Microeconomics

Business Organizations

Microeconomics: Overview

• Study of individual businesses and households• SMALL scale decisions

– A firm’s business decisions about employees– Entrepreneurs’ decisions about how to organize their

businesses• Supply, demand, and prices in the market of a

specific product– Oil Market– Real estate market

• Marginal cost and marginal revenue for a business

Business Organizations

• Sole Proprietorship

• Partnership– General– Limited

• Corporation

• ALL of these have advantages and disadvantages for you, the entrepreneur

Sole Proprietorship• ADVANTAGES• Easiest to organize• No separation of

ownership and control• Owners run business• Lower taxes than

corporations

• DISADVANTAGES• No specialization• Unlimited liability• Limited access to

financial capital• Limited life of firm

Partnership• ADVANTAGES• More specialization

than sole proprietor• Easier to raise

financial capital than sole proprietor

• Lower taxes than corporation

• DISADVANTAGES• Unlimited liability• You share profits with

partner• Possible conflicts with

partner• Possible instability if

partner quits or dies

Corporations• Created by corporate charter• Legally a “living thing”• Owned by shareholders

– Shareholders own stock– They can profit in two ways

• Dividends: divided profit of corporation• Capital gains: profit by selling stock at higher price

• Managed by board of directors– Elected by shareholders

Corporation

• ADVANTAGES• Limited liability

– Owners not responsible for corporate debt

• Specialization• Raising financial capital

– Selling stock– Corporate bonds

• Professional management• Unlimited life

• DISADVANTAGES• Harder to start• Complicated decision-

making• Less control for owners

(shareholders)– Board of directors is elected

by shareholders– Board runs corporation

• Double taxation– Corporate income taxes for

corporation – Capital gains taxes on

shareholders’ dividends

%#@&