1. LARGE FIRMS, CORPORATIONS, AND GOVERNMENT: ECONOMY AND DISECONOMY OF SCALE A.K.A. When to buy from Wal-Mart and when to visit the family-run sub shop…

2. BUSINESSES MERGE TO INCREASE MARKET SHARE, A LESS COMPETITIVE MARKET, AND HIGHER PROFIT MARGINS  Horizontal Merger:  Similar companies unite to diversify product line and expand share of market  Less competition  Increase resources/economy of scale  Vertical Merger:  Different companies along supply chain merge  Minimize costs/ increase profit margins  See Figure 3.5 in textbook

3. COMMON TYPES OF LARGE FIRMS  Franchise  Agreement to purchase or lease an established company name and business model (McDonald’s)  Conglomerate  One company with at least four unrelated businesses, none with a majority of sales  Multinational  Has manufacturing or service operations in different countries

4. CORPORATIONS  Many owners (shareholders)  Limited liability (only liable for as much as one’s stock is worth); should the corporation do more damage than the corporation is worth, the shareholders will lose the value of their stock but are not liable for the additional damages (a legal externality)  Unlimited life (no legal end to the corporation since its stock can be sold and passed on from generation to generation)  Difficult to start (chartered in the state in which it resides)  Ease of raising capital through the stock market  Run by boards of directors elected by major shareholders  Account for 20% of US businesses, 88% of US sales, and 71% of US profits

5. UNPLEASANT THOUGHTS ABOUT CORPORATIONS  Corporations were classified as “individuals” by activist conservative Supreme Court judges in the 1880s, and are therefor protected by the Constitution and its amendments with all the rights of people  Corporations are (potentially) immortal, intangible, without concience, and legally obligated to maximize shareholder profits—i.e., serve their own interests over the interest of society and other individuals  The psychological term for those who have no feelings for others and are willing to harm others to satisfy their own selfish interests is “psycopath”

6. ECONOMY OF SCALE  Economy = Efficient production due to large size  Buy in bulk  Specialization, large runs (low marginal costs)  Sell in high volume (with low profit margins)

7. ECONOMY OF SCALE PRACTICE:  1. Buyer A comes to you and says he’ll buy 2 of your units you normally sell for $10 each and for each you make $1 profit, but he’d like you to reduce your sales price to $9.10 each. The sale involves several minutes of time and paperwork. Do you do it?  2. Buyer B comes to you and says he’ll buy 200,000,000 of your units you normally sell for $10 each and for each you make $1 profit, but he’d like you to reduce your sales price to $9.10 each. The sale involves several minutes of time and paperwork. Do you do it?  3. Why can Wal-Mart or Costco offer lower prices for their products than many of their smaller competitors?  4. How important to Wal-Mart or Costco is any individual customer?  5. Using the concepts above, which entity in the U.S. could theoretically produce or sell goods and services to consumers for the lowest possible price?

8. DISECONOMY OF SCALE  Diseconomy = Inefficient production due to large size  Personal incentives do NOT align with business incentives (or do so VERY loosely)  Specialization leads to bureaucracy  Poor communication

9. DISECONOMY OF SCALE PRACTICE:  1. An employer hires a cashier to run the register at an interstate gas station/convenience store while she is away for hours at a time. The cashier’s friend calls her for a personal call while you are attempting to get service, and she ignores you for the first minute and then serves you while talking on the phone with her friend, dismissing you when you try to ask a question that would have resulted in an additional sale. You leave, having only paid for the gas which could be done without speaking to the cashier and do not buy any other products. Economically speaking, explain why the cashier was willing to be so inattentive to you.  2. Do you think the above scenario would have been different had it been the owner manning the register when you arrived or had the owner been present when the cashier had to assist you? Why?  3. What does the example above tell you about the importance of incentives in economic decision-making?

10. DISECONOMY OF SCALE PRACTICE:  4. International Business Machines, Inc. (IBM) was a multinational corporation with an enormous number of specialists working in the company. The personal computer and visually-based (as opposed to text-based) operating systems, however, were designed in Steve Jobs’ and Bill Gates’ garages with one or two other people. Thinking of bureaucracies, communication, and speed, how does that make sense?  5. You have a great idea and would like to get it to market quickly. You work in the mailroom of a major multinational corporation. List as many steps as you can think of as would be required to get your idea to be implemented by this corporation. How long do you think that would take?  6. Theoretically, governments can produce goods or services more cheaply than businesses, because governments do not need to add a profit margin to the cost of the good or service as does the business. Using the ideas from questions #4 and #5, explain why businesses can often produce goods or services more cheaply than can a government.

11. ECONOMY AND DISECONOMY OF SCALE IN HEALTH CARE  Economy  Buying drugs in bulk  Negotiating lower prices for treatments for patients  Diseconomy  Profits over people (allow some to die by not providing treatment because it is not profitable