Which of the following is true in a monopoly?
- A.)Business owners should focus on pricing products correctly so customers will choose it over other products.
- B.)Business owners should focus on other business functions, since advertising will not impact the success of their products.
- C.)Business owners should use marketing to emphasize the unique features offered by their products.
- D.)Business owners should bring their products to market quickly, before another company can create a similar product
This is the Passage for this question
1. Suppy and Demand
The law of demand in economic terms is defined as a downward sloping curve on a graph where price is the y-axis and quantity is the x-axis. What we’re going to see is as price goes down, quantity sold increases. So, as a product becomes more available at a lower price, people will tend to want to buy more of it, and therefore, the quantity demanded will go up.
The law of supply, on the other hand, is the opposite story. As the price increases, more producers will want to get into the market, which will affect how much product will be available in the market, because more people are coming in and trying to make a profit on the current price. As price goes lower, the law of supply says that the quantity will also go down.
1a. Market Price and Equilibrium
Market price is the current price of a good or service at which a customer is willing to pay. Let’s put our supply and demand curves together on a graph, and set the market price at the point marked with the dot. This will represent, given the current situation, what a customer is willing to pay.
hint Keep in mind that these things are always in flux, so you’ll never see them static, like they’re represented here. This is just for the sake of demonstration.
Equilibrium price is the price at which quantity demanded and quantity supplied will meet. Recall where we set our market price, the price at which a customer is willing to pay given the supply of a particular product. What’s going to happen is that the lines will move around until equilibrium is met, as shown below.
This is the price, given the supply and demand curves, where price will be at an equilibrium, all other things being equal.
terms to know
Market Price The current price of a good or service which a customer is willing to pay Equilibrium Price The price at which quantity demanded and quantity supplied meet
1b. Surplus and Shortage Surplus is when there’s more supply of a product than demand. Shortage is when there’s more demand for a product than there is supply.
This is going to affect the price, obviously. Surpluses will mean lower prices, while shortages mean higher prices.
The size of a business is going to have an effect on how they can cope with surpluses and shortages. Larger organizations have more flex–more money–available, and they’re able to look for more substitutions for a product than a small organization or an individual, who’s going to find reacting to a shortage much more difficult. In addition, surpluses and shortages can be manipulated artificially.
Select the statement below that supports Luis starting a business as a partnership with Derick.
- A.)Luis wants to keep any profits earned and reinvest them in the business.
- B.)Luis has secured the funding needed to start the business.
- C.)Luis needs someone to work with him that has business skills.
- D.)Luis has the technology background needed to design the app features.
The story for this question
1. Sole Proprietorship
A sole proprietor is simply a business which is owned and operated by one person. Now, just because a sole proprietorship starts off that way, doesn’t mean it has to stay that way forever. In fact, Ford Motor Company, Walmart, and some of the other biggest companies in the world today began life as a sole proprietor.
did you know There over 21 million sole proprietorships in the United States alone. How many can you think of? If you think about it, you could probably think of a half dozen simply in your town, where you do business every day.
There are advantages and disadvantages of being a sole proprietor.
Sole Proprietor Advantages Disdvantages It’s easy to start up and close down; it’s as simple as saying you want to be in business, or you don’t want to be in business The workload can be daunting because you have to do everything associated with the business. The owner retains all the profits generated by the business. Funding can be an issue, especially when you’re starting out. You’re considered a risky investment, and people may not want to invest in you. Taxes are simple, because you, as the owner, are simply taxed on the profits that you take from the business. It’s difficult to attract employees, especially starting out, because there’s not a lot of money to go around. Attracting employees with a salary that they would be willing to accept can be difficult. There is pride in a job well done. You are the business, so all of its successes come back to you. You have unlimited liability in the business, which means if the business is sued, they’re actually suing you, and you’re putting your personal assets at risk. You can build great customer relationships with folks. If you’re one of those people who loves building a relationship with a customer, this is probably the business model for you. Continuity is a significant issue, because very rarely will a sole proprietorship survive past the death of its owner. Once the owner dies, the business dies with him or her.
hint Liability is simply a legal obligation or responsibility. Being a sole proprietor, having that unlimited liability means that if someone sues the business–because you are the business–they’re actually suing you.
terms to know
Sole Proprietor A business which is owned and operated by one person Liability A legal obligation or responsibility
A partnership, on the other hand, is defined as a business that’s owned by two or more people. These are both folks who are actively involved in the business. If, for instance, you and I wanted to start a business, we would be partners in a partnership.
There are several different types of partners:
- General Partner: A member of a partnership that plays an active role in the business.
- Limited Partner: Someone who enters the partnership by investing capital, but they don’t play any active role.
Suppose you and I are general partners, and we have someone come along and invest money to help us grow or expand the business. That person would be a limited partner. They’re shielded from some liability, and they can take a portion of the profits for the investment that they made, but they don’t play an active role in the decision making.
- Master Limited Partnership: Similar to a limited partnership, but in this case the company issues units of ownership to attract a larger number of limited partners.
Suppose you and I are running the business, but we can’t find one big investor to give us the capital that we need. So, we sell units of ownership that represent limited partnership in our business. We sell this to lots of different people, so more people can get in for less money. They each have a piece of ownership of the business, and we are able to attract the capital that we need to run the business, or cover operating expenses.
Partnership agreements are absolutely vital in any partnership. This document details how final decisions are made: who gets to make them, and how. It defines who has what responsibility in the business, or who does what job. It also has the profit and loss breakouts, so it defines how much of the profit goes to each of the partners–general or limited–and how to handle any losses that arise from the operating of the business.
Partnership agreements also help define what happens in a disagreement, because if you’re in a partnership, eventually there’s going to be a disagreement. Therefore, having a plan in place for dealing with that is a very good idea.
There are advantages and disadvantages of a partnership.
Partnership Advantages Disdvantages It’s easy to start The general partners have an unlimited liability, just like the sole proprietor does. More people initially means more access to skills, and initial access to money and credit. There will be partnership disagreements, which is why a partnership agreement is a very good idea to help smooth them over. Profits go directly to the partners, just like with a sole proprietorship. Continuity can be an issue. Once a partner dies or decides to leave the business, continuing the business can be very difficult for the remaining partners. Partners are each taxed individually. The business itself is not taxed as a separate entity, so each partner will simply be responsible for their share of the profits. There are frozen assets, especially at the beginning. When money gets tight, any investment that a general or limited partner made into the business can be next to impossible to get back out again, because the assets simply are not there. You can’t use this investment like liquid assets–like a bank account–to draw money in and out.
term to know
Partnership A business which is owned and operated by two or more people
3. Sole Proprietor vs. Partnership
To compare the sole proprietor versus the partnership, let’s take a look at some real-life examples.
Henry Ford was the sole proprietor to begin with, and he had complete control over all of his processes. In fact, when Henry Ford started the Ford Motor Company, that was the third automotive business that he’d started. He would not let a car leave the line unless it met his exact specifications, and that became quite a problem for him and his investors. They wanted to move product out of the line, and Henry Ford wanted something that was perfect.
In addition, there was the issue of frozen assets. Now, when Henry closed his second automotive business, he basically left with simply his name, and that’s about it. He used that name to attract investors and start what we now know as the Ford Motor Company. Of course, he had an incredible workload, and because he was such a perfectionist, this served as a big detriment and source of contention between him and his investors.
Larry Page and Sergey Brin started a small company called Google out of their dorm room in Stanford. Before they were partners, and before they incorporated the company, they were able to split the workload quite effectively. As a result, one was able to market the product while the other one worked on coding. This created a large customer base that was already in place before they ever incorporated the business and took it to a national level.
It also helped them to attract capital. On day one, when they started the business, they had an uncashed check for $100,000 of capital, simply because of the work that they had done prior to incorporation.
Sole Proprietor Partnership Henry Ford Larry Page and Sergey Brin Sole owner to begin Began as partnership before incorporation Complete control over processes Created large customer base Frozen assets Access to capital Incredible workload Split workload
A co-op, which is short for cooperative, is another type of non-corporate business. It’s owned and operated by its members. It is organized around a common goal.
You may have heard of a farmer’s co-op. Farmers are members of the co-op, and they’re able to order supplies in greater numbers, so as to get a better price for the individual members of the co-op. Another good example of this type of organization is a credit union.
Which of the following is an example of a sales forecast?
- A.)Tarheel Coffee intends to implement a social responsibility program aimed at community youth within the first six months of business.
- B.)Market research shows that six similar coffee shops in the surrounding areas profited an average of $150,000 during year one. Tarheel Coffee expects to earn a profit of $170,000 during the first year of business.
- C.)Tarheel Coffee needs an investment of $125,000 to open and is estimated to break even within the first eight months of opening.
The Passage for this question
1. Overview of the Business Plan
A business plan is simply defined as a document that outlines the plan for a business. Simple enough, right?
The business plan is a very valuable tool for any business in three key areas:
- Communication: Communicates to its investors what the business is going to do with the money that they’ve invested.
- Management: Helps set up monitoring and tracking of different goals and objectives that the business may have, and provides the key indicators if they’re succeeding or failing.
- Planning: Provides timelines and milestones, and allows the business to compare the growth of different projects throughout their lifespan.
term to know Business Plan A document that outlines the plan for a business
2. Three Main Parts of the Business Plan
A business plan has three main parts:
- Goals and Objectives
- Sale Forecast
- Financial Plan
Now, it may include other information, such as the product description or product differentiation, to give the people you’re communicating to–the investors–a better idea of what it is that you’re doing, and these can be critically important.
2a. Goals and Objectives
Goals and objectives can differ greatly, depending on if it’s a larger company or a smaller company. Goals are the long-term targets that a company wants to hit. Objectives are the shorter term targets. Most of the time, objectives will simply be ways or steps to achieve the goals that we want to accomplish.
Now, goals should be SMART:
Suppose you have a broad goal of wanting to grow your business. How can you turn this into a SMART goal?
Specific: Acquire three new clients
M: Measure how many clients that are acquired while maintaining client base
Achievable: Ask clients for referrals, launch social media campaign, or network with local businesses
Relevant: Grows business and increases revenue
Timely: Within two months
SMART Goal: I will acquire three new clients for my business within two months by asking for client referrals, launching a social media campaign, and networking with local businesses, which will allow me to grow my business and increase my revenue.
It’s specific. It’s measurable. It’s achievable. It’s relevant to your business, and it’s timely.
2b. Sales Forecast
Sales forecasts are split up into:
- Sales category
- Number of units
- Unit price of the product
- Total sales
- Monthly and annual totals
This allows you to track your sales throughout the year. A sales forecast is also based on a lot of research. Businesses will look at the current market and try to understand the financial strengths and weaknesses of their own business and predict how their business is going to compete within the marketplace.
Let’s take a look at a template for a sales forecast.
As you can see, it is split up among the different months, but it also covers the entire year to see how the business is performing overall throughout the year, and for each individual product or product category.
In addition to the monthly totals, it shows the end of year totals, to compare to prior years. You can use this information to make long-term forecasting for the years that follow.
Below you can see what a graph might look like, using the data from the sales forecast.
Starting in June of 2014, bikes (blue line) is at 20. It moves up and holds steady, then around October, it takes a dip back down to 20 or so. This could indicate a seasonal issue with the product. Various factors may be involved that will determine how to increase sales or output, and ultimately, growth.
For tires (red line), it’s a slightly different story. You can see that it starts off at around 35 and moves steadily downward all the way to the end of the year. Now, the reason someone might chart this is because you may be discontinuing that product by the end of the year.
2c. Financial Plan
A financial plan is a summary of what investments are needed. It also takes a look at the break-even analysis. How much product do you have to sell at a particular price to break even to cover all of your costs? As you can imagine, this is critical for individual business.
It also contains revenue projections, which are based, at least in part, on sales projections or forecasts. Therefore, the better job you do forecasting your sales, the better you can accurately predict your revenue for the following months and years.
Venture capitalists will want to see this particular document. Venture capitalists are high-risk investors who provide funding for startups and small businesses, but they are not just going to hand businesses money without a sound financial plan and business plan.
They are absolutely critical to startups, as startups typically have low access to capital, yet they have high costs from the beginning. Therefore, they need a lot of money to get started and to keep going. Venture capitalists provide the capital needed for those startups to cover those high costs, because they are willing to make riskier investments than traditional lending institutions, like banks.
Which of the following is an advantage to starting a franchise?
- A.)The cost of franchise license is inexpensive.
- B.)Success is guaranteed by the franchiser.
- C.)The franchisee has freedom to incorporate his/her own ideas into the business.
- D.)The customer base is already established.
If an owner makes effective use of people and funds, a business may succeed because of __________.
- A.)checks and balances
- B.)management of resources
- C.)hard work and effort
- D.)auditing decisions
Here is the Passage for these question
1. Business Failure
Some of the big reasons that businesses fail include:
- Mismanagement: There is a management failure of some type; management takes their eye off the ball and fails to do its job in creating wealth for the shareholders.
- Financial Miscalculation: There’s simply not enough money to make it through the growth of the business. They didn’t anticipate how much it would take or they anticipated incorrectly.
- Lack of Focus on the Part of Management or the Employees: This happens a lot with small businesses. A small business owner simply may not have enough time to focus on the things that he or she needs to focus on. You might say they’re “getting into the weeds” of the business.
- Uncontrolled Resources: Things like groupthink or starting to believe your own press. There may not be adequate checks and balances on different departments within the organization, so there’s no control system on decisions that are made. Any large scale decision that is made, no matter who makes it, should involve an audit process within the business. If there’s no auditing process to ensure that the decisions are based on sound data, then one small mistake can have a very large impact on the business as a whole.
An example of small business failure is a website called Wesabe. Wesabe opened in 2006 and closed in July 2010. During this time, it was considered a leader in online personal finance. However, 10 months after Wesabe’s introduction, a competitor, Mint, appeared. Mint had a better name, better design, and was easier to use so people stopped using Wesabe and started using Mint. This lead to Wesabe having to close its website in 2010.
Another example of small business failure is Iparents, which was a website for parents and families that opened in 2008 and closed in 2010. Although Iparents was a popular social network for parents and families, too much time and money was spent on things such as text alerts for appointments and the ability to turn family photos into magnets. This was not something its customers wanted, which lead to business failure for Iparents.
2. Business Success
Many small businesses experience failure, however, a lot of small business experience incredible success.
Small business success can come from:
- Management and Leadership: Business success tends to come from both sound management of both finances and people. If you can’t keep good employees, they’re going to go to your competition.
- Planning and Organizing: This involves correctly analyzing the demand for your product–and not overestimating it–and planning correctly and realistically on how to meet those demands. Over-promising can be a very big problem.
- Hard Work and Effort: Especially in a small business, this is the key to success. It’s not easy to run a small business, as we’ve talked about before. The workload is simply tremendous. Therefore, keeping your eye on the ball and putting in the hours that are necessary for the business are vital. In addition, a little bit of luck certainly helps.
An excellent example of small business success is Oak Street Bootmakers, which is owned by George Vlagos. He realized that in Chicago it was really difficult to find a pair of quality shoes. So he opened his small business, Oak Street Bookmakers, and now there is a six-week waitlist to get a pair! He was able to meet the demand for custom made shoes.
Another great example of small business success is Bamboletta Dolls based in Vancouver. Bamboletta Dolls is about community and using all-natural materials to create hand-crafted, one-of-a-kind dolls for children of all ages. The owner, Christina Platt, was able to meet the demand for all-natural dolls that felt real to children, while also focusing on community.