! Week 3: Firms Dr Christopher Pokarier EB202 Introduction to Business

Transcription

1 Week 3: Firms! Dr Christopher Pokarier EB202 Introduction to Business

2 Legal bases for doing business! Sole traders: do business as an individual without creating a company. The individual has full legal liability for all debts! Partnerships: similar but in partnership with one or more other people.! [partnerships can be legally and organizationally sophisticated in the case of law firms, accountants, architects & other professions]! Basic company: the business is incorporated, with an articles of association (rules, statement of purpose etc)

3 Corporations share risk! Companies started with high risk, capital intensive long-distance sea trading

4 Limited liability! Limited liability firm: shareholders have liability only up to the amount of capital they have invested in the firm (ie. when shares were sold by firm)! That is, shareholders have no personal responsibility for debts of a firm if it goes bankrupt (leaving creditors unpaid)! The firm pools capital from investors and takes on more risk! Limited liability firms are more attractive to investors (small & big) & so governments allowed them to stimulate growth! To protect people who would deal with such a firm it was required that Ltd be added to the end of the firm s name

5 Incorporation! Creates a legal person (from corpus; latin for body) 法人! This allows business to continue if the owner/founder dies! Ownership issues do not disrupt the business & allows multiple owners through trade-able shares! Making the business more viable, reliable and therefore valuable! The ownership of a business might also therefore change easily! Someone can therefore start an enterprise and sell out some or all the shares and this is an incentive for new business creation

6 Government regulation of incorporation! Many governments have made incorporation easy! Many Non-Profit Organisations (NPOs) are also incorporated! Accountability! Assets can be more easily managed! The government keeps a record of incorporated bodies and the public can access this information! Basic responsibilities are made clearer

7 Businesses big and small! Explaining variety in the size of enterprises

8 Optimal Size Why so many small businesses and some huge ones?! This reflects the optimal size of the business given the nature of the product and its production process! Eg. Most trades (eg. plumbing) are either sole operators (typically the majority) plus a few large scale operators! This reflects the difficulty of monitoring work quality

9 Why some bigger businesses?! scale economies associated with spreading overheads (general operational costs) across a larger business operation! Technically efficient scale some things are most efficiently made in large volumes (eg. cars)! Scope economies gaining cost competitive advantages by making related products

10 Business Expansion Businesses start very small and might expand in several ways, often at once! Geographically production in more than one site! By scale making more of the same, lowering the marginal cost of each unit produced

11 Business Expansion II! By function by integrating more of the operations that add value to its final product into the one business! By scope expanding into making related products (eg. Suntory produces beer, wine and non-alcoholic drinks)

12 Limits to Business Expansion! Technological! Managerial and human resource limitations! Environmental Environmental factors include:! Market size & diversity! Related to transport infrastructure! Law & order affecting supply & contracting! Treatment of business by governments

13 Good businesses! Are sometimes best left small

14 falling prices, increasing production?! 14! During times of falling demand, and/or falling prices, it often is logical for a firm with relatively low costs of production to further increase production volume! this increases supply, further reducing market prices! higher cost producers can t profitably continue in the business and must exit! losing firms might be angry towards cheaper producers increasing volume but common! e.g.. iron ore, electronics, fast foods

15 some businesses must be bigger when scale economies bring the lowest production costs firms must grow or exit!