Business

= an organized effort of individuals to produce and sell for profit, goods and

services that satisfy societys needs.

Entrepreneur = a person who risks his/her time, effort and money to start and operate a
business.
To organize a business, an entrepreneur must combine 4 kinds of resources: material,
human, financial and informational.
Material resources: raw material used in manufacturing process, as well as buildings and
machinery. Human resources: the people who furnish their labour to the business, in return
for wages. Financial resources: the money required to pay the employees, purchase
materials and generally, keep the business operating. Informational resources: are the
resources that tell the managers how effectively the other resources are combined and
utilized.
Businesses are of 2 types, generally:

Manufacturing business = organized to process various materials into tangible

goods.

Service business = services ranging from haircuts to legal advice.

A business receives money = sales revenue from its customers, in exchange for goods and
services. It must also pay money to cover the various expenses involved in doing business. If
the firms sales revenue is greater than its expenses, it has earned a profit.

Profit

= what remains after all business expenses have been deducted from the sales

revenue. A negative profit, which results when firm expenses are greater than its sales = loss.
A profit earned by business becomes the property of its owners. It also becomes the payment
for assuming the risk of ownership. The employees, suppliers and lenders must be paid
before the owner.

Economy = the study of how wealth is created and distributed.

Free market economy = a kind of system that allows the individuals to enter and leave
markets at will. This system implies competition among sellers of products and resources.

There are 4 degrees of competition:

Pure the complete form of competition.

The market situation in which there are many buyers and sellers of a product and no one is
powerful enough to affect the price of the product. The price of the products is determined
through the market forces of demand and supply.

Supply = quantity that the producers are willing to sell at each of various prices => supply
is the relationship between prices and the quantities offered by the producers.

Demand

= quantity that buyers are willing to purchase at each of various prices =>

demand is the relation between prices and the quantities purchased by the buyers.
Buyers and sellers interract in a market. Under pure competition, the market price/going price
is a price at which the quantity demanded = the quantity supplied. Pure competition is only a
theoretical concept.

Monopolistic a market situation in which there are many buyers, many sellers, who
differentiate their products from the products of their competitors.

The individual producer sees what looks like a mob of competitors, all trying to chip away, by
differentiating their products from all similar products. The producer obtains some limited
control over the market price of his product.

Oligopoly there are few sellers

Generally these sellers are quite large and sizable; investments are required to enter this
market. For this reason, these industries tend to remain oligopolistic; because there are few
sellers, each has considerable control over the products => similar prices for the same
products.

Monopoly market situation with only one seller => the control over the price is
complete. Most of public utilitis operate theoretically under a close scrutiny and are
legally limited.

In the colonial period of the American business, barter was used as a system of exchange in
which goods and services were trading directly for other goods and services without using
money. As business increased, small enterprises appeared, usually under the form of sole
proprietorship. The domestic system followed, a method of manufacturing in which an
entrepreneur distributed raw materials to various homes where families would process them
into finished goods, to be offered for sale by the merchant entrepreneur.
The industrial revolution brought about the factory system, in which all materials,
machinery and workers, required to manufacture a product, were assembled in one place.
This, in turn, entailed specialization = the separation of the manufacturing process into
different tasks, to different individuals. This increased the standard of living, GDP (produs
intern brut) and the service industries that surpassed those of goods. Social responsibility in
business activities has an impact on society and the consideration of that impact in business
is important in decision making.

Consumerism

= the activities that intend to protect the right of consumers in dealing

with businesses.
Consumers have the right to be safe, informed, to choose and to be heard.

The right to safety products must be safe for their intended use, include clear,
thorough and explicit directions for proper use; they have been tested by the
manufacturer, to insure proper quality and reliability.

The right to be informed consumers must have access to information before they
buy a product. Manufacturers inform the customers about the potential danger of
using their product.

The right to choose consumers may choose products offered by different

manufacturers and sellers to satisfy a particular need; competition helps cutting
prices.

The right to be heard someone will listen and take appropriate measures; this
business must be ethical, apply moral standards to economic decisions and actions.

Forms of ownership

Sole proprietorship no legal documents are required in a civilized country, to start

with no nominal capital and no legal procedures to close it. All earnings become the
personal income of the proprietor and are taxed accordingly.

Disadvantages:
o

unlimited liability, that holds him responsible for all the debt of his business with his
personal assets;

limited liability to borrow from banks;

limited knowledge.

Partnership association of two or more persons to act as co-owners of a business

for profit. A general partner = assumes co-ownership of the business and at the same
time, assuming unlimited liability for its debts. Every partner has to have at least one
general partner to ensure that the liabilities of the business are legally assumed by at
least one member.

Advantages:
o

low cost of formation;

availability of capital;

tax advantages.

Disadvantages:
o

unlimited liability;

lack of continuity;

management disagreement.

Corporation artificial being, existing only in the contemplation of the law. It is a

legal person with rights to operate a business, own or dispose of property, borrow
money, sue and be sued, enter into binding contracts.

Stock = the shares of ownership.

Stockholders/Shareholders = people who own stock.
Incorporation = the process of forming a corporation.
Corporate charter =a contract between the corporation and the state, in which the state
recognizes the formation of the corporation. It includes: the firms name and address, the
incorporators name and address, the purpose, the maximum amount of the stock and types
of stock to be issued, the rights and privileges of the shareholders and how long the
corporation is to exist.
The top governing body of the corporation = board of directors, elected by the
shareholders from within the corporation or from outside. Their major responsibility is to set
the companys goals and develop a strategy for meeting these goals. The board appoints the
chairman, president, vice-president, secretary, treasurer.
Shares of the stockholders are in control of the corporation through the directors.
Advantages:
o

limited liability;

ease of transfer of ownership;

ease of raising capital;

perpetual life;

specialized management by experts.

Disadvantages:
o

difficulty and expense of formation;

governmental restrictions;

double taxation, as corporate and personal income.

Other forms of ownership: joint venture, syndicate.

A small business is one that is individually owned and is not dominant in its field.
If an individual business is part of a chain of stores = franchise; the franchiser = the one
granting the franchise; fast gains and distribution of his products, without incurring the high
cost of constructing and operating its own stores.