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

4. 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

5. 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

6. 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

7. 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)

8. 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

9. 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

10. 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?

11. 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?

12. 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

15. 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

18. 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?

20. 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