1. Chapter 7, Section 1

2.  Understand the purpose of business firms and why we need “bosses”  Learn the three basic forms of business organizations (sole proprietorships, partnerships and corporations)  Know the key characteristics of each form  Be able to state advantages and disadvantages of each form  Learn how franchises work  Understand why similar businesses tend to “cluster” with each other in the same location

3.  Business firm—an organization that uses resources to produce goods and services  Example: What resources does a plumber use to fix a clogged drain?  Question: Could three plumbers working together accomplish more than three plumbers working alone? How and why?  In many cases, specialization allows firms to do more than individuals

4.  Firms (people working together) can increase output compared to people working alone  Shirking example—the lazy fisherman (p. 159)  Unless someone stops people from shirking, the problem gets worse  We call this person a monitor, or “the boss”  Bosses are often paid based on firm profitability (residual claimant) which gives them a strong incentive to stop shirking

5.  SP—business is owned by one individual who makes all decisions and is legally responsible for all debts  Examples?  Advantages:  Easy to form and dissolve  You make the decisions!  Profit taxed only once (treated as your income; no business tax on your profits)  Disadvantages-:  Unlimited liability  Limited duration  Limited ability to raise money

6.  A business owned by two or more co-owners (partners).  Profits are shared and liability of general partners is unlimited  Limited partners have limited liability  Advantages:  Partners can specialize and achieve more together  Income is taxed only once (personal); not true for all partnerships  Disadvantages:  Unlimited liability for general partners  Shared decision-making can create conflict

7.  A legal entity owned by shareholders; capable of doing business in its own name  Dominant form of business (83% of receipts)  Advantages:  Shareholders have limited liability (not liable for corporation’s debts) (except when corporation is a sham—”piercing the corp. veil”)  Perpetual existence  Big advantage in raising money (can issue stock or bonds)  Disadvantages:  Double taxation (corporate tax plus personal  tax on dividends and capital gains)  More complicated to create and maintain

8.  A contract that allows a person or group (franchisee) to use another firm’s name and sell goods and services associated with that firm (franchiser)  Examples?  McDonald’s, Pizza Hut  Franchisee usually pays an upfront fee and then a percentage of profits (royalty)  Franchiser provides training, expertise, national advertising, etc.  List of top franchise opportunities:  http://www.entrepreneur.com/franchises /rankings/franchise500-115608/2011,- 1.html http://www.entrepreneur.com/franchises /rankings/franchise500-115608/2011,- 1.html

9.  Look at Exhibit 7.4 on p. 170  Competing firms tend to locate next to one another to give them an equal chance to compete for customers

10.  Answer questions 1 and 5 on p. 171  Turn in for class participation credit