Economics Chapter 13-14 U.S. has created one of the highest standards of living (how well you live, includes good and services available) U.S. is based on capitalism and controlled supply and demand Capitalism: economy that is based on the right to earn capital (money) and to loose money, “only the strong survive” Capitalist: anyone that wants to make money Law of supply and demand: controls prices of goods and services Supply goes up, price goes down Supply goes down, price goes up Demand goes up, price goes up Demand goes down, price goes down A. B. C. Economy is based on 4 factors. Production-actual making of a product of providing a service Distribution- moving goods and services to where you will sell it Marketing-making your product “known” to the public D. Whole sale-selling to stores of companies Retail- selling to the public Capital –money or investment needed to run a company (research and development) Economic Freedoms in the U.S. Freedom to buy and sell what you want, as long as it is legal (Free market economy is a command economy) Freedom to compete-government can’t tell you where, when and if or if not you can sell your product. Only best survive Some sectors are regulated, ex. Electric utilities Freedom to earn a living –pull yourself up by your own bootstraps, everyone can be rich if they work hard enough Freedom to make a profit charge what the market will bare Freedom to own property House and land Personal Belongings cars, jewels, etc. Ideas in writing (songs, books, etc.) Government gives you a copyright allows only you to make money from it Inventions government gives you exclusive rights if you get a patent expensive to get upwards of $12,000 When we look at businesses they are held: Privately owned by one or more individuals (no stock) ex. Cargill, BST, Coborns Publicly shares of stock traded ex. Coke, Ford, GAP, and RJR Most businesses today are national to international-worldwide market. Business and the way they operate has changed over time. In the beginning a “barter” system people would trade what they made for what they needed. Use of $ allowed to sell your product in exchange for $. Products usually hand made. Cottage System hand made products, no two exactly same, slow and inefficient Industrial Revolution began in early 1800’s New Sources of power allowed this Hydro Steam Gas (fossil fuels) Electricity With the advent of Ind. Rev. businesses were able to produce products more: Cheaply Efficiently Quickly With better quality Bus. Was able to do this with 2 innovated techniques: Interchangeable parts parts from one model will fit all of the same model Assembly –line product product moves down a line and parts are added to it. By time it gets to the end it is complete. During Ind. Rev. Businesses grew to be very large by: Mergers 2 companies becoming 1 sometimes called “Hostile Takeover” Trusts placing controlling interests of several companies in the hands of one Board of Trustees Because some companies got so big, they had “monopolies” (total control) over certain sectors of bus. Ex. Standard oil Eventually the Federal Government had to step in and prevent this by inacting anti-trust laws Broke many of the companies up All business owners are entrepreneurs Businesses can be classified as: Single or sole proprietorship = 1 owner Simplest form to set up, no legal papers but you may want to consult a business attorney Tax rate lowest Deductions are allowed Liable for losses from the business, they can go after all your assets Advantage – your own boss Disadvantage- you can lose everything Partnership- 2 or more involved in ownership of business Requires legal papers, need a lawyer Tax paid is dependent on the percent of the business owned Advantages 2 heads are better than 1 More $ available Disadvantages Upon death of partner the partnership is dissolved, you may have to pay off heirs of partner Each partner assumes unlimited liability for debts incurred in the business **Be careful when picking your business partner! Corporation (Inc.) Advantages of corporation: Not easy to set up, requires a lot of legal paper work, rules vary from state to state May be private of public, if it is public it will have shares (part ownership) of stock you may buy or sell You can only loose what you have put into the company limit on liability –shareholders will be the big losers if it is public Disadvantages Taxed at higher rate Taxed twice A. Income (company income) B. Dividends ( $ given to shareholders quarterly) Private corporations would be run similar to partnerships and sole proprietorships. Public Corporations Run by a board of directors They make decisions regarding the runnings of the company They also pick executive officials including Money for the company can be raised by: CEO (Chief Executive Officer) CFO (Chief Financial Officer) President and others Sales of shares of stock –IPO There is no intrinsic value in the stock, it is worth what someone is willing to pay. Bonds IOU’s that the company issues are guaranteed at a certain % of interest all bonds are rated A, AA, AAA. The higher the rating the less risk, a few have failed. The bottom lines for all companies is profit how much you make after expenses Gross before expenses Net after expenses Business decisions are based on 4 factors: Land Include property and buildings Rent or buy Is it in the right location? Capital does the company have enough money to do what it wants? Labor will the company have enough workers, will they have to educate them? How will they be paid Wages hourly rate, overtime Salaries usually act yearly, paid every 2 weeks, some amount of $ no matter how many hours you put in Productivity amount of work complete in an hr./day Management do you have the right people to get the job done A good manager will: Take charge Be assertive Tell his or her workers that they did a good job Profit is what business owners want and they must consider what they can make as their overhead (cost of product made).