So, you decide to start a business. But what type of business are you going to run and what are your prospects for its growth?
Sole Trader
Sole Traders are usually a One-Man-Band and the owner and business are defined as a single entity. You don't have to pay to form a Sole Trader business but the disadvantage is that a sole trader has unlimited liability in that they are responsible for any losses and are entitled to any profits. Hence when applying for a bank loan, the Bank Manager will take one your assets as a guarantee for the loan. If the business goes under, your house will be sold to pay off the bank loan...Hard Times :(
In addition you may well have a single bank account. e.g. with a plumber all payments are made to Mr T Smith, The Plumber rather than the business. Of course having a separate account is a lot easier though. A sole Trader pays income tax on profits because the profits of the business are treated as your income; provided you don't reinvest the cash. In the unfortunate death of the sole trader, the enterprise will end unless another person takes over.
Partnership
A partnership has the same characteristics as above. Only there are multiple people who run the business and are accountable for the losses / gains.
Private Limited Company (LTD)
You may wish to form a company if your small enterprise and partnership grows big enough. Although you have to apply to Companies House and inform Inland Revenue and Customs etc, you will gain limited liability which means the owners and business are seen as two separate entities. You are required to set up separate bank accounts too. However if the business gets into financial difficulty, you will not have to sell off personal assets the bank can only take the cash out of the business' assets and so you are protected.
Many firms with an uncertain / inconsistent sales pattern may opt for this classification a partnership as it minimises risk. A Sole Trader such as a Market Retailer selling vegetables buys stock and sells it the same day and so risk of loss is rather small, but for a firm producing chocolate bars such as Mars, one of the largest LTD companies, customers may stop demanding your product and there are substantial bills and loans which could become a problem if demand falls significantly. It is not unheard of for big firms to go bust. Look at what happened in the huge global recession of 2008/09.
Finally a LTD company pays Corporation Tax on its profits to the Governments.If the owners wish to pay themselves a wage out of this then they will have to pay income tax on the cash they withdraw. But it will show up on the financial records as a labour cost and so won't be charged corporation tax and income tax simultaneously.
Public Limited Company (PLC)
Liability is still limited but large corporations may wish to raise capital for investment or cash in on their ownership of the firm by listing on the Stock Exchange. They sell shares in the business for the public, who may be eager investors, regular people or pension fund managers to eagerly buy up in the hope that they will increase in value. Therefore the company gets money to grow and those with a stake in the firm get a windfall. As Mark Zuckerberg was a major shareholder in Facebook, when it became a PLC, he became extremely wealthy. The disadvantage is that you lose control in the business. Most owners try and maintain some power by holding on to 51% of the shares but are still answerable to all of the other shareholders who can vote on a new leader (a CEO) if they feel it will boost company performance.
Monday 3 December 2012
Price Elasticity of Supply (P.E.S)
This is simply the responsiveness of supply to a change in price. Will more suppliers supply a given market if the market price increases? The answer is probably. But why?
The important thing with P.E.S. is not to get it mixed up with Price Elasticity of Demand. So read the question carefully or else you will get zero for going on about demand when you should be talking about supply!
So, here is the much anticipated P.E.S. formula:
The important thing with P.E.S. is not to get it mixed up with Price Elasticity of Demand. So read the question carefully or else you will get zero for going on about demand when you should be talking about supply!
So, here is the much anticipated P.E.S. formula:
P.E.S. = (% Change in quantity supplied) / (% Change in price)
The graphs are easy to remember as they're essentially the same as the P.E.D. diagrams - only we are talking about supply here.
Obviously when using the above formula,
where P.E.S.<1 there is inelasticity.
A P.E.S >1 equals elasticity.
Also P.E.S. = 1 when the supply curve passes through the origin.
Determinants of P.E.S.
Time is an important factor in that some goods and services take time to respond to P.E.S. For example increasing the supply of oil by discovering a supply and then building an oil rig takes a long time and so in the short term the P.E.S. of oil will be inelastic. In the long term though, it may well become elastic in that the price of oil is increasing so there are more suppliers willing to supply at the higher price due to higher profit margins.
Stockpiles and reserves are an important because a firm with excess stock can respond to a change in price far quicker. Stocks of finished goods mean that when the price or demand increases, the supplier simply ships the finished goods rather than having to manufacture them first.
Take sandwiches for example. An employee works at maximum output and soon the pile builds up. Suddenly the market price increases - probably due to increased demand for sandwiches - and so the sandwich company can respond quickly to this change in price and so can supply the market quicker than competitors can. And so the firm has an edge. Hence in these industries we can expect an elastic P.E.S.
The cost of hiring resources is next. If hiring capital goods such as machinery and labour are high then profit margin will be cut. If the firm sells the finished good at a market price of £x then this is the revenue. The costs including hiring resources are then deducted from this leaving gross profit. The point is, if profit levels are reduced firms may be less responsive to price fluctuations as they aim to maximise profits primarily and so if prices fall for example don't see the appeal of producing more of that product.
The ease of switching production between products is derived from the previous point. If say the price of burgers increases and so producing burgers becomes more profitable, switching to supplying burgers rather than hot-dogs is an easy transition and so as a catering firm finds it easy to switch, P.E.S. is elastic. This is not the case with car firms. It takes years to shifting production to a new style of car. following emissions pressures, Aston Martin switched some production from Supercars such as the DBS to the Compact City market with the Cygnet. This was not an easy process...
The state of industry is significant in that an industry operating at full capacity cannot respond to a surge in demand / price so P.E.S. is inelastic. However firms which aren't working at full capacity (they can produce more in a given time as they have the resources and storage to do so) can easily respond and so have an elastic P.E.S.
So, I hope that the pattern is emerging. Supply responsiveness = elastic.
Irresponsiveness = inelastic
Obviously when using the above formula,
where P.E.S.<1 there is inelasticity.
A P.E.S >1 equals elasticity.
Also P.E.S. = 1 when the supply curve passes through the origin.
Determinants of P.E.S.
Time is an important factor in that some goods and services take time to respond to P.E.S. For example increasing the supply of oil by discovering a supply and then building an oil rig takes a long time and so in the short term the P.E.S. of oil will be inelastic. In the long term though, it may well become elastic in that the price of oil is increasing so there are more suppliers willing to supply at the higher price due to higher profit margins.
Stockpiles and reserves are an important because a firm with excess stock can respond to a change in price far quicker. Stocks of finished goods mean that when the price or demand increases, the supplier simply ships the finished goods rather than having to manufacture them first.
Take sandwiches for example. An employee works at maximum output and soon the pile builds up. Suddenly the market price increases - probably due to increased demand for sandwiches - and so the sandwich company can respond quickly to this change in price and so can supply the market quicker than competitors can. And so the firm has an edge. Hence in these industries we can expect an elastic P.E.S.
The cost of hiring resources is next. If hiring capital goods such as machinery and labour are high then profit margin will be cut. If the firm sells the finished good at a market price of £x then this is the revenue. The costs including hiring resources are then deducted from this leaving gross profit. The point is, if profit levels are reduced firms may be less responsive to price fluctuations as they aim to maximise profits primarily and so if prices fall for example don't see the appeal of producing more of that product.
The ease of switching production between products is derived from the previous point. If say the price of burgers increases and so producing burgers becomes more profitable, switching to supplying burgers rather than hot-dogs is an easy transition and so as a catering firm finds it easy to switch, P.E.S. is elastic. This is not the case with car firms. It takes years to shifting production to a new style of car. following emissions pressures, Aston Martin switched some production from Supercars such as the DBS to the Compact City market with the Cygnet. This was not an easy process...
The state of industry is significant in that an industry operating at full capacity cannot respond to a surge in demand / price so P.E.S. is inelastic. However firms which aren't working at full capacity (they can produce more in a given time as they have the resources and storage to do so) can easily respond and so have an elastic P.E.S.
So, I hope that the pattern is emerging. Supply responsiveness = elastic.
Irresponsiveness = inelastic
Sunday 2 December 2012
Income Elasticity of Demand (Y.E.D)
Income Elasticity of Demand (Y.E.D.) measures the responsiveness of demand to a change in levels of income. Note that income is represented by a 'Y' in Economics because the 'I' is taken up by imports!
So here's the formula for you to learn:
Obviously this is a tool used when analysing if incomes really will affect the demand of a product and it is important to remember that just because income increases doesn't mean that demand for a given product necessarily increases with it. There are three types of good which we look at here and each correspond to a different Y.E.D. figure if you were to calculate it. Therefore examiners love to throw you a figure and it is your job (how wonderful) to identify which type of good the question is referring to.
Normal Goods
Normal goods are easy to deal with. If income increases the demand will also increase for the product. Take HD Ready Televisions for example; If people receive a bigger pay-cheque they may well buy more luxuries that they otherwise couldn't have previously afforded. In the UK it's likely to be an imported one too as people tend to spend surplus incomes on imports (but this is another matter.)
Normal Goods have a positive (+) Y.E.D.
Inferior Goods
Inferior Goods are the opposite. When incomes increase consumers buy less of the product. The ideal example is a Value Range of goods at your local supermarket. As income increases you can afford branded products such as Heinz Baked Beans over Asda Smart Price Beans. And so your consumption of value beans decreases. Hence value beans are an inferior good.
If asked to identify an inferior good, its Y.E.D. is always negative (-)
Essential Goods
The demand for essential goods after a change in incomes are likely to stay the same as income has no impact on the demand for an essential product. The demand for milk or bread is always the same in the short term (obviously population increase affects it in the long term). I'm sure you would buy milk if you lost your job or if you won the Lottery.
Hence for Essential Goods, Y.E.D. = Zero (0).
There you have it... Y.E.D. in a nutshell.
So here's the formula for you to learn:
Y.E.D. = (% Change in quantity demanded) / (% change in income)
Obviously this is a tool used when analysing if incomes really will affect the demand of a product and it is important to remember that just because income increases doesn't mean that demand for a given product necessarily increases with it. There are three types of good which we look at here and each correspond to a different Y.E.D. figure if you were to calculate it. Therefore examiners love to throw you a figure and it is your job (how wonderful) to identify which type of good the question is referring to.
Normal Goods
Normal goods are easy to deal with. If income increases the demand will also increase for the product. Take HD Ready Televisions for example; If people receive a bigger pay-cheque they may well buy more luxuries that they otherwise couldn't have previously afforded. In the UK it's likely to be an imported one too as people tend to spend surplus incomes on imports (but this is another matter.)
Normal Goods have a positive (+) Y.E.D.
Inferior Goods
Inferior Goods are the opposite. When incomes increase consumers buy less of the product. The ideal example is a Value Range of goods at your local supermarket. As income increases you can afford branded products such as Heinz Baked Beans over Asda Smart Price Beans. And so your consumption of value beans decreases. Hence value beans are an inferior good.
If asked to identify an inferior good, its Y.E.D. is always negative (-)
Essential Goods
The demand for essential goods after a change in incomes are likely to stay the same as income has no impact on the demand for an essential product. The demand for milk or bread is always the same in the short term (obviously population increase affects it in the long term). I'm sure you would buy milk if you lost your job or if you won the Lottery.
Hence for Essential Goods, Y.E.D. = Zero (0).
There you have it... Y.E.D. in a nutshell.
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