Economic Development Day 1 Terms and Definitions AP HG Mr. Hensley

Actors in the Game A business run by a single person is a sole proprietorship Liability means YOU are responsible for the debts and decisions of your business In a sole proprietorship, business funds and personal funds are comingled

Corporations In the 19th Century, laws were changed to allow for corporations The company has limited liability – the owners and employees are not completely liable Corporations are eternal Corporations can raise money by issuing bonds or selling stock

Stocks versus Bonds Bonds are a promise to repay tomorrow what you get today (a bond is a promise) Trade-off: get money now, but have to pay it back (even if bankrupt) Stocks: a share of future profits Trade-off: may get very rich, may lose everything Values change based on current information EQUITY vs DEBT financing

Evolution of Corporations Economies of scale – easier to internalize certain functions than to buy or rent them Ex: easier to own your factory; easier to have your own janitors Unless… incentives change (over time, government changes incentives and outsourcing begins)

Managerial Revolution In early 20th Century, a permanent managerial class began to form White-collar work – the “Executive VP” No prior connection to company, recruited out of college – may change jobs ten or more times The Organization Man Managerial science – efficiency studies

Corporation Structure Shareholders own stock in a publicly-traded company (NYSE) - each share of stock counts as a vote CEO and executives run the company and report to a Board of Directors chosen by shareholders Goal: maximize shareholder value

Are Incentives Aligned? Executives have a strong incentive to increase stock price in the short term (create shareholder value) Does this always benefit company in the long term? Are employee incentives aligned with executives or shareholders?

Tuesday May 2nd TODAY: Economic systems and processes TODAY: lightning round! TODAY: assign presentation times (review progress) REVIEW: What happens where the supply curve intersects the demand curve? Is this a good thing or a bad thing? REVIEW: How do you create a surplus? A shortage?

Economic Systems Pure Capitalism is the absence of any government control over the economy Pure Communism is complete government control of the economy Just about everyone is somewhere in the middle - socialism

The United States A limited social safety net but low taxes Government regulation of marketplace in the form of enforcement of basic standards (FDA, EPA, FTC) and control of infrastructure Has Big Business “captured” government here? WW 2: a command economy including rationing, price fixing

Europe Cradle-to-grave protections but high taxes Many government rules enforced in marketplace, especially regarding labor (ex: long vacations and short work-weeks) Can be difficult to start a new business or to terminate bad employees Better or worse?

Review Be able to explain what a corporation is and how they evolved Stocks and bonds – what are the trade-offs? Corporate governance – are the incentives aligned between workers, managers and owners? Fit various states on the communism-socialism-capitalism continuum