INDUSTRIAL ORGANIZATIONS IN CANADA

An introduction to Microeconomics

Macroeconomics

Up to this point we’ve been looking at how Canadians, as a whole, make decisions about its resources, this is what we call macroeconomics.

Macroeconomics deals with issues such as unemployment, inflation, economic growth, money and banking, and international trade.

Although we have more to discuss about macroeconomics we will switch gears to see how individual organizations make economics decisions.

Microeconomics is the area of economics that emphasizes smaller decision-making units, such as business firms, consumers, and workers.

Types of Business EnterprisesSole ProprietorshipThis is the oldest and simplest form of business enterprises.Apart from its simplicity sole proprietorships have several advantages:

• Small and simple structure

• All income earned goes to owner

• Management is flexible, control

Sole Proprietorships

Sole Proprietorships do have some disadvantages as well, including:

• Owner is fully liable for business, including taxes

• Borrowing is limited to owners ability

• Skill specific

Partnerships

PartnershipPartnerships are enterprises in which two or more persons own and operate the business firm and are liable for its debts.Partnerships are very similar to the Sole Proprietorship but there are more than one owner.Dentists, doctors, accountants and lawyers often form partnerships.

Partnerships

Advantages include:

•Partners are taxed individually

•Skills of each partner brought into business as well as $

•Easier to receive loans from the bank as you can pool resources

Partnerships

Disadvantages include:

• Liability determined by partners involved

• Decision making not simple, less control

• Income is taxed (personal and business)

Extra: cannot sue or be sued as a business, only individually. One partner may be liable for the actions of another partner.

Partnership Agreement – Legal DocsTypically include:- Name of partners- Name of business- Amount of capital invested by each partner

- Outline of each partner’s responsibilities and what each can and cannot do without the approval of the other partners.

- Procedures for termination of the partnership

- Procedures for dispute resolution among partners

Partnerships

All of the assets of the partners are exposed to seizure in fulfillment of the partnership's liabilities.

However, as there is more than one individual whose assets may be seized, the extent of the liability is somewhat diluted in that each partner must contribute some of his or her assets in fulfillment of the debt of the business.

Corporations

Corporations are business organizations created by law that are owned by its shareholders.

They are the most formal and complex form of business.

Unlike with a sole proprietorship or partnership, corporations are a separate legal entity from its shareholders – legally it is regarded as a “person.”

Corporations

It can own property and other assets, it can sue or be sued, and it files its own tax return.

Ownership happens through the purchase of shares or stocks which can be held by as many as thousands of people.

Corporations

Advantage Disadvantage

• The shareholder is only liable for the amount he or she paid for shares.

• In case of bankruptcy creditors are not able to sue shareholders for outstanding debts of the business

• Unlimited life, new owner no prob.• Personal liability of owner is limited• Easy to acquire funds

• Expensive to start, misc. fees• more formal activities(rules and

regulations)• Losses cannot offset personal

income for taxes• Taxation is high• Complex management slows

decision-making

What is a CEO?

Chief Executive Officer; the corporate executive responsible for the operations of the business.

The CEO is ultimately responsible for the success or failure of the business. He or she provides overall strategic direction for the business and makes decisions that will ultimately determine the direction of the organization.

Crown Corporations

Crown Corporations are a corporation whose shares are owned by all levels of government.These are set up with both economic and social objectives in mind.Some control the distribution of products while others are used to obtain financing for capital projects. Crown corporations at the federal government level are divided into categories based on their administration and their method of financing.

Crown Corporations

Departmental Corporations perform a variety of administrative, regulatory, and supervisory functions.

These include National Research Council, Atomic Energy Control Board, and Canada Employment Insurance Commission.

Crown Corporations

Agency Corporations perform a variety of commercial and management functions for the government.

These include Canada Deposit Insurance Corporation, Canada Mortgage and Housing Corporation, The National Gallery of Canada and ACOA.

Crown Corporations

Proprietary Corporations are not part of the government. They are in direct competition with privately owned companies and are expected to finance themselves.

Although they are not linked to any govt. department any deficit that they have will likely be covered by taxpayers.

Examples: Canada Post, CBC, Bank of Canada

Crown corporations get funding by borrowing from the government, by parliamentary appropriations or by borrowing from the money market.

Local and provincial govts take advantage of Crown Corporations to achieve their goals. Housing Authorities, liquor stores and transit systems are examples of Crown Corps that operate on a local or provincial level.

Each of the types of Crown Corporations are quite different from one another but the important purpose to understand is the market power they possess.

Market Power is represented by the ability of a business to control the price of a product or service.

For further perspective on Crown Corporations take a moment to read page 353 in the text.

Competition and the Market

As mentioned earlier market power is represented by the ability of the business to control the price of a product or service.

Do large corporations face similar factors as small businesses?

Business organizations face a variety of competition that is determined by the structure of the industry or market in which the firm operates.

Market Structure

There are five factors that help to determine market structure, they include:

1. The number (and size) of firms in the market,

2. The degree to which competitor’s products are similar,

3. A firm’s control over price,4. The ease with which firms can enter or

leave the market, and 5. The amount of non-price competition*

Most markets and industries can be classified in one of four types:

1. Perfect competition2. Monopolistic competition/differentiated

sellers3. Oligopoly4. Monopoly

Perfect Competition

Perfect competition is characterized by many producers and a uniform product. Perfect competition can be distinguished by five characteristics:

1. Many sellers so that individual firms have no control over total market supply

2. Selling a standardized product

3. Producers have to accept the market equilibrium price

4. Ease of market entry/exit

5. Little non-price competition

Perfect Competition

The overall success of perfect competition firms depend on how well they manage their costs. Reducing costs while maintaining a standard product will determine success.

Perfect Competition is nearly impossible simply due to start-up costs and some non-price competition. The closest example is wheat farmers.

Monopolistic/Differentiated Competition

When products can be slightly differentiated and there are a substantial number of firms operating in the market, the structure is called monopolistic competition or Differentiated .

Characteristics include:1. Many competing firms

2. Products are similar but not identical

3. Firms have some influence over price

4. Easy for new firms to start up

5. Non-price competition is significant (ie. advertising)

Pick a relatively small company or business and brainstorm example of how they differentiate from their competition.

Oligopoly

If you make a list of the top 10 brand-name companies from Canada you would probably have the same names as the person sitting at the table as you.

All of your lists include oligopolies. These are huge firms that dominate their respective markets.

Oligopoly

Characteristics of oligopolies include:1. It is dominated by few, very large firms,2. Competing firms may produce products as

similar as steel or as different as vehicles,3. The firms freedom to set price varies from

slight to substantial, 4. It is difficult to enter into competition due to

many barriers such as brand recognition or cost,

5. Non-price competition can be intense.

Monopoly

In a monopoly, one firm or organization enjoys complete control of the market. Characteristics of monopolies include:

1. A sole firm that has complete control over total supply,

2. Produces a unique product with no close substitute,

3. It can change supply and set whatever price to maximize profit,

4. Major barriers to enter the market,

5. Does not engage in non-price competition as there is no competition.

Many firms gain monopoly status through patents or copyrights that give them full legal exclusive control over their product. (ex. New tech, music, inventors…)

Govt. can create monopolies by granting them sole rights to provide a service to a region. (ex. Rogers Cable)

While monopolies are often regarded as a bad thing keep in mind that they are able to do enormous tasks due to nearly unlimited resources and money as well as the ability to be incredibly efficient due to economies of scale.

Monopolies

Reading Activity

Read the Consumers Beware handout and answer questions 1,2,3,6

Extra Business Organizations

The Co-operative Enterprise

A co-op is a business firm owned equally by its various members.

Retail co-ops offer goods to members at reduced prices

Marketing co-ops are created to sell produce for members at the best possible prices.

Financial co-ops are formed to arrange savings and loans for members at rates better than banks.

Service co-ops exist to provide services such as housing, medical insurance, and equipment rentals.

Co-op

In a co-operative enterprise all members are entitled to vote at meeting but day-to-day activities are controlled by an elected board of directors.

Co-ops are popular in western Canada and in rural Atlantic Canada.

The Credit Union is a good example of a co-op.

Many co-ops are operated in such a way that any profits that are made are often paid out to its members as dividends or patronage returns. These payments are often linked to the percentage that each individual has invested in the co-op.

Decision making can be problematic for co-ops as members may disagree with the direction of the business and the non-paid officers’ positions don’t encourage capable people to volunteer.

Multinational Corporations (MNCs) As part of their natural growth and

expansion many firms:1. sell a portion of their output abroad, 2. license foreign companies to use their

manufacturing processes, or even3. Establish their own branch plants, or

subsidiaries, abroad. Pepsico is a good example of a

multinational.

MNCs

America is the hub of many MNCs and they often tend to establish subsidiaries in Canada due to geographical proximity, political stability, natural resources and well-developed markets.

How does the practice of this type of corporate growth be seen as a negative?

MNCs

Foreign investment by MNCs have a few positives that help improve their profitability:

Foreign branches allow direct access to new markets,

Access to comparatively cheap raw materials and labour,

Tax concessions or grants from govt. who want foreign investment,

Diversification*

MNCs

One of the negatives that accompany MNCs are the complex corporate decisions. Decisions are often made at each level of the organization (ie R&D decisions are often made at head office while marketing and distribution decisions are made at branch levels).

The brain drain is another downside of foreign investment.

Brain Drain

MNCs

While making decisions can be a challenge for MNCs they still have many other benefits including being able to negotiate favorable terms when dealing with suppliers, govts, and trade unions by playing off one community against another-a practice that gives MNCs a bad reputation.

MNCs also have the ability to skirt around laws as they can threaten to close operations or buy influence over politicians to achieve an outcome.

Questions to Consider

1. Why would industries characterized by oligopoly and many differentiated sellers use non-price competition like advertising, while perfect competition would not?

2. How would you characterize each:a) Record industryb) Furniture industryc) Cable television industry

Questions to Consider

On page 371of the text complete questions 3-7