Levels of economic activities.

Types of economic system:

1- Free market economy: there is no government control over factors of
production. All resources are owned privately.
2- Planned economy: it does not have a private sector because all the resources are
owned by the state.
3- Mixed economy: it has both a private sector and a public one.
a. Private sector: is made up of businesses not owned by the government.
They decide what to produce, how to produce and what price to charge
b. Public sector: is made up of government control businesses. The
government decides what to produce and how much to charge. There are
some services which are provided free of charge (ex: health; education). The
money comes from tax payers, not from the user.
Free market economy: all resources are owned privately. There is no government
control over land, capital and labour. Prices are influenced by the demand for and supply
of the goods.
-

Advantages:
o Consumers are free to choose what they want to buy
o Businesses compete with each other and this could keep prices low
o New businesses are encouraged to set up in order to make profit
Disadvantages:
o There are no government-provided goods or services available to everybody;
only those who can afford to buy these important services will benefit from
them. (ex: health; education)
o As there is no government control over the economy there could be many
recessions or economic booms
o Businesses might be encouraged to create monopolies in order to increase
prices

Planned economy: it doesnt have a private sector because all the resources are owned
by the state.
-

Advantages
o There is work for everybody
o Government eliminates competition
o Peoples basic needs are met, but there are no luxuries for the wealthy
people

Disadvantages
o People may not find products they want
o The lack of a profit motive for firms leads to low efficiency
o As government fixes wages and private property is not allowed, workers
have less incentive to work

Most common areas of government control:

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Public transport
Water and electricity supply
Health and education
Defense

Privatization: it is the process of converting a public service into a private service.

Businesses owned by the government are sold to the private sector.

Forms of business organization in the private

sector

Sole traders: it is a business owned and operated by just one person. Although the sole
trader can employ others, the owner is the sole proprietor.
-

Advantages:
o There are few legal regulations to worry about when the sole trader sets up
the business
o Complete control over the business.
o Freedom to choose his own holidays, ours of work, prices to charge and
whom to employ
o Close contact with his own costumers
o Incentive to work because he is available to keep all of the profits after he
had paid taxes. He doesnt share the profits.
Disadvantages:
o He has no one to discuss business matters with him since he is the sole
owner
o He doesnt enjoy the benefit of limited liability so he can be held responsible
for the debts of the company. His liability is not limited to the investment he
made. If the business cannot pay its debts, his creditors can force him to sell
his own possessions in order to pay them.
o The sources of finance are limited to the owner savings, profits made by the
business and small bank loans. There are no other owners who can put
capital into the business.

Partnerships: is a group of between 2 and 20 people who agree to own and run a
business together. The partners contribute to the capital of the business. They can be set
up very easily. There can be a verbal agreement or a written one.
-

Advantages:
o More capital could be invested and this would allow the expansion of the
business
o The responsibilities are shared. One can specialize in the accounts and the
other on the marketing services
o Absences and holydays do not lead to major problems as one of the partner
is always available
o Motivation to work hard because everyone benefits from the profit and if
they lose, the losses are also shared
Disadvantages:
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o
o
o

Partners do not have limited liabilities. If the business fails the creditors can
force the partners to sell their own properties
There is no separate legal identity. If one of the partner dies, the partnership
would end
Partners can disagree on important business decisions and consulting all the
partners take time.

Private limited company: it exists separately from the owners and will continue to
exist if one of the owners should die. It can make contracts. Its accounts are kept
separately from the accounts of the owners. These companies are owned by the people
who had invested on the business. These people buy shares in the company and they are
called shareholders.
-

Advantages:
o Shares can be sold to a large number of people. This would be likely to be
friends or relatives of the owners. They could not advertise the shares as
being for sale to the general public. The sale of shares could lead to large
sums of capital to invest in the business
o All shareholders have limited liability. It means that if the company fails with
debts owing to creditors, the shareholders could not be forced to sale their
possessions to settle the debts. Limited liability encourages people to buy
shares, knowing that the amount they pay is the maximum they could lose if
the business is unsuccessful.
o The people who started the company keep control of it as long as they do
not sale too many shares to other people.
Disadvantages:
o There are significantly legal matters which have to be dealt with before a
company can be formed
o The shares cannot be sold or transferred to anyone else without the
agreement of the other shareholders
o The accounts of a company are much less secret than for either a sole trader
or a partnership. Each year the latest account must be sent to the Registrar
of Companies and members of the public can inspect them.
o The company cannot offer its shares to the general public. Therefore it will
not be possible to raise really large sums of capital to invest in the business

Public limited company:

In sole traders and partnerships the owners have control over how their business is run.
They take all the decisions. This is also the case in most private limited company where
the directors are often the majority shareholders. However, in a public limited company
there are thousands of shareholders, so it would be impossible for all these people to be
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involved in taking decisions. The shareholders own, but the directors and managers
control. This is called the divorce between ownership and control. The dividends are
payments made to shareholders from the profits of a company after it has paid
corporation taxes. They are the return for investing in the company.
-

Advantages
o Limited liability to shareholders
o Its accounts are kept separately from those of the owners and the business
will exist should one of the shareholders die.
o There is an opportunity to raise very large capital sums to invest in the
business. There is no limit to the number of shareholders it can have
o There is no restriction on the buying, selling or transfer shares
o It usually has high status and, if properly managed, it will find it easier to
attract suppliers to sell goods on credit and banks willing to lend.

Disadvantages
o Legal formalities are quite complicated and time consuming
o There are many more regulations and control
o Some plc. grow so large that they become difficult to control and manage.
o Selling shares to the public is expensive

Cooperatives: are group of people who agree to work together and pool their resources.
All members have one vote no matter how many shares they have bought. All members
help in the running of the business. The profits are share equally among members.

Franchising: it is a form of business operation. The franchisor does not want to sell the
product or service idea to consumers directly. Instead, it appoints franchisees to use the
idea or product and to sell it to consumers.

Advantages

disadvantage
s

To the franchisor

To the franchisee

-Expansion of the franchised

business is much faster than
if the franchisor had to
finance all new outlets.
-All products sold must be
obtained from the franchisor.
-The management of the
outlets is the responsibility of
the franchisee.
-Poor management of one
franchised outlet could lead
to a bad reputation for the
whole business.
-The franchisee keeps profits
from the outlet.

-The chances of business

failure are reduced because a
well-known product is being
sold.
-The franchisor pays for
advertising
-All supplies are obtained
from a central source: the
franchisor
-Less independence than
with operating a nonfranchised business
-Hi may be unable to make
decisions that would suit the
local area (new product that
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are not part of the range

offered by the franchisor)
-He must pay a percentage
of the annual turnover.