Explorations in

Economics

Alan B. Krueger & David A.

Anderson

Chapter 7: Business Organizations

-Module 19: Businesses and the
Economy
-Module 20: Types of Businesses
-Module 21: How Businesses Grow
-Module 22: Business Ethics

MODULE 19:
BUSINESSES AND THE
ECONOMY
KEY IDEA:
The lure of profits motivates entrepreneurs to
take risks and start businesses.

OBJECTIVES
To describe how the workings of a business firm
differ from the workings of a market.
To explain why and how entrepreneurs start
businesses.
To discuss the risks and rewards of running a
business.

WHY ARE THERE

BUSINESS FIRMS?
The incentive to earn an
income, coupled with a demand
for goods and services, creates a
willingness to start a firm.
A firm can provide income, selfworth, and community needs.

THE ROLE OF
ENTREPRENEURS

Entrepreneurs
can be
inventors and/or
innovators.

WHAT MAKES A
SUCCESSFUL
ENTREPRENEUR

Visionary sees a business opportunity when others may

not
Innovative transforms ideas into new products,
processes, or businesses
Willing to take risks puts savings and reputation on
the line by starting a new venture
Optimistic is realistic but confident of business success;
Self-motivated is disciplined and persistent willing, and
able to solve problems
Attentive learns from experts, colleagues, and
customers and recognizes and adapts to market conditions
Organized coordinates and manages resources
efficiently

IMAGINE YOURE AN
ENTREPRENEUR
The Tutor Shop
1. How would you earn revenue?
2. Would you collect a fee from the tutor after
each session with a student?
3. Would you charge the tutors a one- time fee
when you first connect them to each student?
4. How would you find and recruit good tutors?
5. How would you inform those who need tutors
about the service?

MODULE 19
REVIEW
What does it mean to
be
A. Visionary?
B. Innovative?
C. Willing to take risks?
D. Optimistic?
E. Self- motivated?
F. Attentive?
G. Organized?
H. An entrepreneur?

KEY IDEA:

MODULE 20:
TYPES OF
BUSINESSES

Entrepreneurs consider the advantages and

disadvantages of different organizational types
before they form a new business.
OBJECTIVES:
To identify the important features of sole
proprietorships, partnerships, and corporations.
To evaluate the advantages and disadvantages to
the owners of each form of business organization.
To assess the importance of each form of business
organization to the economy.
To explain other ways to organize a business.

SOLE
PROPRIETORSHIP
A sole proprietorship is aS
business firm
owned by one person, the proprietor.

1.
2.
3.
4.

How to Start a Sole Proprietorship

Register the name of your business
Check and conform to regulations
Obtain any necessary licenses and permits.
Keep records and prepare tax forms.

SOLE
PROPRIETORSHIP
Advantages of
Disadvantages of
SSole
Sole
1.Proprietorships
Easy start- up
2. Ease of
decision making
3. Ownership of
profits
4. Tax benefits
5. Intrinsic
rewards

1.Proprietorships
Burden of
responsibility
2. Difficulty raising
funds
3. Unlimited liability

PARTNERSHI
PS

A partnership is a for- profit business

firm owned by two or more people,
called partners, each of whom has a
financial interest in the business.
Small businesses like retail stores,
restaurants and contractors may
operate as partnership.
Large law firms, medical practices
and business consulting firms will
most often be organized as
partnerships.

PARTNERSHI
PS
Advantages
of
Partnerships
1. Larger pool of
financing
2. Shared decision
making.

Disadvantages of
Partnerships
1. Unlimited liability for
general partners
2. Disagreements among
partners

Corporations
A corporation is a business firm
that is itself a legal entity.
Owned by stockholders who
purchase stock. The shares of
stock represent ownership.
A private corporation is owned
by one person or a small group of
individuals.
Public corporations are held by

Corporations
Advantages
of
Corporations
1. Limited
liability for
stockholders
2. Ability to raise
funds by issuing
shares
3. Ability to raise
funds by issuing
bonds
4. Rapid growth

Disadvantages of
Corporations
1. Expensive start- up
costs
2. Delays in decision
making
3. Low nonmonetary
rewards
4. Divided ownership of
profits
5. Tax treatment

THE THREE MAJOR

BUSINESS TYPES:
AN OVERVIEW

COMPARING THE COMMON

TYPES OF BUSINESS
ORGANIZATIONS

OTHER TYPES OF
BUSINESS
ORGANIZATIONS
A limited liability company
(LLC) is a hybrid
business organization that combines features of
corporations, partnerships, and sole proprietorships.
A business franchise consists of a parent
company and numerous associated businesses that
sell a standardized good or service.
A cooperative, or coop, is a business owned by its
members and operated to supply members and
others with goods and services.
A nonprofit organization is a legal entity formed
to carry out a not- for- profit mission.

MODULE 20
REVIEW
What is a
A. Sole proprietorship?
B. Partnership?
C. Corporation?
D. Corporate bond?
E. Business franchise?
F. Nonprofit organization?
G. Limited liability company?
H. Cooperative?

KEY IDEA:

MODULE 21:
HOW BUSINESSES
GROW

Business organizations have many avenues for

growth.

OBJECTIVES
To explain how firms can grow by reinvesting profits.
To identify sources of outside funding used for
business growth.
To recognize the role of mergers and acquisitions in
business growth.

GROWTH FROM
REINVESTING
PROFITS

GROWTH FROM
OUTSIDE FUNDING
A firm can borrow funds by:
issuing and selling
bond
issuing and selling
new shares of stock.

MERGERS AND
ACQUISITIONS
A merger occurs when two firms legally join
together to form a single, larger firm.
An acquisition is the purchase by one firm
of a controlling interest in another firm.

A horizontal merger combines two firms that

produce the same type of product.
A vertical merger combines firms that operate
at different stages in the production of a
good.

MERGERS AND
ACQUISITIONS
A conglomerate is a single business enterprise
formed by combining firms from unrelated
industries.

GOING GLOBAL
A multinational corporation is a company
that operates in more than one country.

GOING GLOBAL

MODULE 21
REVIEW
What is
A. After- tax profit?
B. Acquisition?
C. Income statement?
D. Horizontal merger?
E. Vertical merger?
F. Depreciation?
G. Conglomerate?
H. Multinational corporation?

MODULE 22
BUSINESS ETHICS
KEY IDEA:
Increasingly, businesses are expected to pursue not
only profits but the ethical treatment of workers,
consumers, communities, and the environment.

OBJECTIVES:
To explain two viewpoints in the controversy over
corporate responsibility.
To describe how public scrutiny of business behavior
has increased in modern times.
To identify ways in which firms can make decisions
about questionable behavior.

THE VALUE OF
DOING RIGHT
Business ethics is the
examination of standards for
right and wrong behavior by
firms.
Business Ethics in the 2000s:
-Corporate Scandals
-Financial Crisis of 2008

BUSINESS ETHICS
AT THE FIRM
Ethical businesses do the
following
Develop a clear vision of company
values and mission
Publish a code of business conduct
Conduct ethics training programs
Reward employees who exhibit
ethical behaviors
Obey national and international laws.

CORPORATE SOCIAL
RESPONSIBILITY IN THE
GLOBAL ECONOMY
Globalization is the broadening access to
products, people, businesses, technology,
ideas, and money across national borders
to create a more integrated and
interdependent global economy.
Corporate social responsibility (CSR)
refers to the duties and obligations
corporations have to different
stakeholders.

MODULE 22
REVIEW
What is
A. Business ethics?
B. Globalization?
C. Corporate social
responsibility?