Business Organizations CE.E.3.3 – Analyze various organizations in terms of their role and function in the U.S. economy.

Business Organization * single / sole proprietorship Definition * a business owned or started by one person / family ** most common form

Advantages * all profits go to the owner * very easy to start Disadvantages * the owner takes all the risks * unlimited liability – an owner’s personal property can be taken to pay for business debts * limited life – the business only lasts for the life of the owner and must be reorganized when the owner is gone

Business Organization * partnership Definition * a business started by 2 or more people who enter into a legal agreement together (either general partnership or limited partnership) ** least common form

Advantages * easier to raise $ (can pool resources) * share expenses / costs of production * share work / responsibility (example: doctors or lawyers) Disadvantages * share profits * unlimited liability (in most cases) – partners are responsible for the others’ debts should something happen to them

Business Organization * corporation Definition * a business started by getting a charter from the government * is a legal entity and is separate from the owners ** most revenue-generating business organization

Advantages * limited liability – owners can only lose what they invest in the company * unlimited life * much easier to raise $ through the sale of stock or corporate bonds (a loan to the firm) Disadvantages * harder to start / establish * share profits with many (stockholders) * owners have no / little say in how the business is run ** Board of Directors make decisions

Obtaining resources for a business: 1. loans – borrowing $ and paying back the amount you borrowed (principle) + interest (payment for using someone else’s $) factors influencing the rate of interest paid: 1. risk the bank is taking 2. length of the loan 3. availability of $ prime rate – the lowest / best interest rate a bank offers its customers 2. bonds – a loan given to a company by individuals who receive a piece of paper (a bond) promising repayment with interest at a particular date  the maturity date

3. stocks – units / shares of ownership in a company; a company raises $ by selling shares to individuals 2 ways to make $ from stocks: 1. dividends – piece of the profit given for each share of stock you own 2. capital gains - $ made when you sell a stock for more than you paid for it example: bought stock at $ 10 / share sold stock at $ 15 / share capital gain = $ 5 / share ** can have capital loss, too  when you sell a stock for < you paid for it

costs of production – all the expenses a business pays to produce / sell a product 2 types: fixed – costs which do not change with the # of products made / sold example: rent or insurance variable – costs which do change with the # of products made / sold example: employees’ wages or raw materials profit = when the money brought in (revenue) is > the money put out (costs of production)

average fixed costs: the total amount of fixed costs ÷d by the # of units / products sold ** can be reduced if a business sells more items 2 ways a business can do this: * sell different types of products (diversify) * open more hours / day price of a product P - variable costs - VCaverage fixed costs = - average fixed costs - AFC fixed costs / # of units profit per item PPI AFC = FC #

Suppose a store sells shirts for $30 each and has fixed costs of $100 a day. If it sells 10 shirts a day, it would have an average fixed cost (AFC) of $10 per shirt.AFC = FC / # $100 in fixed costs divided by 10 shirts = $ 10 per shirt AFC If the store could increase its sales to 20 shirts a day by lowering the price to $28 per shirt, it could reduce its AFC per shirt to $5. AFC = FC / # $100 in fixed costs divided by 20 shirts = $ 5 per shirt AFC If the store had variable costs (VC) of $ 12 for every shirt it sold, its profit per shirt could be determined. Price (P) $ 30 - VC - 12 AFC = $100 / 10 = $10 - AFC - 10 Profit per PPI $ 8 item

Total profit = # of units sold X profit per item Shirts sold 10 X Profit per itemX $ 8 Total Profit $ 80 If the store could sell 20 shirts a day by lowering its price to $28, it would increase its profit. Price (P) $ 28 - VC - 12 AFC = $100 / 20 = $ 5 - AFC - 5 Profit per PPI $ 11 item Total profit = # of units sold X profit per item Shirts sold 20 X Profit per itemX $ 11 Total Profit $ 220

A man sells bicycles in a store for $110 each. His fixed costs are $ 50 a day. It costs him $ 80 to buy the parts and put together a bicycle. He can sell an average of 10 bicycles a day at that price. What is his total profit each day at that price? Should he lower his price to $100 if he can then sell 20 bicycles a day? Price (P) $ VC - 80 AFC = $ 50 / 10 = $ 5 - AFC - 5 Profit per PPI $ 25 item X 10 $ 250

Price (P) $ VC - 80 AFC = $ 50 / 20 = $ AFC Profit per PPI $ item X 20 $350