|
|
The Need For a Written Agreement Between Partners
R. J. Pullen,
To teach the hazards of being in a partnership and the need for a written agreement, I ask the students to join in groups of four to form a partnership. Each partner is given a written description of him/herself. Part of the description is in italics, and that part is known only to the partner receiving it. The description not italicized is shared with the group. Each partnership is formed for the sole purpose of manufacturing and selling skis. The groups have one class period to reach a written agreement and hand it in. Below are the descriptions I provide, along with a list of items normally included in a partnership agreement:
Partner No. 1: You are a medical doctor with extensive assets including cash up to $100,000. You do not want to be a general partner and do not need to be involved in the day‑to‑day affairs of the partnership. You desire no less than a 25 percent share of all profits.
Partner No. 2: You are a salesperson experienced in ski equipment sales. You have very little in the way of outside assets and can afford to invest only $10,000. You must be able to draw $600 a month. You have been involved in partnerships before and want everything in writing.
Partner No.
3: You graduated from
Partner No. 4: You are an expert in laminating and metal working with Master Journeymen classifications. You have $100,000 in assets, all of which are easily turned into cash. You have a desire to be a senior partner and will accept no less than a 20 percent share of the profits for any investment you make.
William Nelson,
The following can be used to illustrate the role of profits in
signaling where resources ought to be allocated and the ingenuity that profits
bring forth. Citibank was interested in testing its automatic teller system. It
offered a $5000 reward to any Cal Tech student who could find the best method
of beating its "foolproof" encoding device. They received many solutions.
Would they have received more if they'd allowed the winner to use it for one
day. Why? It is also noted that
Irrational Firm Behavior and Contingency Fee Audits
Eric K. Steger,
I ask my students, "Do employees of some firms always act rationally?" I explain that I know of a firm that provides no‑risk contingency fee gas pipeline audits for oil and gas operators. I explain that this is simply a second opinion audit and works this way. If the auditors don't recover retroactive monies from gas previously sold to natural gas purchasers, there is no fee. However, if retroactive monies are recovered, the audit firm gets a payment only when the oil and gas operator receives the retroactive monies from the gas purchaser. I explain that the only expected marginal costs to the firm are transactions costs such as meeting with the auditors, answering questions, photocopying documents, etc. Since these are the only costs, why isn't the audit allowed?
This question stimulates some good discussion. Typically answers are: (1) the employees are afraid of looking bad to management; (2) management is afraid of looking bad to stockholders and/or interest owners in the wells; (3) the audit firm may have a poor reputation; (4) the offer has not been clearly communicated; (5) the oil and gas operators are so wealthy that a few hundred thousand dollars is too trivial to worry about; (6) the expected marginal revenue is less than the expected marginal transactions costs incurred.
This question helps students better understand profit maximizing behavior, transactions costs and why some employees may not always act in the firm's best interest.
Joseph. Phillips, Jr.,
In studying the principal legal forms of business enterprises (Sole Proprietorship, Partnership and Corporations) it is generally taught that corporations have the distinct advantage of providing limited liability to the owners. The stockholders risk only what they paid for stock purchased. Creditors can only sue the corporation as a distinct legal entity but not the owners on an individual basis.
A pointed exception to this involves the IRS being granted authority by Congress to collect trust fund monies used by corporations in the course of business (withheld income and social security taxes) from certain corporate officers who were responsible for remitting the funds to the government.
The existence of this statute in the IRS Code supersedes the normal shielding of liability of individuals in the corporate structure. The presentation of this fact alerts students to look beyond the generalities, be they in textbooks, newspapers or magazines. In the real world, there are exceptions to practically everything as opposed to the abundance of absolute truths.
The Appropriate Definition of an Industry
Michael Vaughan,
Before students can
understand the importance of market structure and the competitive process they
must comprehend the basic microeconomic concept of an industry. To the
economist, an industry is a group of firms producing similar or identical
products. The critical point for students to understand is that the products
are similar or identical from the perspective of the consumer. In other words,
the consumer views the products as substitutes for each other. To emphasize
this point, I ask students if all firms providing airline travel are members of
the same industry. The inevitable response is "Yes". Students are
then asked to name some firms in the airline industry. Eastern, Delta, TWA,
American, and United are typically named. I then select a route, for example
Socialism and Giant Corporations
Harry G. Shaffer, The
I first explain to my students that a socialist economy is one in which the means of production are owned by society at large and are operated under the guidance of some central planning authority, under the theory that the goals of socialism are not profits, but rather the broad interests of society, (as the planners conceive this interest to be). I then tell them that in order to get a picture of what a socialist economy would be like they could imagine a gigantic corporation that owns all the means of production (factories, mines, farm lands, banks, transportation facilities, retail outlets, etc.) and in which each citizen is theoretically an equal share‑holder. And just like a corporation with hundreds of thousands of stock holders must have a board of directors to run it, so must a socialist economy.
This "board of directors" could be the government, a political party, a planning board, or even one single dictator. And this central authority could be democratically elected at periodic intervals, or it could perpetuate itself in office (as is the case in most large American corporations), thereby effectively depriving the "owners" of a decisive voice in the operation of their enterprise.
Differentiating Accounting and Economic Profits
Tom Hyclak,
Figure 22‑1 is very useful in explaining the difference between accounting and economic profits. The difference is the reference point: zero for accounting and M for economics, where M = minimum profit needed to cover the opportunity cost of the owners of the firm. The $M‑diem are added to labor and capital costs when drawing the total cost curves.
Figure 22‑1
Economic Profits and Accounting Losses
Ralph T. Byrns
In distinguishing between accounting and economic profits, stress that economic profits are better guides to decision making. Examples are fairly easy where accounting profits are realized simultaneously with economic losses so that a firm will shut its doors in the long run. A nice twist is to discuss a case where economic profits are realized in spite of an absence of accounting profits (e.g., when a proprietor systematically cheats on the firm's income tax statements, when accelerated depreciation allowances eliminate a firm's tax liabilities, or when a profitable firm absorbs a firm that has experienced losses.)
Notes: