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UNIT 5How Are Businesses Organized (6 days)
UNIT 5 - HOW ARE BUSINESSES ORGANIZED? (6 Days)All teaching resources in this document are free for teachers. Here is how to you access them:1. Many are hyperlinked in the document, so you can get started right away. 2. Lessons that do not have a hyperlink can be found on the lesson plan resource calledVirtual Economics 4.5 or 5.0 (VE). All teachers can and should get this resource for freeby participating in a VCEE training session. Visit www.vcee.org for more information.3. Lessons from Financial Fitness for Life are on VE. They also have educationaltechnology tools that can be found here:https://www.econedlink.org/resources/collection/fffl-9-12/When most students enter the workforce they will work for a business or start their ownbusiness. So, it’s important for them to understand the basics of how businesses work. Somepeople want to own their own company so they can be their own boss and just work when theywant to. What they find is that they will be working many more hours than if they worked forsomeone else--because all of the responsibility falls on them. Other folks form partnerships;generally the partners bring resources to the company as well as different skills. Partnership hasthe difficulty of shared decision-making. Both forms have unlimited liability--so the ownerspersonal assets are on the line.Some businesses organize as corporations. With corporations, the owners are shareholders. Manylarge corporations are publicly traded; that is, their shares can be bought and sold on stockexchanges such as the New York Stock Exchange, the American Stock Exchange and theNASDAQ. They answer to their shareholders. Each form of business has advantages anddisadvantages for the owners. Shareholders, for example, have limited liability for actions of thecorporation.All businesses must earn profits to continue--whether they are sole proprietors, partners orcorporations. This impacts what prices they charge for the goods or services they produce. Italso impacts who they hire and what salaries they pay.EPF.2 The student will demonstrate knowledge of the role of producers and consumers in amarket economy byd) comparing the costs and benefits of different forms of business organization including soleproprietorships, partnership, corporation, franchise and cooperative(BUS6120.043)Day 1 and 2 Proprietorship, partnership, franchise, cooperative, corporation—what arethe characteristics as well as the advantages and disadvantages of each?EPF.18 The student will demonstrate knowledge of investment and savings planning byf) describing how the stock market works(BUS6120.137)Day 1 Some corporations go publicDay 2 How are stock prices determined?1Virginia Council for Economic Education
EPF 2 The student will demonstrate knowledge of the role of producers and consumers in amarket economy byh) describing the effects of competition on producers, sellers and consumers(BUS6120.047)Day 1 What are the characteristics of competitive and less competitive markets?Evaluation Day2Virginia Council for Economic Education
Day 1 and 2 - Proprietorship, partnership, franchise, cooperative,corporation—what are the characteristics, advantages anddisadvantages of each?Content KnowledgeThe role of an economic system is to get goods and services produced for the members of asociety. In a market economy businesses produce most of the goods and services—based onwhat consumers are willing and able to buy. Businesses may be small or large, have manyowners or just a few. Owners consider the advantages and disadvantages of the various forms ofbusiness and are free to decide which works best for them.VocabularyCooperative – A legal form of business owned by the people who use its services or by thepeople who work there.Corporation – A legal entity owned by shareholders whose liability for the firm's losses islimited to the value of the stock they own.Franchise – A form of business in which one owner uses the model, methods and trademarks ofanother.Partnership – A business with two or more owners who share the firm's profits and losses.Proprietorship – A business with one owner who takes full responsibility for the firm’s profitsand losses.Virginia Board of Education FrameworkSole ProprietorshipBenefits: The owner makes all decisions and keeps all profits.Costs: The owner generally has limited financial resources. The owner also facesunlimited liability, which means if the company fails, the owner can lose personal assetsalong with business assets.PartnershipBenefits: Owners make decisions and keep the profits. They share responsibilities, andeach has a unique set of skills and expertise.Costs: Owners face unlimited liability, limited financial resources, and potential conflictwith partners.CorporationBenefits: Corporations are able to accumulate sufficient financial capital to makelarge-scale investments and achieve economies of scale (i.e., bringing down cost ofproduction by producing in volume). They also have limited liability, meaningshareholder risk is limited to their share of ownership in the corporation. The corporationtranscends the lives of those persons who created it.3Virginia Council for Economic Education
Costs: Corporations face tax implications (e.g., double taxation—profits are taxed at thecorporate level and again when distributed to shareholders as dividends). Corporationsare more expensive to establish and are governed by more regulations.CooperativeBenefits: Cooperatives are member-owned and operate for members’ benefit (e.g., creditunions, agricultural cooperatives). Members enjoy discounted products and/or services,may receive refunds at the end of the year, face no personal liability, have a vote in howthe business is run, and have interests similar to other members.Costs: Decisions made by the group may not suit all members, and the decision-makingprocess may be more complex and slower than in other organizations.FranchiseBenefits: Training and marketing is provided by the franchisor. The franchisee gains theexclusive right to sell in an area and benefits from product development.Costs: The franchisee pays high franchise fees, enjoys a limited product line, andoperates under strict guidelines and standards.Most businesses in the United States are organized as sole proprietorships. Corporations generatethe most income.Teaching Tips1) Ask students what kind of work they plan to do when they get out in the world. Suggest thereare really only three types of places they can work. See if they can come up with—business(including owning one’s own business), government or non-profit organization. Have studentswrite down the three categories. In groups have them decide what percentage of the workforce isemployed in each category. Remind them that their answers must total 100%. Write the threecategories on the board. As each group reports, write their answers under the correct heading.Expect them to be surprised when you tell them that approximately 17% work for government(state, local and federal), 10% for non-profits and 75% work for a business. Conclusion: It’s1important to understand how businesses work because you will probably work for one or evenown one.2) Introduce the main forms of business with the advantages and disadvantages of each.3) Discussion points: Students should be asked to suggest advantages and disadvantages of eachform of business. Sole proprietorship and partnership are two organizational forms. In thediscussion, you can suggest that sharing has both an up-side and a down-side and ask thestudents what would be the up-side and down-side of sharing for each factor. For example, if thebusiness needs to replace a machine that has quit working, what are the advantages of having a1Data from OECD “Government at a Glance 2015”(https://www.oecd-ilibrary.org/governance/government-at-a-glance-2015_gov_glance-2015-en) and the Bureau ofLabor Statistics (https://www.bls.gov/opub/ted/2014/ted_20141021.htm).4Virginia Council for Economic Education
partner or partners? What are the disadvantages of having a partner or partners? If the businesshas an extremely good year, what is the advantage of having a partner or partners? What is thedisadvantage of having a partner or partners?Franchise is a form of business that many students are probably aware of. Explain that withfranchises, certain decisions are limited to the franchising company (franchisor) and others arethe responsibility of the franchisee. For example: the owner of a McDonald’s franchise hascertain restrictions on what they can offer on the menu. They are also restricted to purchasingcertain products from certain suppliers.The last two forms of business allow for a greater number of owners – the corporation and thecooperative. The corporation was designed as a way to raise large quantities of capital byinvolving a greater number of owners (stockholders). The advantage of the corporation is that thefirm becomes a legal entity or person in its own right. And the liabilities of the firm are limitedto the assets of the firm itself. The stockholder’s loss is limited to the capital invested through thepurchase of stock, while the profit potential is theoretically limited only by the success of thecorporation.Cooperatives are also multi-owner and limited liability firms. They differ from corporations inthat the firm’s owners are either the customers or the employees of the firm. Students may bemost familiar with the customer-owned cooperative as this is the model of most credit unions.(Costco and Sam’s are not cooperatives. They do have members, but the members do not ownthe company.) In both cases, the instructor should make an effort to demonstrate how liabilitiesare limited through this form of ownership and compare it to the more extensive liability of aproprietorship or partnership.4) Give examples of businesses in various situations; let students decide which business formwould meet the needs of that business.5) Look up data on which form of business most companies choose. (Sole Proprietorship) Whatform of business has the greatest total sales? (Corporation)Lessons and ResourcesFocus: Institutions and Markets Lesson 3: Business OrganizationsOnline Readings[Article about cooperative ownership] What Millions of Retiring Small Business Owners CouldMean for Citieshttps://nextcity.org/daily/entry/what-millions-of-retiring-small-business-owners-could-mean-for-citiesFive Steps Before Investing in a Pet Franchisehttps://www.franchising.com/articles/5_steps_to_take_before_investing_in_a_pet_franchise.html5Virginia Council for Economic Education
Day 1 - Some corporations go publicContent KnowledgeFinancial markets include banks and insurance as well as the stock and bond markets. Somecorporations grow so quickly that they don’t have enough money to finance the growth. Theymay choose to sell shares of their company (stock) to raise money to expand. The people whobuy those shares of stock become part owners. If the company is profitable the shares will paydividends and increase in value. Sometimes a company will go out of business altogether andtheir shares become worthless. However, because it is a corporation, the shareholders havelimited liability. Shareholders can only lose the money they have invested. They have noadditional liability.VocabularyCorporation - A legal entity owned by shareholders whose liability for the firm's losses islimited to the value of the stock they own.Stock - An ownership share or shares of ownership in a corporation.Stock Market - A market in which the public trades stock that someone already owns; thebuying and selling of stock.Bond - A certificate of indebtedness issued by a government or a publicly held corporation,promising to repay borrowed money to the lender at a fixed rate of interest and at a specifiedtime.Shareholder - One who owns one or more shares of stockDividend - A share of a company's net profits paid to stockholders.IPO - A company's first sale of stock to the public. When a company "goes public," it sellsblocks of stock shares to an investment firm that specializes in initial offerings of stocks andresells them to the public.Primary Market - The market where new securities are offered for sale for the first time.Investment banks buy shares of stocks directly from corporations that issue them and sell theseshares to others.Secondary Market - A market in which stocks can be bought and sold once they are approvedfor public sale; for example, the New York Stock Exchange.Virginia Board of Education FrameworkEPF 18f: When companies make profits, they may keep the profits to help them grow or theymay share the profits with shareholders in the form of dividends. Shareholders can make moneythrough dividends or through capital gains. A capital gain occurs when one sells a share for morethan one paid for it.Teaching Tips1) Ask students if they know the difference between stocks and bonds. Perhaps some haveparticipated in the Stock Market Game or own stock of their own. Define the two terms. Explainthat people who own stock share in the success and failure of a business. If the business is6Virginia Council for Economic Education
profitable, the value of its shares may rise (so the owner may be able to sell for more than he/shepaid) and the company may distribute dividends from the profits of the company. In contrast tothe ownership represented by stock, when one buys a bond it is like making a loan to a companyand earning a specific rate of return. The bondholder expects to receive that interest whether thecompany does well or poorly.2) Review limited liability as one of the advantages that corporations enjoy. Why is thisimportant with respect to the stock market? (People would be reluctant to buy stock if it meanttaking on the liabilities of the company.) Why is it important to have a stock market? (Peoplealso would be reluctant to buy stock if they had to go find someone to buy their stock when theywanted to sell. Also, the market tells just how much buyers and sellers think a stock is worth.)3) Explain that nearly all corporations started out as small companies and grew. When acompany first comes to market it is called an IPO (Initial Public Offering). Have studentsresearch current public offerings. Did any companies on the New York Stock Exchange start inyour community?4) Look up companies which are headquartered in Virginia and listed on the New York StockExchange, American Stock Exchange or the NASDAQ.5) Time permitting, participate in a simulation that walks students through an IPO.Lessons and ResourcesLearning, Earning and Investing for a New Generation Lesson 10: Financial Institutions in theU.S. Economy.Learning, Earning, and Investing for a New Generation Lesson 3: What is a Stock?Khan academy on what it means to buy a company's stock (13:46)http://www.khanacademy.org/video/what-it-means-to-buy-a-company-s-stock?playlist=Finance“What is a company,” from The Stock Market Game“What is a stock?” from The Stock Market GameDay 2 - How are stock prices determined?Content knowledgeWho sets the price of a stock? Like most other things that are sold in a market economy, the priceof stock is set by supply and demand. Something in the news makes people want to buy a7Virginia Council for Economic Education
particular stock. This is an increase in demand. If everything else remains the same, the demandcurve will shift to the right and the price will rise. Suppose there is bad news about a company.Some shareholders will decide to sell. This brings more stocks to the market for sale—anincrease in supply. The supply curve shifts to the right and the price of the stock goes down.Stock prices are based on expectations. If investors expect the price of a stock to go up, they willwant to buy. This brings an increase in demand. If investors expect that the price of a stock isgoing down, they may decide to sell. That would result in an increase in supply. What investorsexpect determines supply and demand and the price of stock.VocabularyDemand - The quantity of a good or service that buyers are willing and able to buy at allpossible prices during a period of time.Expectations - What consumers or businesses anticipate will happen, especially concerningmarkets and prices.Stock - An ownership share or shares of ownership in a corporation.Stock Market - A market in which the public trades stock that someone already owns; thebuying and selling of stock.Supply - The amount of a good or service that producers are willing and able to offer for sale ateach possible price during a given period of time.Virginia Board of Education FrameworkEPF 18f: Stock prices are determined by supply and demand based on investor expectations. If acompany is expected to be profitable in the future, demand for its shares rises and the price rises;when a company’s future looks less-than-profitable, demand decreases and the price falls.When the overall economy is robust and growing, people become optimistic about prospects forbusiness and the stock market goes up. Likewise, when investment interest rates fall, the stockmarket generally rises.When interest rates rise, the market goes down. When the overall economy is in decline,investors lose confidence and the stock market goes down.Teaching Tips1) This is an opportunity to show how supply and demand work in the real world. Use this timeto review and practice using supply and demand curves to show how prices are determined in thestock market.2) Define expectations. Explain how the expectations of buyers and sellers of stock affect pricesin the stock market.3) Prepare cards which read “supply” “demand” “increase” “decrease” “right” “left”. Give eachgroup a set of these cards. Practice with newspaper headlines such as the following anddemonstrate on a supply and demand graph. Think about how the event will affect stock buyers’and stock sellers’ expectations about the future profitability of the company.8Virginia Council for Economic Education
“Analysts predict that Coca Cola profits will be higher than expected due to international sales.”Is this likely to affect supply or demand? (both) Will there be an increase or decrease in demandfor Coca Cola stock? (increase) Will the demand curve shift to the right or to the left? (right)Will there be an increase or decrease in the supply of Coca Cola stock for sale? (decrease) Willthe supply curve shift to the right or to the left? (left) Will the price of Coca Cola stock increaseor decrease? (increase)“The XYZ company has been sued for patent infringement.” Will this affect supply or demand?(both) Will there be an increase or decrease in the supply of XYZ stock for sale? (increase) Willthe supply curve shift to the right or to the left? (right) Will there be an increase or decrease inthe demand for XYZ stock? (decrease). Will the demand curve shift to the right or to the left?(left) Will the price of XYZ stock increase or decrease? (decrease)Continue using current news events. Help students think about events from the perspective ofboth the stock buyer and the stock seller. For every trade, there must be both a buyer and seller.One party thinks it’s a good time to sell while the other thinks it’s a good time to buy. They havediffering expectations.Lessons and ResourcesEconEdLink Lesson : “Buy and Hold: A Stock Market Simulation.”https://www.econedlink.org/resources/buy-and-hold-a-stock-market-simulation/Learning, Earning and Investing for a New Generation Lesson 14: How Are Stock PricesDetermined?Ecedweb “What is a stock? or Who Owns McDonalds”https://www.unomaha.edu/college-of-business-administration/center-for-economic-education/teacher-resources/6-8/who-owns-mcdonalds_.pdfNGPF NextGen Personal Finance Lesson 24: ANALYZE: What’s the S&P 500?https://docs.google.com/document/d/17r7G2VTMLEtI0zjw111HMfiouL72kIiqSXzvEOlqh3k/editSimulationThe Stock Market Game in Virginia – Student teams manage a $100,000 portfolio and cancompare their results with other teams in the region and the state. Recognition is given to theteams with the highest portfolios after a state period of time.http://www.vcee.org/programs-awards/view/4The Stock Market Gamehttp://www.smgww.org/9Virginia Council for Economic Education
Day 1 - What are the characteristics of competitive and lesscompetitive markets?Content KnowledgeCompetition makes athletes improve by pushing them to do better. Competition does the samething to businesses. Businesses work to produce better products at lower prices in order to attractcustomers. Consumers benefit from this. Businesses also benefit from competition when they canchoose to buy their supplies from a variety of competing sources, which keeps their costs down.Some industries are more competitive than others. When there are many buyers and manysellers, no one has market power. This is a very competitive market structure. On the otherhand, a monopoly has only one seller and it can use its market power to raise prices and reducethe quantity it brings to market. Oligopoly has a few sellers. Monopolistic competition has manysellers, but is different from perfect competition.Because competition has benefits to consumers, such as lower prices, more choices, and betterquality, the government seeks to keep competition in industries. There are laws againstmonopolizing and collusion which reduce competition.VocabularyBarriers to entry - Factors that restrict entry into an industry and give cost advantages toexisting firms. Examples would include the large size of existing firms, control over an essentialresource or information, and legal rights such as patents and licenses.Competition - Attempts by two or more individuals or organizations to acquire the same goods,services, or productive and financial resources. Consumers compete with other consumers forgoods and services. Producers compete with other producers for sales to consumers.Differentiation – Making a non-price distinction between the features or characteristics of one’sproduct or service from those of similar products and services.Industry - An industry is a distinct group of productive or profit-making enterprises sharingsimilar products or services (e.g., the automobile industry).Monopolistic Competition - A market structure in which slightly differentiated products aresold by a large number of relatively small producers, and in which the barriers to new firmsentering the market are low.Monopoly - A market structure in which there is a single supplier of a good or service. Also, afirm that is the single supplier of a good or service for which there are no close substitutes; alsoknown as a monopolist.Natural Monopoly - An industry in which the advantages of large-scale production make itpossible for a single firm to produce the entire output of the market at a lower average cost than anumber of firms each producing a smaller quantity.Oligopoly - A market structure in which a few, relatively large firms account for all or most ofthe production or sales of a good or service in a particular market, and where barriers to newfirms entering the market are very high. Some oligopolies produce homogeneous products;others produce heterogeneous products.10Virginia Council for Economic Education
Perfect - Competition A market structure in which a large number of relatively small firmsproduce and sell identical products and in which there are no significant barriers to entry into orexit from the industry. Firms in perfect competition are price takers and in the long run will earnonly normal profits.Virginia Board of Education FrameworkCompetition among producers and sellers leads to more choices, improved quality, and lowerprices as producers seek to attract customers away from other businesses.Competition among consumers leads to higher prices and allocates goods to those willing to paythe most (e.g., several buyers bidding at an auction push the price up).An industry is a distinct group of productive or profit-making enterprises sharing similarproducts or services (e.g., the automobile industry). The level of competition in an industry isaffected by the ease with which new producers can enter the industry and by consumers’information about the availability, price, and quantity of substitute goods and services.Markets with perfect competition have many buyers with perfect information and sellers allselling identical products. Sellers here have no market power—no control over the market price.(For example, a grower of plain white rice can only sell at the market price; no one will pay morebecause they can get plain white rice from any supplier at that price.)Teaching Tips1) Discuss the benefits of competition to consumers. Discuss the benefits of competition tobusinesses.2) Ask students if businesses like having competitors. (Businesses would rather bemonopolies—so they wouldn’t have the pressure of competition. But they like competition amongtheir suppliers.)3) Draw a continuum on the board with perfect competition at one end and monopoly on theother. Describe and discuss each of the market structures. Explain that the continuum showsdegrees of competition.perfect competitionmonopolisticcompetitionoligopolymonopolyMany buyers andmany sellersHomogeneous productNo market powerLow barriers to entryMany buyers andmany sellersDifferentiated productFew sellersPrice leadershipHigh barriers to entryHomogeneous ordifferentiated productOne sellerUnique productHigh barriers to entryIn perfect competition sellers have no control over the market price. Their product is identical toall others of the same type (homogeneous) —for example winter rye, feed corn. The market11Virginia Council for Economic Education
price is set by supply and demand for the product and each supplier has to take the market price--suppliers have no market power to set the price. Buyers will pay no more than the market priceto get the product from one seller when they can get the same product from other sellers at themarket price. This is the market structure farmers face. When good weather brings a bumpercrop the increase in supply may result in a market price that is actually below what it costs thefarmer to grow the crop.Looking at the other end of the continuum, ask students for examples of monopoly (in someplaces cable TV, electrical power, popcorn in movie theaters). How are monopolies able to keepcompetitors out? There are barriers to entry such as patents, copyrights, control of resources,high cost of getting into the business. Discuss prices and sensitivity to customer conveniencewhere there are monopolies. Define natural monopoly. Why does government regulate the priceof electricity and cable tv? (To keep companies from taking advantage of being the singlesupplier and charging a high price). Compare monopoly to perfect competition.There are market structures in between. Oligopoly is a market structure where a few companiesdominate an industry—think soft drinks, cereal, detergents, and automobiles. Observe that softdrink makers make many different drinks—but there are just a few companies. One of thecharacteristics of oligopoly is “price leadership.” Because there are so few companies they canwatch and follow one another. In 2011 some large banks began charging for debit card use.When customers complained, and other big banks did not follow, those who started the trend hadto stop the practice or lose customers to banks who did not charge those fees. Similarly, oneairline started charging for checked luggage—and, with few exceptions, other airlines quicklyfollowed.Monopolistic competition sounds like it should be most like monopoly—but it’s really most likeperfect competition. The chief difference is differentiation. There are many sellers in thisindustry and they differentiate (point out the difference, often in advertising) their goods orservices in hopes that consumers will pay a bit more for them. Examples would be restaurants,auto repair shops, hotels, hair salons.4) Suppose that all the gas stations in town got together and agreed on one price. Would that be agood thing or a bad thing for consumers? For gas station owners? Why is collusion unlawful?Why would businesses want to collude? When the Organization of Petroleum ExportingCountries (OPEC) established a cartel to control oil prices through managing the supply of oil,this was an example of collusion.Lessons and ResourcesCapstone Lesson 22: How Competitive is the Industry?High School Economics Lesson 4: A Classroom Market for Cocoa.http://hseconomics.councilforeconed.org/Videos12Virginia Council for Economic Education
“Real World Economics – Market Structure” (13:00)http://www.dailymotion.com/video/x871gq_real-world-economics-market-structu_schoolmjmfoodie - Episode 25: Market Structure (5:51)http://www.youtube.com/watch?v=9Hxy-TuX9fs (about competitive and uncompetitive markets)Stossel: The Fight Against Food Truckshttp://reason.com/reasontv/2017/12/12/stossel-the-fight-against-food-trucksEmily Smith “Types of Markets” https://www.youtube.com/watch?v=QJnP8jzBjvkArticle“Competition in the Food Truck Industry.”https://www.dummies.com/business/start-a-business/competition-in-the-food-truck-industry/“Study Explores the Impact of Uber on the Taxi Industry”https://www.forbes.com/sites/adigaskell/2017/01/26/study-explores-the-impact-of-uber-on-the-taxi-industry/#601855ea16b0“Competition in the Banking Industry Comes From an Unexpected Source.”https://mobilebusinessinsights.com/2017/03/competition-in-the-banking-industry-comes-from-an-unexpected-source/EVALUATION DAY13Virginia Council for Economic Education