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MGTA05 Notes (Section A).docx

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Management (MGT)
Iris Au

SECTION A: Types of Economic Systems -different economic systems manage factors of production in different ways -economic systems also differ in ways decisions are made about production and allocation -a command economy relies on a centralized government to control all or most factors of production -in market economies, individuals control production and allocation decisions through supply and demand Command Economies -two basic forms of command economies: communism and socialism -communism: system in which the government owns and operates all sources of production -socialism: the government owns and operates only selected major industries -often government-operated enterprises are inefficient, since management positions are frequently filled based on political considerations rather than ability Market Economies -market: a mechanism for exchange between the buyers and sellers of a particular good or service -business to business (B2B) transactions far exceed business to consumer (B2C) transactions in dollar value -in a market economy, B2C and B2B exchanges take place with little government involvement Input and Output Markets -using this particular model, input market, firms buy resources from households, which then supply those resources -in the output market, firms supply goods and services in response to demand on the part of the households -the political basis for the free market economy is called capitalism Mixed Market Economies -command and market economies are two extremes -most countries rely on varying forms of mixed market economies that features characteristics of both command and market economies -one trend in mixed market economies is privatization - converting government enterprises into privately owned companies -policy of nationalization - converting private firms into government-owned firms -governments in mixed market economies that try to intervene in the economic system in an attempt to stabilize it usually lead to higher deficits Demand and Supply in a Market Economy -how much of what product a company offers for sale and who buys it depends on the laws of supply and demand The Laws of Supply and Demand -demand: the willingness and ability of buyers to purchase a product or service -supply: the willingness and ability of producers to offer a good or service for sale -the law of demand states that buyers will purchase (demand) more of a product as its price drops -it also states that producers will offer (supply) more for sale as the price rises -to optimize profits, businesses seek to find the right combination of price charged, and quantity supplied -> this right combination is called the equilibrium point Private Enterprise and Competition -market economies rely on a private enterprise system - one that allows individuals to pursue their own interests with minimal government restrictions -private enterprise requires the presence of four elements: 1. Private Property Rights: Ownership of the resources used to create wealth is in the hands of individuals 2. Freedom of choice: You can sell your labour to any employer you choose. You can also choose which products to buy, and producers can usually choose whom to hire and what to produce 3. Profits: The lure of profits (and freedom) leads some people to abandon the security of working for someone else and to assume the risks of entrepreneurship. Anticipated profits also influence individuals‟ choices of which goods or services to produce 4. Competition: Profits motivate individuals to start businesses, and competition motivates them to operate those businesses efficiently. Competition occurs when two or more businesses vie for the same resources of customers. To gain an advantage over competitors, a business must produce its goods or services efficiently and be able to sell at a reasonable profit. Competition forces all businesses to make products better or cheaper Degrees of Competition -economics identified 4 basic degrees of competition within a private enterprise system: 1. Perfect Competition - for perfect competition to exist, firms must be small in size (but large in number), the products of each firm are almost identical, both buyers and sellers know the price that others are paying and receiving in the marketplace, firms find it easy to enter or leave the market, prices are set by the forces of supply and demand, and no firm is powerful enough individually to influence the price of its product in the marketplace 2. Monopolistic Competition - there are fewer sellers than in pure competition, but there are still many buyers. Sellers try to make their products appear to be -if only slightly- different from those of their competitors by tactics such as brand names, design or styling, and advertising. Monopolistic competitive businesses may be large or small, b/c it is relatively easy for a firm to enter or leave the market. Product differentiation also gives sellers some control over the price they charge 3. Oligopoly - when an industry has only a handful of large sellers. Competition is fierce because the actions of any one firm in an oligopolistic market can significantly affect the sales of all other firms. Most oligopolistic firms avoid price competition because it reduces profits. Rather than compete on price, they emphasize advertising. Entering an oligopolistic market is difficult b/c large capital investment is usually necessary. Therefore oligopolistic markets usually remain that way 4. Monopoly - when an industry has only one producer. Being the only supplied gives a firm complete control over the price of its product. Its only constraint is how much consumer demand will fall as its price rises. Natural monopolies are closely watched by provincial utilities boards, and the assumption that there is such a thing as a natural monopoly is increasingly being challenged. Interactions Between Business and Government How Government Influences Business -government plays several different roles in the Canadian economy, each of these roles influences business activity in some way -the roles are as follows: Government as Customer -governments buys thousands of different products and services from business firms -the government is also the largest purchaser of advertising in Canada -many businesses depend on government purchasing, at least for a certain level of prosperity -government expenditures on goods and services amount to billions of dollars per year Government as Competitor -government also competes with business through Crown corporations, which are accountable to a minister of parliament for their conduct -Crown corporations exist at both the provincial and federal level, and account for a significant and wide variety of economic activity in Canada Government as Regulator -federal and provincial governments in Canada regulate many aspects of business activity -regulated through many administrative boards, tribunals, or commissions -there are several important reasons for regulating business activity, including: protecting competition, protecting consumers, achieving social goals, and protecting the environment Government as Taxation Agent -taxes are imposed and collected by all 3 levels of government -taxes are levied by governments primarily to raise the revenue governments need to fund their services and programs -taxes remove money from private enterprise and divert it to the services the government provides as a public good -the higher the taxation, the less private enterprise has to invest, but the more is spent on programs that should benefit everyone -governments may use taxation system to subsidize certain activities by lowering taxes to those engaged in those activities -taxation may be used as an incentive to engage in certain economic activity and not others -taxation has a strong influence, generally, on the way in which business is conducted Government as Provider of Incentives -all levels of government offer incentive programs that help stimulate economic development -governments also offer incentives through the many services they provide to business firms (ie Export Development Corporation which assists Canadian exporters by offering export insurance against nonpayment by foreign buyers) -there are many other government incentive programs, including municipal tax rebates for companies that locate in certain areas, design assistance programs, and remission of tariffs on certain advanced technology equipment -government incentive programs may or may not have the desired effect on the economy Government as Provider of Essential Services -all levels of government facilitate business activity through a wide variety of services they supply -federal provides highways, postal service, the minting of money, statistical data on which to base business decisions etc. -tries to maintain stability through fiscal and monetary policy -these services and more create the kind of stability that encourages business activity SECTION B: The Sole Proprietorship -the sole proprietorship is a business owned and operated by one person. -legally, if you set up a business as a sole proprietorship, your business is considered to be an extension of yourself (and not a separate legal entity) -though usually small, a sole proprietorship may be as large as a steel mill or as small as a lemonade stand -majority of businesses in Canada are sole proprietorships, but only accounts for a small proportion of total business revenues Advantages of a Sole Proprietorship -freedom; answer to no one but themselves since no shared ownership -easy to form; if operated under your own name, with no additions, the business name need not even be registered to start operating -simplicity of legal set-up procedures, and low start-up costs -tax benefits; most businesses suffer losses in their early stages. Since business and the proprietor are legally one and the same, these losses can be deducted from the income of the proprietor earns from personal sources other than business Disadvantages of a Sole Proprietorship -unlimited liability - a sole proprietor is personally liable for all debts and legal liabilities incurred by the business -if the business fails to generate enough revenue, bills must be paid out of the owner‟s pocket -lack of continuity; a sole proprietorship legally dissolves when the owner dies -depends on the resources of one person whose managerial and financial limitations may constrain the business -sole proprietors often find it hard to borrow money to start up or expand The Partnership -a partnership is formed when two or more persons operate a business for profit -the partners own the business and pool their financial, managerial and technical resources to carry it on -in Canada, when two or more lawyers and accountants carry on business together, they are required by law to carry on their business as a partnership -business owners may wish to work together as partners for tax reasons -there are 2 basic types of partnerships: 1. General Partnerships - in a general partnership, all of the partners share in the profits of the business and have a say in managing the business. Most important, all partners are personally liable for the debts and other liabilities of the partnership business. This means that if the partnership does not have enough money or other assets to satisfy its debts, the partners must pay the debt from their own personal assets. 2. Limited Partnerships - a limited partnership has two kinds of partners-at least one general partner and one or more limited partners. The general partners run the business and have unlimited personal liability for its debts and liabilities. The limited partners, however, do not participate in managing the business. They do share some of the profits, but they have no personal liability for the debts and liabilities of the partnership business. A limited partner can lose only the original investment in the partnership, while a general partner can lose much more. If a limited partner does participate in managing the business of the partnership, the limited partner becomes a general partner and loses the protection of limited liability Advantages of a Partnership -most striking advantage is the ability to grow by adding talent and money -somewhat easier time borrowing funds than sole proprietorships b/c banks prefer to depend on enterprises rather than a single individual -can invite new partners to join by investing money -simple to organize, few legal requirements -partnerships must still begin with an agreement of some kind, whether written, oral, or even unspoken -it is wise to insist on a written agreement to avoid trouble later -some questions to be answered are „how will disagreements be resolved?‟, „who invested what sums of money in the partnership‟, „who will receive what share of the partnership‟s profits?‟, „who does what and who reports to whom?‟, „how will the partnership be dissolved?‟, and „how would leftover assets be distributed among the partners?‟ -the partnership agreement is strictly a private document -no laws require partners to file an agreement at a government agency -partnerships are not regarded as legal entities -legally, partnerships are nothing more than two or more persons working together -partnerships lack legal standing which means that partners are taxed as individuals Disadvantages of a Partnership -unlimited liability is the greatest drawback of a general partnership -by law, each partner may be held personally liable for all debts incurred in the name of the partnership -also, if any partner incurs a debt, even if the other partner knows nothing about it, they are all liable if the offending partner cannot pay up -lack of continuity; when one partner dies or pulls out, a partnership dissolves legally, even if other partners agree to stay to continue the business -difficulty of transferring ownership; no partner may sell out without the other partne
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