Nearly 90 per cent of all business is done by corporations. A business corporation is an institution established for the purpose of making profit. It is operated by individuals. People, who would like to form a corporation, must file for permission in the state where the business will have its headquarters. If approved, a charter, government document that gives permission to create a corporation, is granted. The charter states the name of the company, address, purpose of business etc.
The charter specifies the number of shares of stock, or ownership parts of the firm. These shares are certificates of ownershipand are sold to investors called shareholders or stockholders. The money is then used to set up corporation. If the corporation is profitable it will eventually issue dividend or a check, representing a portion of the corporate profits to shareholders.
There are several advantages of the corporate form of ownership. The major advantage is the ability to acquire greater financial resources than other forms of ownership. The next advantage is that the corporation attracts a large amount of capital and can invest it in plants, equipment and research. It can offer higher salaries and thus attract talented managers and specialists. Corporations have great capacity for growth and expansion.
Corporations face some major disadvantages. It is difficult and expensive to organize a corporation. The process of obtaining a charter usually requires the services of a lawyer. Most small firms prefer to avoid these expenses by forming proprietorships and partnerships. There is also an extra tax on corporate profits. The government taxes corporate income in addition to the taxes paid by shareholders on their dividends.
MARKETS and MARKET STRUCTURES
Economists classify markets according to conditions that prevail in them. They ask questions like the following: How many supplies are there? How large are they? Do they have any influence over price? How much competition is there between firms? What kind of economic product is involved? Are all firms in the market selling exactly the same product, or simply similar one? Is it easy or difficult for new firms to enter the market? The answer to these questions helps to determine market structure, or the nature and degree of competition among firms operating in the same market. For example, one market may be highly competitive because a large number of firms produce similar products. Another may be less competitive because of fewer firms, or because the products made by each are different or unique.
In short, markets can be classified according to certain structural characteristics that are shared by most firms in the market. Economists have names for these different market structures: pure competition, monopolistic competition, oligopoly, and monopoly.
An important category of economic markets is pure competition. This is a market situation in which there are many independent and well-informed buyers and sellers of exactly the same economic products. Each buyer and seller acts independently. They depend on forces in the market to determine price. If they are not willing to accept this price, they do not have to do business.
To monopolize means to keep something for oneself. A person who monopolized a conversation, for example, generally is trying to stand out from everyone else and thus attract attention.
A situation much like this often exists in economic markets. For example, all the conditions of pure competition may be met except that the products for sale are not exactly the same. By making its product a little different, a firm may try to attract more customers and take over the economic market When this happens, the market situation is called monopolistic competition.
The one thing that separates monopolistic competition from pure competition is product differentiation. The differences among the products may be real, or imaginary. If the seller can differentiate a product, the price may be raised a little above the market price, but not too much.