Chapter 2 Section 3 Capitalism (free enterprise) Private citizens own factors of production. – Many are entrepreneurs 5 characteristics of a Free Enterprise Economy – Economic Freedom – Private Property Rights – Profit Motive – Voluntary Exchange – Competition 1

Economic Freedom What individuals can do: – People have the Freedom to choose their occupation and employer. – People can choose to own their own business or work for someone else – People may leave their job for better opportunities. What businesses can do: – Hire the best workers – Produce what they believe will be most profitable – The right to charge what they believe is profitable

Voluntary exchange The interactions, transactions, and decisions of buyers and sellers are – Willful – Free 3

Private property rights the privilege of an individual to own and control their possessions as they wish. – Tangible goods – Intangible Ideas Skills/abilities Treatment (use or abuse) 4

Profit an organization is better off at the end of a business period than they were when they started. – Company A had $10 million more at the end of the second quarter (April to June) than they had at the beginning. – Company A had $10 million less at the end of the second quarter (April to June) than they had at the beginning = loss 5

Profit motive the force or compulsion that makes a person or organization get involved in business: – Improve their material well-being/wealth 6

Competition sellers struggle to attract consumers – LOWER COSTS – Vary products – Advertising Buyers compete to find the best products at the lowest price. 7

Consumers Rule the Market Consumer sovereignty the consumer has the role of deciding – What she/he wants to buy Includes design and function – What she/he will pay – When she/he will purchase “The customer is always right.” 8

Government in the Economy Protector – Protecting citizens from false advertising, unsafe food and drugs, environmental hazards, and unsafe automobiles. Provider and Consumer – The government provides services and consumes products from the private sector. Regulator – Preserving competition and overseeing interstate commerce.

Mixed economy (modified private enterprise economy) economic decisions are made by private consumers and businesses Government intervenes and regulates in some cases: – Civil rights – Labor rights – Public safety 10

Chapter 3 Business Organizations Section 1 Sole proprietorship/proprietorship a business owned and run by one person 1/6 of American businesses are such Advantages – Easy to start and operate – Easy to manage – Keep all profits – Only pays one income tax – Psychological satisfaction Disadvantages – Unlimited liability – Difficulty to raise financial capital – Limits size and efficiency – Limited managerial experience – Problem attracting qualified employees – Limited life 11

Unlimited liability owner is personally responsible for all losses and debts of the business Owner may lose all possessions if he/she goes bankrupt or loses a lawsuit. 12

Inventory a counting (stock) of finished good and parts in supply (reserve). Businesses have the goods they are selling on the shelves where consumers choose. Keep a stock of extra goods to replace items chosen by consumers. Inventory needed to keep track of: – What is available – What needs to be ordered To prevent running out. – What has been sold Also helps decide if a good will continue to be sold by the business. 13

Limited life a business (firm) ceases if the owner – dies – Quits – Sells the business off – Your crowd dies out 14

Partnership a business jointly owned by two or more persons – General partnership – Limited partnership Examples – HP – Ben & Jerry 15

Partnership Advantages – Easy to establish – Easy to manage – Lack of special taxes – Can attract financial capital – Larger in size – Can attract top talent Disadvantages – Each partner is fully responsible for the acts of all partners – Limited Life – Potential conflict between partners

Limited partnership partners have an agreed-upon amount of responsibility and liability. – Often based on amount of investment in the company. 17

Bankruptcy a court-granted permission to an individual or company to cease or delay debt payments – Will result in reduction or denial of future credit 18

Corporation a form of business Recognized by law A separate legal entity (like a separate person) Has the rights of an individual to – Buy and sell property – Enter into legal contracts – Be sued Charter – government document allowing a corporation to exist Run by a board elected by the stock holders – Headed by a chairman, selected by the board. 19

Corporation Advantages Ease of raising financial capital Directors can hire professional managers Limited liability for owners Unlimited life Ease of transferring ownership Disadvantages Difficulty and expense of getting a charter Most owners/shareholders have little voice in decisions after picking the board of directors Taxes More government regulation than other forms of business 20

Stock Ownership certificates in the firm Stockholder, shareholder: An investor owning stock in a firm. Dividend: A check for part of the firm’s earnings in time of profit: – Amount depends on number of shares owned. 21

Types of Stocks Common Stock – Usually receives one vote per share of stock. This vote is used to elect a board of directors who decide policy and goals for the company. – If a common Stockholder has a majority of stocks they can control the company. Preferred Stock – These stockholders receive dividends before common stockholders, and receive their funds back first if the company goes out of business – Do not have voting rights in the company.

bond written promise to repay the amount borrowed at a later date. Issued by…… – Industrials, – Utilities, – Transportation, – Banks, – Finance (non-bank). One method a company uses to raise financial capital – Bought by investors Principal Amount of money borrowed Interest Price paid for the use of another’s money, a fee for borrowing the principal. 23

Bonds are cheap! Bonds tend to have much lower returns (interest rates) than stocks. Why would anyone buy bonds at such low interest rates? – Most investors sell their bonds to other investors long before the term is up – Other investors are looking for safer (slower) ways to make/protect money Usually part of many other investments (portfolio), that might have risky stocks – If an investor loses on a risky stock, they have money safe in bonds. 24

Double taxation The corporation pays a tax on its earnings – Just like any person – Reduces the shareholders dividend Shareholders must pay a tax on their dividend earnings from the corporation. 25

Quick Write What are some of the benefits and draw backs of capitalism?