1. Unit 3: Participants in the United States Market System
Businesses, Securities, Banks, and Labor

2. Entrepreneurs Entrepreneurs: - Come up with an idea
- Turn that idea into a marketable product (innovation)
- accept the risk of success or failure
- claim resulting profit or loss
- In other words, entrepreneurs take an idea and turn it into a business
Entrepreneurs role in US Market System:
- Introduce new products to the market
- Introduce new production methods
- Improve the quality of existing products
- Introduce new ways of doing business
Entrepreneurs need financial capital (money to start or expand a business) – Get loans from banks or venture capitalists

3. Entrepreneurs Role in the Economy:
- Consumers get new and better products
- Workers get employment opportunities
- Government gets higher tax revenue - public goods
- Economy gets a boost and standard of living increases
Successful entrepreneurs attract competitors and substitutes - this forces competition and encourages businesses to constantly strive to improve products and quality and lower prices
Intrapreneurs - inventors that work for an existing company to improve technology and products

4. Firm/Business Organization in the United States
Business in the United States can be organized in the following ways:
Sole Proprietorship
Partnerships
Corporations
Franchises
Entrepreneurs must decide which business model best fits their needs.

5. Sole Proprietorship
Firm owned and managed by a single individual who earns all the profits and is responsible for all of the losses
70% of American Businesses but less than 5% of sales
Can have multiple employees
Farmers, Landscapers, Doctors, Lawyers, Repair services
Advantages:
easy to start - few government regulations
complete control over business
owner keeps all profits - low taxes
pride of ownership
Disadvantages:
unlimited personal liability- responsibility for losses, debts, and other claims
Limited funds - difficult to raise financial capital
difficult to find and keep good workers
limited life of firm
unlimited responsibility

6. Partnerships
Firm is owned by two or more individuals who agree to contribute resources to the firm and share the profits
8% of American Businesses
Law Offices, Accountants, Real Estate, Doctor’s Offices
Advantages
Easy to start- few government regulations
shared decision making and increased specialization
greater ability to raise financial capital
greater ability to attract and keep good workers – offer partnership
low taxes
Disadvantages
unlimited personal liability
Limited life of the business
profits must be shared
partners may disagree
Limited Liability Partnership (LLP) – partners are not responsible for the debts or other liabilities of other partners

7. Corporations Legal entity that is distinct from the people who own it
Large businesses that account for the most business sales in the US (85%)
Owners = stockholders – stockholders vote for the board of directors and earn profits from the company
Stockholders can earn profits two ways:
Value of stock can increase (based on value of the company) – must sell stocks to earn profits
Dividends are shares of the corporations profits paid directly to stockholders
Majority Shareholder: a person or company who owns more than 50% of a company’s stocks, has more power than all other shareholders combined, often the founder
Board of Directors oversee large business decisions and hire corporate executives
Corporate executives are hired by the Board of Directors to oversee day-to-day operations - specialization

8. Corporate Executives CEO (Chief Executive Officer)
Highest ranking executive, responsible to develop successful strategies, oversee operations of entire business, make major decisions on the direction of a company, communicate with the Board of Directors
CFO (Chief Financial Officer)
Responsible to oversee financial activities of the company, Oversees accounting, ensures financial reports are accurate, projects long term financial goals
COO (Chief Operating Officer)
Responsible to manage the day-to-day operations of the company, Might include obtaining resources, producing goods, and shipping supplies
CIO (Chief Information Officer)
Responsible for communications with the public, oversees marketing strategies, website design, and relations with the press

9. Corporations Types of Corporations:
Private Corporations – limited number of shareholders (usually family), stocks not available for sale to the public
Publicly Traded Corporations – Many shareholders, stocks are bought and sold in financial markets, stock sales are open to the public
Multinational Corporations (MNCs) – also called international corporations or global corporations – operate globally

10. Corporations Advantages Disadvantages
Easy to raise financial capital (Stock sales raise capital for the company)
limited liability (owners can only be liable for the value of their stocks)
unlimited life (stocks are inherited)
specialized management – professional management
Disadvantages
difficult and costly to start - Must file articles of incorporation (written application) with the government and in return receive a charter (legal authorization to organize a corporation)
More Regulation – In addition to labor and business laws, corporations must file quarterly earnings reports with the SEC
Owners have less control
Double taxation (both the corporation itself (corporate income tax) and the shareholders (capital gains tax) pay taxes on profits)

11. Franchises
Contract between a parent company (franchiser) and another business or individual (franchisee)
Allow for a successful business to grow quickly
For a fee, the franchiser gives the franchisee exclusive rights to sell a certain product in a given region
Franchiser provides the franchisee with a brand name, production and marketing experience, research and development, and successful business practices
Examples: McDonalds, Chili’s, Shell, BP

12. Securities
Corporations sell stocks and bonds to investors to raise capital to fund operations and pay for new plants and equipment
Corporate Stocks = Share of ownership of the company
Corporate Bonds = long term loans – corporations promise to pay back bond-holder a fixed sum of money on a designated maturity date and make annual interest payments until that date
Securities = corporate stocks and bonds
Buying stocks directly from a corporation:
- IPO – Initial Public Offering – initial sale of corporate stock to the public
- Secondary Offerings – when a corporation issues more stocks in order to raise additional funds
Buying stocks from other people (Much more common):
-Secondhand securities – Stocks and bonds sold in security exchanges (stock exchanges, stock markets)
- Security exchanges increase Liquidity – how easily stocks can be sold for cash
Mutual Funds: sells stocks to investors and then invests the money in a number of securities for the investors – not as risky as stocks because investment is diversified

13. Securities Markets
Security Markets – Also called stock exchanges or stock markets, where secondhand securities are purchased – NASDAQ and NYSE
Each corporation is listed by its stock symbol or ticker symbol
- the value of each share fluctuates constantly
Bull Market vs. Bear Market
Market Value of a Corporation = the price that a share is selling at times the total number of shares
SEC (Securities and Exchange Commission): regulates the securities market to ensure fairness
Investors in the Stock Market:
Investors are trying to buy low and sell high in order to earn money
Risk – possibility of a loss on an investment
Return – profit or loss made on an investment
Stocks have greatest risk but can also have highest returns, Bonds have low risk but generally low returns, Mutual Funds are in between
Diversification – the practice of distributing investments among different financial assets to maximize return and limit risk

14. Stock Market Indices: Ways to measure stock performance
1. Dow Jones Industrial Average: Shows how 30 large, publicly owned companies traded during a standard trading session, indicates general trends in stock prices
2. NASDAQ Composite: Similar to DJIA but includes all three thousand companies that trade in NASDAQ exchange and not exclusively US companies
Other indices: NYSE Composite, S&P 500

17. United States Banking System
Banks: Financial intermediaries – give savers a place for their money and give borrowers credit
FDIC – Federal Deposit Insurance Corporation
Two main types of banks:
1. Commercial Banks
take deposits and give loans to customers (Credit Unions)
Banks pay interest to savers (reward for not consuming now) and borrowers pay interest on their loans to the bank
Reduce the risk of loans by spreading the liability of savers to several borrowers – diversification
Interest Rate = the amount of interest paid on a loan
2. Investment Banks
raise capital for business, sell IPOs, Secondary Offerings, and Bonds for corporations, Buy and sell secondhand securities for investors
help people save for retirement and earn money on the stock market – financial advisor

18. Labor in the United States
Unskilled workers, skilled workers, professional workers
Wages = payments workers receive in return for work
Labor Unions – Strikes, Collective Bargaining
Government Regulations:
Minimum Wage Laws
Safety and Health Requirements
Workman’s Compensation
40 hour work week/Overtime pay
Antidiscrimination Laws
Labor Unions – Closed Shops/Right-to-Work Laws, Collective Bargaining

19. Recent changes in Labor in US
Agrarian, Industrial, Information Economy
Larger labor force – growth of population, women
Better educated workers
Increase in technology – less unskilled workers, more computer expertise
Globalization and outsourcing
Working from home – Telecommuting, Virtual Offices
Changing Careers more often