held legally liable for the actions and debts the business incurs.

Some corporations are publically traded, meaning anyone can buy a share of the company. The more shares you own the more say you have. Each company only has so many shares which are bought and sold at stock exchanges, like Wall Street.

Many people invest in stocks to make money. As a corporation makes money, the price of their stock goes up, and the stockholder makes money (by selling their shares)

Corporate organizationThere are several forms of corporate organization:-Horizontal combination- a merger between two or more companies

producing the same good or service

-Vertical combination- a merger between two or more companies involved in different production phases of the same good or service (steel companies owns the mines and the steel mills)

-Conglomerate- a merger of companies producing unrelated products

-Franchise- an enterprise that uses the original company’s name to sell goods and services.

Unequal competitionWhile many economists follow Adam Smith’s advice for free enterprise there are challenges. When competition is no longer equal the consumer will be hurt.

Oligopolies and Monopolies can hurt economic systems because they restrict competition among businesses.

Oligopolies Oligopolies are market structures with only a few large sellers controlling most production of goods and services.

An Oligopoly exists when there are certain conditions:-only a few large sellers-sellers offer identical or similar products-other sellers cannot enter the market easily

Oligopoly problemThe lack of competition means the oligopoly can keep their prices similar. There are times of price wars where the oligopoly members try to lower prices to gain market share. Often these price wars are followed by a return to higher prices.

It is illegal for the oligopoly companies to work together to set prices. However, simply aligning prices to the similar products is legal.

For instance: Wendy’s, McDonalds and Burger King all have a dollar menu

Monopolies Monopolies are market structures with only a single seller controlling the prices of a good or service.

A Monopoly exists when there are certain conditions:-only a single large seller-no close substitute goods available-other sellers cannot enter the market easily

Monopoly problem The lack of competition means the monopoly could raise prices and consumers would have no other options. However, the government monitors monopolies to ensure they are not taking advantage of the consumers.

Some monopolies develop naturally, as a result of having a large economy of scale. That is, the seller’s large size allows them to use their resources more efficiently.

Utility (gas and electric) companies are examples of natural utilities because competitors cannot easily enter the market.

Costs of BusinessRemember, businesses mostly operate for profit. Profit is the amount of money remaining after producers have paid all of their costs. There are two types of business costs: Fixed and variable

Fixed Costs- an expense that does not vary from month to month regardless of the individual's or business’s output (ex: rent, salaries, interest on loans)

Variable Costs- Costs that change directly with a change in the output, typically rising and dropping as production increases or decreases (ex: hourly wages, utility bills, raw materials)

Review: Opportunity CostRemember, economics is all about the efficient use of scarce resources. The Production Possibilities Frontier shows all the possible combinations of making two goods. If we choose to use resources to make rubber ducks, we wont be able to use those same resources to make tires.

When we sacrifice one good to make something else we call it trade off. Opportunity cost is the cost of the trade off, or the value of the next best alternative given up.

Let’s say you go to the mall with $50 and you need to decide between a 2 shirts or a pair of sneakers. You choose to purchase the sneakers, your opportunity cost would be 2 shirts.

What you gained What you lost

Task1) Most people would agree that price fixing trusts and monopolies

are a negative to the economy. However, according to Adam Smith’s Laissez Faire and invisible hand, restricting these strong businesses will hurt the economy. Pick a side, do you think we should continue restricting monopolies, or should the government stay out of the economy and let equilibrium develop over time.

2) What are the advantages of corporations compared to sole proprietorships? Disadvantages?

3) Identify an example for each of the following (cannot use the examples in the notes):

a) Horizontal combinationb) Vertical combinationc) Conglomerated) Franchise

4) Use the pie charts to answer: What discrepancies do you see when looking at the pie charts? Does the information make sense? What does it mean for wealth in America?

Task

Use the pie charts on the right to answer questions in the task