Institutions that Affect Economic Behavior Section 4

Objectives Discuss the major institutions that shape and are shaped by economic behavior. Discuss the major institutions that shape and are shaped by economic behavior. Identify and discuss the three major institutions Identify and discuss the three major institutions

Three major institutions Households Households Businesses Businesses Government Government Discussed in section 5Discussed in section 5

Households Households provide some of the resources needed by businesses. Households provide some of the resources needed by businesses. Households consume many of the goods produced by businesses. Households consume many of the goods produced by businesses. Members of households are the ultimate owners of wealth. Members of households are the ultimate owners of wealth. Households provide labor, land, capital & entrepreneurial to businesses. Households provide labor, land, capital & entrepreneurial to businesses. Households consume automobiles, food, clothing, and host of other products produced by businesses. Households consume automobiles, food, clothing, and host of other products produced by businesses.

Households Businesses and all the assets they use are owned ultimately by individual households. Thus, businesses ultimately do not receive profits; they are only the middlemen who channel profits to the owners of the businesses, who are the individuals of the households.

Types of Business Ownerships Sole Proprietorship Sole Proprietorship Partnerships Partnerships Corporations Corporations These three businesses are the only three legal forms of businesses that can be established in the United States.

Sole Proprietorship A sole Proprietorship is the easiest type of business to establish. A sole Proprietorship is the easiest type of business to establish. Registering with the state and getting a federal tax number is about all it takes in most cases. Registering with the state and getting a federal tax number is about all it takes in most cases. You are the owner and the boss. You are the owner and the boss. The amount of profit you make depends on your skill, hard work, and luck. The amount of profit you make depends on your skill, hard work, and luck.

Basic Advantages of Sole Proprietorship Easy to start up Easy to start up Simple to manage Simple to manage Relatively free from government regulation Relatively free from government regulation

Some Distinct Disadvantages Getting financed is limited by the wealth & credit standing of the proprietor Getting financed is limited by the wealth & credit standing of the proprietor The business dies when the proprietor dies or quits The business dies when the proprietor dies or quits Unlimited liability of the proprietor Both business and personal assets may be lost if the business fails or becomes a losing party in a lawsuit Unlimited liability of the proprietor Both business and personal assets may be lost if the business fails or becomes a losing party in a lawsuit

Partnership Two or more individuals combine to form a business so they can overcome some of the financial & managerial disadvantages of sole proprietorships

Advantages of Partnerships Easy to start up Easy to start up Relatively simple to manage Relatively simple to manage It is subject to relatively few government regulations It is subject to relatively few government regulations

Disadvantages Unlimited liability of partners Unlimited liability of partners If your partner makes a mistake or is dishonest, your personal assets may be in jeopardyIf your partner makes a mistake or is dishonest, your personal assets may be in jeopardy Division of ownership often leads to disagreements in operations and management Division of ownership often leads to disagreements in operations and management Death or withdrawal of one partner dissolves the partnership Death or withdrawal of one partner dissolves the partnership A new organization may be formedA new organization may be formed

Corporations Organizations sanctioned by state laws Organizations sanctioned by state laws Considered “legal entities” Considered “legal entities” Separate and distinct from owners Separate and distinct from owners To start To start Required to submit a charter to the state government out lining the type of business intendedRequired to submit a charter to the state government out lining the type of business intended Charter should be specific on how it will be financed and governedCharter should be specific on how it will be financed and governed

Advantages Easier to finance because a corporation can sell stocks and bonds Easier to finance because a corporation can sell stocks and bonds Limited owner liability Limited owner liability The stockholder will only lose their investmentThe stockholder will only lose their investment Unlimited life Unlimited life The death of a stockholder does not mean the end of the corporationThe death of a stockholder does not mean the end of the corporation Highly specialized management Highly specialized management

Disadvantages More difficult to start up More difficult to start up Subject to extensive government regulation and taxation Subject to extensive government regulation and taxation

Review Three major institutions Three major institutions Households Households Businesses Businesses Sole proprietorshipSole proprietorship PartnershipPartnership CorporationCorporation