Economics
CHAPTER 1 INTRODUCTION
3 key things that affect the behaviour of firms:
1. The legal status of the business
2. The way in which the firm is organized (what kind of organization, for example multi-department)
3. The aims of the firm (is profit maximization the objective of the firm, or are there other aims?)
1. THE LEGAL STATUS OF THE BUSINESS
The sole proprietor business is owned by just one person (small shops, easy to set up, relatively small capital
investment)
2 main disadvantages:
- Limited scope for expansion (limit to the size of an organization, because there is one person
controlling)
- Unlimited liability (the owner is responsible for the losses the business might make. Think about
selling his house or car to pay off bills because of failing the business)
The partnership business owned by 2 or more people (limit of 20 partners)
Advantages Disadvantages
Scope for expansion A loss of control because decision making is shared
Partners can specialize in different areas of the Limited liability, a mistake of a partner could affect
business the personal assets of all the other partners
Larger organization is more viable (rendabel)
Partnerships are not generally an appropriate form of organization
Where large amounts of capital are required and when the risks of business failure are relatively high it is best
to form a company
Company a company is separated from its owners. It can enter into contracts and own property. The debts
(schulden) are their debts and not the owners.
The owners of a company are shareholders (aandeelhouders)
Each shareholder receives his or her share of the company’s profit. These payments are called dividends
,The owners have limited liability This means that if the company goes bankrupt, the owners will lose the
amount of money they have invested in the company but no more.
2 types of companies
- Public
- Private
Public companies Companies that can offer new shares publicly: by issuing a prospectus, they can
invite the public to subscribe to a new share issue. (Dit zijn vennootschappen die nieuwe aandelen
publiciteit kunnen aanbieden: door een prospectus uit te geven, kunnen ze het publiek uitnodigen om in te
schrijven op een nieuwe aandelenemissie.)
Private companies private limited companies cannot offer their share publicly. This makes it more
difficult for private limited companies to raise finance, and consequently they tend to be smaller than
public companies. They are easier to set up than public companies. (besloten vennootschappen met
beperkte aansprakelijkheid kunnen hun aandeel niet openbaar aanbieden. Dit maakt het voor besloten
vennootschappen moeilijker om financiering aan te trekken, en bijgevolg zijn ze doorgaans kleiner dan
overheidsbedrijven)
Co-operatives An organization which is owned by its members who share the profits (at least 5
members, equal voting rights)
2 types co-operatives
- Consumer
- Producer
Consumer Officially owned by the consumers but they play no part in running the business
Producer Owned by the firm’s workers, who share the firm’s profits
2. THE WAY THE FIRM IS ORGANIZED
The internal operating structure of a firm depends on their size and technology (technological changes
forces organizations to change their organizational structure)
U- form business organization M-form business organization Flat organisations
Unitary form Multi-divisional form
Small – medium size firms Larger firms
,The central organization of the The firm is divided into divisions, Technology enables senior
firm is responsible for both, the each division is responsible for a managers to communicate (they
day-to-day administration but particular thing don’t have middle managers
also the business strategy anymore)
, The holding company H-form,
3. AIMS OF THE FIRM
The owners (shareholders) may want to maximize profit to increase their dividends but what are the objectives
of the managers?
Managers still have to ensure that sufficient profits are made to keep shareholders happy, but that may be
very different from maximizing profits.
The problem of managers not pursuing the same goals as the owners is an example of the principal-agent-
problem.
Agents = the managers
Principals = the owners
Principle-agent-problem example
Principal 1 Director Agent 1 Teacher
The director hires the teacher, the director is the principal and the teacher is the agent.
The director wants that students have to work together in class so he tells this to the teacher. The teacher can
think about this because the director is not there during his lectures so he can decide if he do this or not. You
call this asymmetric information (A situation in which one party knows more than another)
The director finds collaboration very important because you need this for your future job. But the teacher finds
it very nice if everyone works alone so it is quiet in the class and he can go on with other things (checking tests,
preparing lectures). The teacher doesn’t have the same interest (belang) as the director. This can lead to issues
between the director and the teacher (principal and agent) which is called principal-agent-problem.
§ 1.2 THE EXTERNAL BUSINESS ENVIRONMENT
The external business environment includes:
Political
Factors PEST
CHAPTER 1 INTRODUCTION
3 key things that affect the behaviour of firms:
1. The legal status of the business
2. The way in which the firm is organized (what kind of organization, for example multi-department)
3. The aims of the firm (is profit maximization the objective of the firm, or are there other aims?)
1. THE LEGAL STATUS OF THE BUSINESS
The sole proprietor business is owned by just one person (small shops, easy to set up, relatively small capital
investment)
2 main disadvantages:
- Limited scope for expansion (limit to the size of an organization, because there is one person
controlling)
- Unlimited liability (the owner is responsible for the losses the business might make. Think about
selling his house or car to pay off bills because of failing the business)
The partnership business owned by 2 or more people (limit of 20 partners)
Advantages Disadvantages
Scope for expansion A loss of control because decision making is shared
Partners can specialize in different areas of the Limited liability, a mistake of a partner could affect
business the personal assets of all the other partners
Larger organization is more viable (rendabel)
Partnerships are not generally an appropriate form of organization
Where large amounts of capital are required and when the risks of business failure are relatively high it is best
to form a company
Company a company is separated from its owners. It can enter into contracts and own property. The debts
(schulden) are their debts and not the owners.
The owners of a company are shareholders (aandeelhouders)
Each shareholder receives his or her share of the company’s profit. These payments are called dividends
,The owners have limited liability This means that if the company goes bankrupt, the owners will lose the
amount of money they have invested in the company but no more.
2 types of companies
- Public
- Private
Public companies Companies that can offer new shares publicly: by issuing a prospectus, they can
invite the public to subscribe to a new share issue. (Dit zijn vennootschappen die nieuwe aandelen
publiciteit kunnen aanbieden: door een prospectus uit te geven, kunnen ze het publiek uitnodigen om in te
schrijven op een nieuwe aandelenemissie.)
Private companies private limited companies cannot offer their share publicly. This makes it more
difficult for private limited companies to raise finance, and consequently they tend to be smaller than
public companies. They are easier to set up than public companies. (besloten vennootschappen met
beperkte aansprakelijkheid kunnen hun aandeel niet openbaar aanbieden. Dit maakt het voor besloten
vennootschappen moeilijker om financiering aan te trekken, en bijgevolg zijn ze doorgaans kleiner dan
overheidsbedrijven)
Co-operatives An organization which is owned by its members who share the profits (at least 5
members, equal voting rights)
2 types co-operatives
- Consumer
- Producer
Consumer Officially owned by the consumers but they play no part in running the business
Producer Owned by the firm’s workers, who share the firm’s profits
2. THE WAY THE FIRM IS ORGANIZED
The internal operating structure of a firm depends on their size and technology (technological changes
forces organizations to change their organizational structure)
U- form business organization M-form business organization Flat organisations
Unitary form Multi-divisional form
Small – medium size firms Larger firms
,The central organization of the The firm is divided into divisions, Technology enables senior
firm is responsible for both, the each division is responsible for a managers to communicate (they
day-to-day administration but particular thing don’t have middle managers
also the business strategy anymore)
, The holding company H-form,
3. AIMS OF THE FIRM
The owners (shareholders) may want to maximize profit to increase their dividends but what are the objectives
of the managers?
Managers still have to ensure that sufficient profits are made to keep shareholders happy, but that may be
very different from maximizing profits.
The problem of managers not pursuing the same goals as the owners is an example of the principal-agent-
problem.
Agents = the managers
Principals = the owners
Principle-agent-problem example
Principal 1 Director Agent 1 Teacher
The director hires the teacher, the director is the principal and the teacher is the agent.
The director wants that students have to work together in class so he tells this to the teacher. The teacher can
think about this because the director is not there during his lectures so he can decide if he do this or not. You
call this asymmetric information (A situation in which one party knows more than another)
The director finds collaboration very important because you need this for your future job. But the teacher finds
it very nice if everyone works alone so it is quiet in the class and he can go on with other things (checking tests,
preparing lectures). The teacher doesn’t have the same interest (belang) as the director. This can lead to issues
between the director and the teacher (principal and agent) which is called principal-agent-problem.
§ 1.2 THE EXTERNAL BUSINESS ENVIRONMENT
The external business environment includes:
Political
Factors PEST
