9-3 Big Business Challenge Answers

Corporations Ø     An organization owned by many people, but treated by law as a single person Ø     Owners are called stockholders, because they own shares of ownership called stock Ø     Can raise large amounts of money by selling stock Financial risk spread out among many people

Economies of Scale Corporations could make goods more cheaply because they produce more and faster with large machines

Fixed Costs Operating Costs Ø     Costs a company has to pay whether or not it is operating --ex: mortgages, loans and taxes Operating Costs -- Costs that occur while running a company --ex: paying wages, buying supplies, shipping charges

Advantages of big corporations over small businesses (forced many to close) Ø  could produce goods more cheaply & efficiently Ø  could cut prices to increase sales many could negotiate rebates (money back) from railroads due to quantity shipped

Pools Ø     organized by manufacturers to maintain prices at a certain level didn’t last long, often one member would cut prices and competition would resume

Andrew Carnegie Ø first job was “bobbin boy” for $1.20/week Ø     became railroad supervisor, invested in railroad industries (locomotives, sleeping cars, iron mills, etc.) Ø     quit railroad to focus on steel industry Ø     used Bessemer process – a new process for making steel efficiently and cheaply

Vertical Integration Ø     to own all of the different businesses involved in a particular industry ex: instead of paying someone else for coal, buy a coal mine

Horizontal Integration Ø     to combine many firms engaged in the same type of business into one large corporation Ø     ex: Standard Oil buys 90% of oil refineries in the US becomes a monopoly when a single company gains control of an entire market

Vertical and Horizontal Integration

Trusts Ø     by late 1800s, many Americans fear large corporations and monopolies (can charge whatever they want) and several states pass laws forbidding one company to own stock in another w/out specific approval from the legislature Ø     instead of buying a company, a trust was formed to manage the stock (by trustees) Ø     allowed trustees to control a group of companies as if they were one

Holding Company Ø     doesn’t produce anything itself, just holds the stock of companies that do produce goods holds stock of several companies and controls them as if they were one  

Selling the Product Ø advertising with large print and illustrations Ø     department stores brought different products together in one building Ø     chain stores offered low prices mail-order catalogs for people in rural areas