Fascinating economy

Bill Gates and his company Microsoft control the market when it comes to operating systems, such as Windows 95, Office 2003, and other software applications.

Did you know that 90% of the world’s personal computers run on Microsoft software from the minute they are turned on? Microsoft has managed to automatically set up its operating systems in most computers being sold in the world. It has a monopoly, because its products are unique, and its rivals cannot compete against it. Microsoft is also able to control the price of its operating systems because there are no similar products on the market.

In 1998, a court case was filed against Microsoft Corporation. Microsoft rivals accused Microsoft of abusing its monopoly in the way it sold its operating systems and web browsers. The main issue was whether Microsoft was allowed to sell its Internet Explorer web browser software with its Microsoft Windows operating system.

Many technology companies have fought legally against Microsoft’s monopoly, including Apple Computer, Netscape, and Sun Microsystems. However, Microsoft still holds the majority of the market of operating software. It has the monopoly, because it has blocked the entry or has made it very difficult for competitors to enter the same market.

Monopolistic Competition

Monopolistic competition is a market structure that includes many producers providing products or services that are almost the same, but not quite identical.

A market structure of this sort allows some price control. But businesses generally accept the prices charged by rivals, ignoring the impact of their own costs. Monopolistic competition resembles pure competition except that different producers are selling similar products.

Oligopoly

In a system of monopolistic competition, there are a large number of small businesses. In an oligopoly, there are a small number of large businesses dominating a particular market. Businesses keep a close eye on the decisions made by the few other businesses in the industry.

Because there is not much competition, businesses in this type of market do not change prices often. In order to attract customers away from the small number of competitors they face, businesses in an oligopoly offer incentives, including bonuses and rebates.

The characteristics of an oligopoly are

– An industry dominated by a small number of large businesses.

– Businesses sell either identical or slightly differentiated products.

– Businesses give incentives instead of changing prices.

– Significant barriers exist to enter industry.

Oligopoly Models

Oligopoly is a common market structure because many industries are difficult to break into. Anyone can open a lemonade stand with just a few dollars, but it takes millions and millions to build and operate a car factory. As a result, lemonade is a pretty competitive market, while the automobile industry is an oligopoly.

The automobile industry is considered an oligopoly because it is dominated by a small number of large companies. These companies all sell similar cars, such as four-door sedans, minivans, and SUVs.

Another good example of an oligopoly is the airline industry. This industry is dominated by a small number of large companies. These businesses offer their customers similar products. However, certain airlines go to certain cities, while others do not. Airline companies also have incentives to attract customers, such as ticket upgrades or free air miles.

Considering Competition

Businesses compete with each other as they pursue the profit motive, but they take into account the type of competition they face before they make decisions.

The four different market structures you have examined show the differences between the competitive situations faced by producers operating in different markets.

Remember that the level of competition varies depending on the number and size of competitors, the type and quality of their products and services, and their degree of market control over price.

The continuum of market structures

Market Structure Review

From the largest corporation to the humblest small business, participating successfully in the free-market system requires a good plan, lots of determination, and the willingness to take some risks. A person who starts a new business is a risk taker. We call these people entrepreneurs. An entrepreneur is an individual who begins, manages, and bears the risks of a business.

Entrepreneurs play an important role in economics by offering consumers new ideas, new products, or new services. They compete in existing markets and sometimes create entirely new markets. Entrepreneurship is difficult and risky because many new businesses fail. But when successful, entrepreneurship contributes to the growth and prosperity of the overall free-market economy. Entrepreneurs create jobs and encourage a greater exchange of goods and services.

An Entrepreneur’s Motivation

There are many reasons why entrepreneurs decide to start a business. Henry Ford wanted to produce cars more efficiently; Oprah Winfrey wanted to help people make their lives better; Steve Jobs wanted to provide customers with user-friendly personal computers and new entertainment ideas. These are just three examples of innovative and successful entrepreneurs. Entrepreneurs often share common motivations. The also share common characteristics.

Motivations and Characteristics of Entrepreneurs

– Autonomy: Entrepreneurs like to work for themselves.

– Profits: Entrepreneurs are driven by their quest for profits. Successful entrepreneurs can create wealth rapidly.

– Risk: Entrepreneurs have a low level of risk aversion, since investing money in their own businesses is very risky.

– Innovation: Entrepreneurs need innovation in the product, service, or business process in order to be successful.

Innovation

One key to becoming a successful entrepreneur is innovation. The development of new devices, ideas, or ways of doing things helps entrepreneurs sell more goods or provide more services. Innovation is how businesses create new solutions to satisfy their customers’ needs and wants. Innovation includes the creation of more effective products, systems, services, or technology.

Entrepreneurs’ Innovations

Entrepreneurs innovate by creating

– New products.

– New production methods.

– New markets.

– New sources of supply.

The Innovation Game

Entrepreneurs innovate by introducing new means of production, new products, and new forms of organization. Innovations consist of inventions, discoveries, and new methods of production. Sometimes, innovations can change the entire economy.

One of the biggest business sectors in the world is the media industry. The media provide a service that nearly every person consumes in one way or another.

Because the media are a part of nearly every consumer’s life, they are important to producers. Businesses use the media to advertise their message to potential customers. Almost every business relies on the media in some way to stay in business.

Unlike some businesses with a specialized customer base, media companies can sell to everyone – consumers and producers alike.

If a satellite turns in the desert and there is no one there to see it, does it still reach thousands of viewers?

Advertising Dollars

Media companies can make money by selling magazines, newspapers, televisions subscriptions, Internet services, and more directly to consumers. But for most media companies, the bulk of their profits come from selling advertisements. In fact, the mass media and news media make 90 percent of their revenues from advertising. If it were not for advertising, most media companies would not exist.

Businesses spend a lot of money on advertising. In 2012, companies spent more than $152 billion on advertising in the United States and more than $490 billion worldwide.

What Advertisers Are Buying

Advertisers pay a lot of money to media companies, but what exactly are they buying? In one sense, they are simply purchasing time or space: ink on a page, pixels on a screen, or 30 seconds of time. But what advertisers are really paying for is the audience – viewers, listeners, readers, browsers, or whoever might be exposed to the ads. Advertising is all about buying access to an audience.

Media companies provide content – shows, articles, information – to attract an audience so that they can turn around and sell that audience to advertisers. In the world of the media, the consumers are also the product.

How Visible Is It?

Because they pay high prices to advertise their goods and services, businesses want as many people as possible to see their ads. Visibility is an important measurement.

Businesses try to advertise in places where they feel they will have high visibility in front of a large audience.

Visibility is determined by a few factors. One is the size of the advertisement. A full-page image attracts more attention than a half-page image, so a full-page advertisement costs more. A one-minute commercial is more expensive than a 30-second commercial because it has greater visibility.

Another important factor is popularity. Popularity determines the rate for a specific amount of advertising space. If a lot of people read a particular magazine, then a full-page ad will be expensive. If only a few people read it, that same page will be much less expensive.

Expensive Advertising Slots

The Super Bowl regularly has the most expensive advertising on television. A 30-second commercial during Super Bowl XLI costs $2.4 million – that is $80,000 per second. Because of the high cost and high visibility of these ads, advertisers often use the Super Bowl to show innovative or unusual commercials or to launch new ad campaigns.

The Olympics is another sporting event with high visibility. Ad rates vary depending on the time of day, but the average cost of a 30-second commercial during the 2006 Olympics was $700,000. That is a lot less than a Super Bowl ad, but NBC made a total of $900 million selling ads during that Olympics.

Popular TV series also command high ad rates. American Idol, one of the top-rated shows in recent years, charges as much as $700,000 for a single 30-second commercial. The same 30-second ad on CSI costs only $465,000. Survivor and The Apprentice each get $350,000 for a 30-second spot. As ratings drop, ad rates drop, too. ER charged $440,000 for a 30-second commercial in 2004, but its ratings went down the following year, so the rates went down to $400,000.

Measuring the Audience

The cost of advertising depends on the size of the audience and the size of the advertisement. The bigger the audience, the more it will cost a business to advertise to that audience. Advertisers buy access to the audience’s attention, and more audience members means more sales, which means more money.

But how can advertisers know how big the audience is going to be?

What is the Medium?

The method of measurement of the audience size depends on the medium. It is easy to measure consumers on the Internet. A Web page can count the number of times a page has been viewed.

In other forms of media, the count needs to be estimated. For print sources, circulation counts the number of magazines or newspapers that are printed and distributed. Not every magazine or newspaper will actually get read by somebody, and some will get read more than once. However, circulation is still a pretty good measurement of the size of the potential audience. For TV and radio, audience size is measured by a ratings system.

Advertising Outlets

Media companies are not limited to a single way of selling advertisements. In fact, the more ways they can sell ads, the more money they can make. Most media companies use a variety of methods to advertise.

Magazines and newspapers, for instance, have traditionally sold advertising to raise revenues while also charging subscription fees to people who receive the publication in the mail. With the advent of the Internet, many magazines and newspapers have continued to enjoy advertising revenues but have struggled to find ways to charge subscription fees, because so many websites are available for free.

American Media

People get the information they need to make decisions primarily from the media. People watch TV, browse the Internet, read newspapers and magazines, and listen to the radio. What they see, read, and hear affects how they think and choose.

There are thousands of media sources for people to choose from, but a large number are owned by a few large companies. These companies are known as media conglomerates. Their dominance of the media industry creates a market structure that closely resembles an oligopoly because a few large companies control nearly all the media industry.

Global Media Giants

The centralized global media system is a very recent development. Until the 1980s, the basic broadcasting systems and newspaper industries were domestically owned and regulated. Starting in the 1980s, the U.S. government, along with its Federal Communications Commission (FCC), began to deregulate, or remove the legal restrictions that had been in place on media and communication systems.

With the rise of satellite and digital technologies, deregulation resulted in the success of global media giants. There are only a few global media giants today.

The Internet Media Revolution

The Internet operates differently from other forms of media. Because it is relatively easy and inexpensive to build an Internet site, it is easy for many different producers to have an Internet presence.

Millions of people contribute to the information available on the Internet. The popularity of blogging, instant messaging, and social media sites means that more and more people get their information and entertainment from sources that are not controlled by large media companies.

Despite the possibilities of the Internet, many of the most popular websites today belong to large media conglomerates. While it may always remain inexpensive to put information on the Internet, the most popular websites will likely come from large global corporations.

The Business of Media Review

Media companies are unique types of producers. They create content for people to consume, but these consumers are themselves something that is sold to other producers who buy advertisements.

Media companies play an important role in the game of economics. They provide information that affects the decisions of consumers, and they provide advertising services that nearly every producer needs to purchase.

People start new businesses every day. It requires a lot of planning and organizing, not to mention hard work and determination. It also takes money. Potential business owners can use their own money. They can borrow it from the bank, take on a business partner, or have a third party, sometimes called a venture capitalist, invest what it takes to open for business.

There are many kinds of businesses. Some businesses only have one owner. Others have multiple partners who own the company together. In the end, all businesses try to accomplish the same goals: providing goods and services to satisfy the needs and wants of consumers.

The first thing any aspiring business owner has to do is decide which goods or services to offer for sale. The variety of goods and services available from businesses is wide, and new entrepreneurs are always trying to come up with new ideas about what to sell and how to sell it.

Sole Proprietorships

One way to start a business is to operate alone, with little or no help from anyone else. This kind of business is called a sole proprietorship. The owner of a sole proprietorship is completely in charge of the operation of the business. If there are other employees, the owner is the boss. The owner receives all the profits but also bears all the financial risks (that is, the losses).

Many entrepreneurs prefer to open a new business as a sole proprietorship. It is the most common type of business, and it is also the easiest type to build. Almost all small businesses are sole proprietorships. Many medium-sized businesses and large businesses begin as sole proprietorships but grow with success and add partners and investors.

The Risks and Rewards of a Sole Proprietorship

With a sole proprietorship, a business is much like an extension of the business owners. It has no separate existence.

There are many benefits to a sole proprietorship. For instance, business owners can make their own decisions without having to consult other people.

Another advantage is that business owner pay personal income taxes, not corporate taxes, on profits. This makes accounting much simpler. And, of course, business owners also get to keep all the profits.

But there are also downsides. A sole proprietor has unlimited liability. That means that the business owner is responsible for all the debts and financial losses of the business. If the business fails, the owner can lose all assets. This includes not just business assets like equipment and supplies, but also personal assets like real estate and savings.

Sole proprietors also need to have enough money to start the business in the first place. Some potential business owners borrow money from a bank to start a company, but this is risky because of unlimited liability. The bank can collect personal assets if an owner defaults on a small-business loan.

Partnerships

Another way to organize a business is to form a partnership with others. A partnership is a contract in which business partners agree to operate the company together by combining their money, knowledge, and time. Partners share profits based on their contributions.

There are two main ways of organizing a business partnership: as a general partnership and as a limited partnership.

A general partnership is much like a sole proprietorship except that each partner is fully responsible for the debts of the business, including debts incurred by the other partners. Every partner has an equal voice in running the business, and the partners have to consult one another to make decisions related to their business.

In a limited partnership, on the other hand, each partner has limited liability. The most each partner can lose is the amount he or she has contributed to the partnership. In a limited partnership, the business is managed by one or more of the partners, while the other partners are investors who rarely take part in any business decisions.

Failed Partnerships

Two partners decide to start a restaurant. Each contributes $10,000 to fix up an old building, hire servers and cooks, and buy supplies. After the first year, the business is failing. The restaurant is $40,000 in debt by the time it closes its doors. Under a general partnership, each partner is fully responsible for this debt. If one partner only has $5,000 in her savings account while the other partner has $50,000, the partner with more savings can be made to pay $35,000 of the debt.

If this same restaurant had been a limited partnership, each partner would be responsible for only 50% of the debt. So, the richer partner only has to pay back $20,000 of that $40,000. If the other partner can only pay $5,000, some of the debt might go unpaid. This can happen in a limited partnership. Investors generally prefer limited partnerships so that they are not held fully responsible if the business incurs too much debt.

Pros and Cons of Partnerships

There are many advantages to a business partnership. First of all, partnerships are fairly easy to establish. Also, partnerships typically make it easier to raise money that can be invested in the business. That is why partnerships are the preferred type of business for some small companies. Instead of going to the bank and borrowing money, business owners can ask people to be partners and invest their money. Another advantage to a partnership is that there are rarely any extra taxes to file, just personal income taxes on any profit made.

Being held individually responsible for all the company’s debts is one of the major disadvantages to a general partnership. General partnerships can also be difficult to operate because partners need to work together and agree on business decisions. What might be a simple decision with just one person in charge can become much more complicated with two or more people trying to agree. This difficulty is lessened within a limited partnership because business decisions are made only by the managing partner. Still, the lack of input into business decisions by the «silent» partners takes away control, leaving their investment in the hands of the managing partners.

Corporations

Another type of business is a corporation. Corporations are like partnerships in that they are funded and operated by more than one person. But a corporation has many people who invest, and few investors have as much direct control or responsibility in the business operations as they would in a partnership.

The investors in a corporation are not partners but stockholders. A stockholder is someone who owns a share in the corporation in the form of stock. Unlike partners, stockholders do not make the business decisions themselves, unless they own a majority of all available stocks. Usually, a corporation is run by a board of directors, who are elected by stockholders. The board of directors is responsible for managing the business and making the daily decisions required to operate it.

Stockholders

When compared to forming a business partnership, investing in a corporation is much easier and safer. Stockholders do not need to help make day-to-day business decisions the way partners do. Those business decisions are left up to the board of directors. If stockholders do not agree with the decisions made by the board, they can vote for new members or simply sell their stock and invest in another corporation.

Because stockholders own the shares of a corporation, many businesses in the United States face a situation known as «double taxation.» The government taxes both corporate profits as well as the personal income of all the shareholders when they receive dividends or distributions of corporate profits.

Investors who buy stock in profitable corporations usually receive dividends. A dividend is a portion of the company’s profit paid on each share of stock. Investors who own a lot of stock receive large dividend payments.

Stockholders are also protected if a corporation fails. Unlike sole proprietors or partners, stockholders are not responsible for any of the corporation’s debts.

Benefits of Being a Stockholder

A corporation is a legal entity. It has rights to buy, sell, trade, and own property. It must also pay corporate taxes. A corporation has many advantages for its owners and stockholders. One of those advantages is limited liability. As a stockholder, you cannot lose more than you initially invest.

When a company is doing well and paying high dividends, there are always other investors who want to buy that company’s stock. This drives the price up. Stockholders can earn money in two ways: through dividends and by selling their shares for more than the original purchase price.