Econ Chapter 3

Explain how mergers improve efficiency.

Mergers can diminish cost and increase buying power.

Who are really the owners of a corporation?

Stockholders

Depreciation is added back to net income to get what?

cash flow

Why have some multinational companies been criticized?

paying low wages to workers, exporting scarce natural resources, and driving out local businesses.

Professional associations set

standards for those in the profession and influence government policies on issues concerning members' interest.

Many nonprofit organizations incorporate to what?

take advantage of a corporation's unlimited life and limited liability

Disadvantages of corporations:

- a charter is expensive - ownership and management are separated so shareholders have little say in running the business - corporate income is taxed twice - subject to government regulation.

A company may merge with another to what?

- grow faster - become more efficient - acquire or deliver a better product - eliminate a rival - or change its image

Partnership

A business jointly owned by two or more persons. It is the least and has the second smallest proportion of sales and net income.

Sole Proprietorship

A business run by one person. It is the smallest type of business organization in size, yet the most numerous and profitable.

Nonprofit Organizations In what ways does a consumer cooperative differ from a service cooperative?

A consumer co-op offers goods to its members, whereas a service co-op offers services.

Multinational

A corporation with manufacturing and service operations in several countries, which are subjected to each nation's business regulations.

What spells out how the partners divide up the profits or losses?

Articles of the partnership document

Government corporations have boards of directors, but...

Congress's money rather than investor's money supports their work.

First way a business can grow:

It can grow by reinvesting some of its profits.

Discuss the structure and features of the corporation.

It is a separate legal entity with all the rights of the individual. It possesses a charter and shares of stock that are sold to investors. Investors purchase common stock or preferred stock.

Business Growth What advantages might a multinational bring to a host nation?

Multinationals transfer new technology, generate new jobs, and produce tax revenues for the host nation.

Vertical Merger

The joining of firms involved in different stages of manufacturing or marketing.

Why do many people prefer to deal with credit unions rather than banks?

They can borrow at better rates.

List three examples of cooperative associations.

consumer: a food co-op; service: a credit union; producer: a farmers' co-op

Provide examples that illustrate the government's direct and indirect roles as an economic institution.

direct: police and fire protection, schools, court systems; indirect: regulation of public utilities and quasi-monopolies, subsidies

Conglomerate is composed of what?

four or more businesses, each making unrelated products, none of which is responsible for a majority of its sales.

Identify five reasons why firms merge.

grow faster, increase efficiency, acquire new product lines, eliminate rivals, or change corporate image

Businesses may be organized as what?

individual proprietorships, partnerships, or corporations.

State governments may offer what to help industries relocate or tax credits to draw investments?

industrial development bonds

Business associations are what?

industries or trade associations that represent specific kinds of businesses. Some business associations, such as the Better Business Bureau, help protect the consumer

Business revenue can be used to what?

invest in factories, machinery, or new technologies.

Cooperative

is voluntary association of people who carry on an economic activity that benefits its members.

When a corporation wants to introduce a potentially profitable but risky product, it frequently sets up a separate company that has its own corporate structure. Why do you think the corporation does this?

limited liability-the first corporation limits its exposure by setting up a separate corporation

Businesses grow through what?

merging with other companies and by investing in the machinery, tools, and equipment used to produce goods and services.

Nonprofit organization

operates in a businesslike way to promote the collective interests of its members rather than to seek financial gain for its owners.

Identify the characteristics and organization of the sole proprietorship.

owned by one individual; all decisions made by owner; owner receives all profits, responsible for debts, losses; limited life

Investors who buy common or preferred stock in a corporation become what?

owners of the firm

Explain why partnerships are able to attract more capital than sole proprietorships.

partnerships are bigger, better established, have a better chance of getting a bank loan, and new partners bring financial capital

Government plays a direct role in the economy when its agencies

produce and distribute goods and services to consumers such as the Tennessee Valley Authority (electricity), and the U.S. Postal Service (stamps and mail delivery).

A nonprofit organizations is in business to what?

promote its members' collective interests, not to seek financial gain.

Producer cooperatives help members, such as farmers, do what?

promote or sell their products

Advantages of partnerships:

- the ease of start-up - ease of management - no special taxes on a partnership - easier to raise capital through bank loans or new partner - larger size aids efficient operations - easier to attract skilled employees.

When firms merge...

one gives up its separate legal identity.

Second way a business can grow:

By engaging in a merger-a combination of two or more businesses to form a single firm.

Describe the difference between a nonprofit institution and other forms of business organizations.

Nonprofits do not seek financial gain.

Corporations receive a charter, or government permission to do what?

create a corporation, which includes details about stock ownership

Cash flow:

the bottom line, or the real measure of business profit.

There are three main forms of business organizations in the economy today:

the sole proprietorship, the partnership, and the corporation.

Describe the purpose of a labor union.

to work for its members' interests

Disadvantages to Sole Proprietorships:

- the owner has unlimited liability - it is hard to raise financial capital - owner may not be able to hire enough personnel or stock enough inventory to operate efficiently - owner may have limited managerial experience - hard to attract qualified employees - business has limited life and legally stops existing when the owner dies or sell the business.

Corporation

A business organization recognized by law as a separate legal entity with all the rights of an individual.

Describe how a firm can generate funds internally to grow and expand.

A firm can reinvest revenue from sales into the company in the form of new plants, equipment, and technologies.

Explain why a corporation might choose to become a conglomerate.

Its overall sales and profits will be protected from isolated economic happenings.

Horizontal Merger

The joining of firms that make the same product.

Before reinvesting, a business must estimate its what?

cash flow.

What are the benefits and drawbacks of multinationals to their host countries?

- benefits: help spread new technology, generate new jobs, produce tax revenues for host countries - drawbacks: may exploit workers, export scarce natural resources, or adversely interfere with local business

Identify the purpose of the different types of nonprofit organizations.

- community/civic organizations: provide goods and services and promote a common good - cooperatives: carry on activities that benefit members - labor, professional, and business organizations: promote interests of members - government: regulate economy

Describe the different types of cooperatives.

- consumer: buy goods in bulk/offer members reduced prices - service: provide service instead of goods - producer: help members promote/sell products

Advantages of corporations:

- ease of raising capital - professionals may run the firm instead of the owners (shareholders) - owners have limited liability; business's life is unlimited - easy to transfer ownership.

Advantages to Sole Proprietorships:

- ease of start-up - ease of management - owner gets all the profits - business itself pays no income taxes - taxes only on the owner's personal income - psychological satisfaction of owning one's business - ease of closing the business

Disadvantages of partnerships:

- partners are responsible for the acts of each and every partner, except in a limited partnership where the limits are spelled out - limited life of partnerships ends if a partner leaves potential for partner conflicts.

General partnerships

A type of business in which all partners are involved in the management and finances.

Limited partnership

at least one partner is not involved in management. This partner may have helped to finance the business.

Federal and state governments regulate what?

interest rates and utility rates

If the nonprofit organization has money after its expenses are paid, what is done with is?

its board of directors may apply the surplus to other projects that further the organization's mission.

Most businesses use scarce resources to what?

produce goods and services in hopes of earning a profit for their owners

Government plays an indirect role when it

regulates public utilities or when it grants money to people in the form of Social Security and student financial aid.

Labor unions

represent workers' interest and negotiate with management through collective bargaining.

Service cooperatives, such as credit unions, offer what>

services to its members at lower rates.

Producer and worker cooperatives are associations in which:

the members join in production and marketing to lower costs for their members' benefit.