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Economics Unit 2 Interactive Review
Terms in this set (123)
What is a market structure?
A model of competition among businesses in the same industry.
One characteristic of perfect competition is that..
Sellers offer a standardized product.
What is a price taker?
A business that accepts the market price determined by supply and demand.
The interaction of supply and demand sets the equilibrium price when...
Neither buyers nor sellers join together to influence price.
The wholesale markets for some agricultural precepts come close to perfect competition...
Because there are many producers of the same products.
A group that acts together to set prices and limit production is a...
How did De Beers maintain control of the diamond market for most of the 20th Century?
It bought up the diamonds from smaller producers to resell.
What kind of monopoly exists when a firm controls a manufacturing method or invention?
The government grants patents...
To allow inventors to recover the costs of developing the invention or technology.
Why must monopolies be careful not to set prices too high?
Demand for the product will drop.
What type of market structure does the breakfast cereal industry have?
Monopolistic competition occurs when..
Sellers offer similar, but not standardized products.
Using factors such as style, service, and giveaways to attract customers is called...
The purchase of one company by another is called...
To evaluate a merger, the government...
Considers the market share of the firms before and after the merger.
The practice of setting prices below cost to drive smaller competitors out of a market is known as...
What agency sets safety standards for many types of products sold to the public?
Consumer Product Safety Commission
For consumers, one benefit of deregulation is that...
The prices of products generally drop.
One characteristic of monopolistic competition is that...
Producers have similar but differentiated products.
Why is it hard for firms in an oligopoly to exit a market?
Their operations are too big and complex to sell off easily.
An economic model that helps economics examine the nature and degree of competition among businesses in the same industry
- The level of competition in a market has major impact on the prices of products: the more sellers compete for your dollars, the more competitive prices will be.
- Each market structure had benefits, problems
•each creates different balance of power between producers and consumers
Ideal model of a market economy, economists assess how competitive market is by where it falls short.
- Consumer has most influence, little choice.
• Many buyers and sellers
• Standardized Product
• Freedom to Enter and Exit Markets
• Independent Buyers and Sellers
• Well-informed Buyers and Sellers
Perfect Competition: EX
* Smith Family, sells raspberries at Montclair's Farmers Market
* Competition in corn & beef
*basic agricultural products:
One of most common market structures; Many sellers offer similar products.
- Consumer has some influence, most choice.
• Many Sellers and Many Buyers
• Similar but Differentiated Products
• Limited Control of Prices
• Freedom to Enter or Exit Market
Monopolistic Competition: EX
* Hamburger market
- different restaurants to choose from, no seller has enough share to control the market
- brand names = loyalty
- quality of product
Less competitive than monopolistic competition; Market structure with only a few sellers offering similar product.
- Consumer has limited influence, some choice.
• Few Sellers and Many Buyers
• Standardized or Differentiated Products
• More Control of Prices
• Little freedom to Enter or Exit Market
* Breakfast Cereal: 4 large firms control 80% of the market
- less competition
* Soft drinks: Coke, Pepsi, 7-Up, RC Cola
Market structure with one seller; No substitutes for product
- Producers have the most control.
• Only One Seller
• A Restricted, Regulated Market
• Control of Prices
*De Beers cartel, held virtual monopoly on diamond market most of 20th century
- 80% of market in uncut diamonds
- used this power to control price and create entry barriers
Cost of production lowest, with only one producer.
• In some markets, inefficient to have companies competing
EX: Water Company
- Public utilities that require complex systems. Economies of scale: average production cost falls as production grows
- Government both supports and regulates
Government owns and runs or permits only one producer.
•Government runs some businesses that provide goods and services that private firms cannot do, or do not want to provide because of low profits.
EX: The Postal Service
- The postal service has solve right to deliver first-class mail.
- New services and technologies now compete: private delivery companies, fax, e-mail, online bill paying
One firm owns invention, technology, and method.
• Monopoly lasts for time limit of patent or until substitute invented.
- Patent let Polaroid keep Kodak out of instant photography market: simpler cameras, digital cameras, and quick processing reduced its market
No other sellers within a region.
• Physical Isolation: no other supplier in are, lets owner control prices.
• Very small market; may not support two businesses of same type.
EX: Professional Sports
- Sports leagues tie teams to cities, regions; limit number of teams. Owners can charge high ticket prices and sell team merchandise.
Market Structures (VFC)
An economic model that allows economists to examine competition among businesses in the same industry
Perfect Competition (VFC)
The ideal model of a market economy
Standardized Product (VFC)
A product that consumers soldier identical in all essential features to other products in the same market
Price Taker (VFC)
A business that cannot set the prices for its products but, instead, accepts the market price set by the interaction of supply and demand
Imperfect Competition (VFC)
Market structures that lack one of the conditions needed for perfect competition are examples of this
A market structure in which only one seller sells a product for which there are no close substitutes
A formal organization of sellers or producers that agree to act together to set prices and limit output
Price Maker (VFC)
A business that does not have to consider competitors when setting its prices
Barrier to Entry (VFC)
Something that hinders a business from entering a market
Natural Monopoly (VFC)
A market situation in which the costs of production are lowest when only one firm provides output
Government Monopoly (VFC)
A monopoly that exists because the government either owns and runs the business or authorizes only one producer
Technological Monopoly (VFC)
A monopoly that exists because the firm controls a manufacturing method, an invention, or a type of technology
Geographic Monopoly (VFC)
A monopoly that exists because there are no other producers or sellers within a certain region
Economies of Scale (VFC)
A situation in which the average costs of production falls as the producer grows larger
A legl registration of an invention or a process that gives the inventor the exclusive property rights to that invention or process for a certain number of years.
Monopolistic Competition (VFC)
Market structure in which many sellers offer similar, but not standardized, products
Product Differentiation (VFC)
The attempt to distinguish a product from similar products
Non-price Competition (VFC)
Using factors other than low price--such as style, service, advertising, or give aways-- to try and convince customers to buy one product rather than another
A market structure in which only a few sellers offer a similar product, and is less competitive than monopolistic competition
Market Share (VFC)
Percent of total sales in a market
Even though most make little money, what is one reason most businesses in the United States are sol proprietorships?
They are easy to open and close.
How do business organizations help their community?
They provide jobs and pay taxes.
Why do sole proprietorships often have trouble getting start-up funds?
Banks are less willing to lend money to untried businesses.
How did Mary Kay Ash encourage her beauty consultants to make more sales?
She rewarded them with cars, jewelry, and other incentives.
Which is a disadvantage of sole proprietorships?
Owners are personally responsible for all business debts.
A business in which at least one partner is liable only for the funds he or she has invested is a..
One advantage of partnerships is..
The potential for specialization.
In what way are partnerships different from sole proprietorships?
Disagreements among owners can lead to problems running the business.
Limited liability partnerships...
Are common in areas where malpractice can be a problem.
A vertical merger combines companies...
Involved in different steps of producing or marketing a product.
A contract issued by a corporation to repay borrowed money, plus interest, on a fixed schedule is a...
A public company...
Issues stocks that can be freely bought and sold.
Unlike partners and sole proprietorships, a corporation...
Is a legal entity separate from the people who own and run it.
What is one disadvantage of corporations?
A business operated for the shared benefit of the owners, who are also the customers is a..
Which of the following best describes a franchisee?
Gets training in running the business from the franchiser.
The most common type of franchised business is...
How do nonprofit organizations raise most of their money?
Selling donations, grant sand membership fees.
Service co-ops are organizations...
That offer their members a business service.
Types of Business Organizations
Most of the producers in a market economy are business organizations, commercial or industrial enterprises and the people who work in them. The purpose of most business organizations is to earn a profit.
- Businesses vary in size and are organized differently. The American free enterprise system allows producers to choose the kind of business organization that best suits their purpose.
Owned and managed by single person:
- 70% of U.S. businesses, but generate only 5% of all sales
• Not governed by as many regulations as other types of businesses
• Have limited life -- close if owner dies, retires, or leaves business
• Owners have unlimited liability-- responsible for all losses, debts
Sole Proprietorship EX:
Barts Cosmic Comics:
• Steps Bart followed to set up and run a new business
- raised funds to rent space, stock store through savings, loans
- obtained licenses, site permit; registered name
- ran advertisements, promotions to get customers
- paid back loans; began earning profit; expanded
Sole Proprietorships ADV.
• Easy to open or close as long as owner settles all bills
• Must meet few regulations; possibly going, labor laws for employees
• Owner makes own decisions, controls business; personal satisfaction
• Owner keeps all profits
Sole Proprietorships DIS.
• Have limited funds, especially at start-up
• Have limited life
• Have unlimited liability
- owner personally responsible for all debts
Business co-owned by two or more people
- partners agree on division of responsibilities, profits, and losses
• Advantages, disadvantages similar to those of sole proprietorships
• Some differences because owners work together
Found in all areas of business
- very common in professional and financial services
• Easy to start up and dissolve
• Few regulationsL legal agreement; UPA
• More funds means easier to get loans, attract employees
• Joint decision making: partners bring different perspectives
• Partners can specialize: promotes efficiency
• Unlimited liability
- partners risk personal savings and property to cover debts
• Potential for conflict if many partners must agree on decisions
• Limited life --if partner leaves or joins, new agreement must be drawn
Most common type
- Partners share responsibilities, profits, debts, losses equally
At least one limited partner
- not involved in running business
- liable only for funds he or she invested
Must have general partner who runs business, is liable for all debts
- money for business comes from limited partners
Limited Liability Partnership
All partners are limited
- not responsible for liabilities of other partners
Not all businesses can register as LLPs
- only those in which malpractice can be an issue
Stockholders have rights to profit, limited liability
- Limited Liability: Owners liability for debts and losses is limited
- Unlimited Life: Corporation continues to exists even if owners change
F & S Publishing, Inc
• Owners have no personal liability; only assets of business at risk
• Owners hire lawyers to file legal documents to incorporate
• State government grants corporate charter:
- registers name, address, purpose; specifies amount of stock can sell
• Stockholders elect board of directors which hires corporate officers
• Can raise money in various ways:
- borrowing from banks, selling more stock, issuing bonds
• Professional managers likely to produce higher profits
• Limited liability--stockholders, directors, officers protected
• Unlimited life--business operates as before if stockholders change
• Starting up: Time consuming, difficult, expensive; paperworks, lawyers
• Heavy regulation, specifically for public companies:
- annual SEC reports, quarter;y financial reports, stockholder meetings
• Both profits and dividends taxed; some small corporations excluded
• Decisions made by board; founders must give up some control
Shares of ownership in a corporation.
Part of a corporation's profit paid out to stockholders.
Issues stock that can be freely bought and sold.
Controls who can buy or sell its stock
Contract issued by corporation
- Promises to repay borrowed money, plus interest on fixed schedule
Theory: diversified businesses protect patent company
PracticeL difficult to manage unrelated companies
*1960s Gulf and Western in combinations, clothes, mines, food: eventually sold all except entertainment, publishing - became Viacom
Multinational, or transnational, corporations increase globalization
• Benefits: provide jobs, products; spread technology; pay taxes
- Help raise standard of living of poor countries
• In countries with lax regulations, factories may cause problems:
- pollution; long work hours; unsafe conditions
Acts like a business but purpose is to benefit society
- Include charities, professional associations, labor unions, museums
Business that licenses the right to sell its products
An Almost Independent Business:
• After working as an assisting manager, Tim wants to run own restaurant
• Concerns: lacks enough experience, start-up funds
• Likes organic juice and sandwich franchise; decides to apply
• High level of independence
• Franchiser provides training in running business and products/ other material at low cost
• Franchiser pays for national and regional advertising
• Franchisee must invest own money to start business
• Must share some of the profits with franchiser
• Does not have full control of business
- must buy only franchiser's materials
- must sell only franchiser's products
Sole Proprietorship (VFC)
A business owned and managed by a single person.
Limited Life (VFC)
A situation in which a business ceases to exists if the owner dies, retires, or leaves the business for some other reason.
Unlimited Liability (VFC)
A situation in which a business owner is responsible for all the losses, debts, and other claims against the business.
A business co-owned by two or more people or "partners" who agree on how responsibilities, profits, and losses will be divided.
General Partnership (VFC)
A partnership in which partners share responsibility for managing the business and each one is liable for all business debts and losses.
Limited Partnership (VFC)
A partnership in which at least one partner is not involved in the day-to-day running of business and is liable only for the funds he or she has invested.
Limited Liability Partnership (VFC)
A partnership in which all partners are limited partners and not responsible for the debts and other liabilities of other partners.
A business owned by individuals, called shareholders or stockholders.
Shares of ownership in the corporation.
Part of the the profit that the company pays out to stockholders.
Public Company (VFC)
A corporation that issues stock that can be freely bought and sold.
Private Company (VFC)
A corporation that retains control over who can buy or sell the stock.
A contract the corporation issues that promises to repay borrowed money, plus interest, on a fixed schedule.
Limited Liability (VFC)
Situation where the business owner's liability for business debts and losses is limited.
Horizontal Merger (VFC)
Describes the joining of companies that offer the same or similar products or services
Vertical Merger (VFC)
Describes the combining of companies involved in different steps of production or marketing of product or service.
Result of a merger of companies that produce unrelated goods or services.
A business made up of semi-independent businesses that all offer the same products or services.
A type of business operated for the shared benefit of the owners, who are also its customers.
Nonprofit Organization (VFC)
An institution that acts like a business organization, but its purpose is usually to benefit society, not to make a profit.
Tucker Notes: Corporations
- has to put together board of directors and prepare to sell stocks: PUBLIC CORPORATION
- selling stocks when people want to invest
- board of directors taking over control from Tucker, don't believe he is making the right choices: sent him on a publicity you
- taking control from other heads, not just Tucker
- regulated by SEC
Tucker Notes: Oligopoly
- car industry: oligopoly. hard to break into industry
- advertisement = key: people are branded and want the product they see
- "the big three" car companies, yet factory was still given to tucker
*GM, Ford, Chrysler: few firms
- high start up cost: 50,000$
- cannot get clay or steel at reasonable price: barrier entry (needed to buy a steel plant to get by)
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